Face Time with Robert Kimmitt

(CNN) -- It can't be easy to talk up the U.S. economy in the middle of a global stock market sell-off based on growing fears of a U.S. recession.

But that's exactly what U.S. Deputy Treasury Secretary Robert Kimmitt attempted to do this week.

As markets veered wildly between triple-digit gains and losses, the dollar tumbled and oil hit new record highs, Kimmitt declared that this "near-term turbulence" wouldn't last.

MME's John Defterios (JD)asked Robert Kimmitt (RK) when investors could start looking with confidence to the future, rather than looking for a bottom in the credit crunch.

(RK): We're always looking forward, and as we look forward we see those long-term fundamentals being strong both in the U.S., in Europe, in the Middle East, indeed in the world. But we have to get through this near-term set of difficulties: turbulence in the credit markets, significant head winds from the housing market in the United States and rising commodity prices. I think we share a global responsibility to take the steps each country thinks is appropriate on both the fiscal and monetary side, but we're also in active dialogue with our partners around the world.

(JD): As you know there is some concern that the severe interest rate cuts and then providing liquidity sends the wrong signals, signals of panic. Would you disagree with some of the words that are in the markets today?

(RK): Well, I will let the Federal Reserve comment on any aspect of monetary policy making. We have respect for the Federal Reserve, respect for its independence. What I would say is if you look at the market reaction to the actions taken by the Federal Reserve and others earlier this week, the markets were strongly upward in the United States, have been throughout the world. I think that there is a shared responsibility in the markets themselves, among governments, among independent Central Banks -- each to take the steps that they think are appropriate.

(JD): We've gone from parity, dollar-euro, to above 150 in a record low this past week. When does it become a problem for foreign governments buying bonds where they don't think it's a good value anymore? Chinese investment funds, Middle East investment funds... they say: 'This is not a good value for us anymore.'

(RK): There is only one person in the U.S. who speaks to the dollar, and that is the person in the office next to mine, the Secretary of Treasury. So I won't make any comment on the dollar itself. What I will say is that we have investors in all classes of U.S. securities including governments, and we watch very closely the investment decisions made by all overseas purchasers including governments who buy into U.S. securities. Our market is broad, it's deep, it's highly liquid and we continue to think that investors, including governments overseas, will continue to hold U.S. treasuries as a part of a diversified portfolio.

(JD): I wanted to draw your attention to the European Central Bank Chief Jean Claude Trichet who called the dollar's fall against the euro an excessive exchange rate move. Do you share than concern?

(RK): I will let Mr. Trichet speak for himself and certainly on any further illumination he would like to provide on what he has said. With regard to monetary policy, that's for the Federal Reserve to comment on publicly. And again, as I say on the dollar, that's really for the Secretary of Treasury.

(JD): Does the currency market affect the movements of the sovereign wealth funds? You're very active on this front. Do they not move into bonds but instead take equity positions, because they see not just value there but also a better return the over long haul, and it's a natural move into equities for these sovereign funds?

(RK): Excellent question. I think sovereign wealth funds, which we define as reserves managed separately from official reserves, are generally held in government bonds whereas sovereign wealth funds have been looking to diversify their portfolios. They will hold some fixed instruments. Sure they're looking for equity opportunities both in the U.S., Europe, the Middle East and elsewhere; we think this is what any prudent investor would do. Indeed sovereign wealth funds, which have been around since Kuwait established its own in the mid 1950s, have to this point been a very positive force in the world economy. They are patient long term investors, not highly leveraged, they don't change their asset allocation at a time of stress. But they are growing to a size and number. The vigilance is required to ensure that they continue to invest for commercial, not political reasons, but mostly that they can demonstrate that so that there is not a political response that could lead to investment protectionism.

(JD): As you know the new sovereign funds feel like they're being singled out for this call of greater transparency. How do you balance the long term players that have been there thirty, forty, fifty years and the newer players on the block who're quite aggressive with their investments?

(RK): At first what we and others have suggested is we need to look at both sides of the investment equation. So those of us who receive investments, be they from sovereign funds or others, need to be open, we need to be transparent, we need to be non-discriminatory. And that's an effort in which we're engaged with the OECD. On the side of the investors, that is in this case the sovereign wealth funds, they're working with the IMF and the World Bank, with whom they have worked for decades on reserve management issues to come up with a voluntary set of best practices that demonstrates the continued commercial nature of their investments. And I would say whether one is an old or a new fund, continuing to be that responsible player in the world community not only will help allay political concerns, but is also a very good investment strategy.

(JD): I thought it was unusual that Warren Buffett, the famed investor, last week in the shareholders' letter said this was not a nefarious plot by these investors but that the trade imbalance in the United States requires this investment, and that we should welcome the investment. What do you think of his statement and the fact that he decided to come out and talk about it?

(RK): Well, he is one of our most knowledgeable, most successful investors. He knows that the word economy operates best on the basis of free trade, flexible exchange rates, and the free flow of capital across borders. He knows that we in the United States benefit tremendously from the foreign capital invested in the United States, not just the capital that's going recently into our banks as they look to sure up their balance sheets, but also the ten million American jobs that are supported by foreign capital. And therefore we need to be open to investment, including if we want our companies to have opportunities overseas. I think Mr. Buffett was just making a proposition that might be self-evident to those of us in the financial world. I think we need to tell that story more effectively, that foreign direct investment creates jobs in America, creates jobs and opportunity overseas, and that it's a net positive for the economy.

(JD): Can we close the gap between the sovereign funds now -- some of them who feel a little bit disgruntled -- and the European Union and the U.S. and come up with a compromise in the next three to six months?

(RK): Sure, I think we'll see by the Spring meetings of the IMF and World Bank, interim reports on where the effort both with recipient countries and sovereign wealth funds stands, and I think we will see an agreed position by the Fall annual meetings in September. We very much welcome the recent paper by the European Commission on this subject. It starts out by saying 'open investment is essential' and it closes by saying 'we need to approach this issue on a multilateral basis.' I'm going from here to Brussels to continue those conversations and I will say that since you and I last saw each other in Davos, I've been in contact with every single sovereign wealth fund and every single finance minister from the sovereign wealth fund countries. It's a very open dialogue; we are listening and learning. We're not trying to tell people what to do. These are, after all, sovereign wealth funds and we're talking about voluntary best practices. And I think we have a common interest in ensuring that these vital cross-border investment flows, vital to the health of the world economy as well as the national economies, continue.

(JD): As you know Vice President Cheney is beginning a Middle Eastern tour and is said to be going to Saudi Arabia to talk about getting OPEC to put more oil on the market. The way I understand it there is not excess capacity. Is it really politics that we're talking about here, and not really putting more oil onto the market?

(RK): Well, the vice president would be going to quite a number of places in the region covering a broad range of issues -- political, security, as well as economic and financial. He is someone with considerable experience in the private sector, including in the oil services sector. I think I'll have some very good discussions with our partners in the region and talk to them about the common interest we share in a global economy that runs best when all sectors and all segments of the world economy are thriving. Right now we're going through some tough times in the United States, as I said our long term fundamentals are strong and we believe we will continue to grow. But I do think high oil prices right now are one of the contributors to the headwinds we face. I think we will be talking very directly about that issue as it relates not only to bilateral relations but [also to] the global economy. Ultimately, these will be sovereign decisions made by sovereign countries, but sovereign countries will have an interest in the health of the world economy and therefore in the health of the U.S. economy. E-mail to a friend