Robert Mundell, the Nobel Laureate whose research helped lay the foundation for the creation of the euro, said the U.S. and Europe should cooperate to prevent exchange-rate swings from worsening the global recession. The Federal Reserve and European Central Bank should peg their currencies to a range of between $1.20 and $1.40 per euro, and use that as a basis for establishing “a new world currency,” Mundell said in a speech at the Hong Kong Monetary Authority. He also said that Asia should look into creating a regional currency. “The soaring dollar and falling gold price were symptoms of a shortage of dollar liquidity,” said Mundell, who won the Nobel prize in 1999. “Had the Fed recognized this shortage and bought foreign exchange to prevent the appreciation, there would probably have been no financial crisis in the fall.” The dollar rose 30 percent from its record low over four months late last year, making it harder for U.S. banks to sell off their troubled assets, Mundell said. The collapse of consumer and business confidence and the excessive leverage at banks was more responsible for the current crisis, said Gerrard Katz, head of foreign-exchange trading in Hong Kong at Standard Chartered Plc. Pegged euro and dollar exchange rates “would just mean that at some stage the ECB or the Fed would have to defend their currency which is probably something they would not want,” he said. “I’d argue that flexible exchange rates should help address imbalances rather than cause them. But of course I’m biased.” The dollar rose from a record low of $1.6038 reached on July 15 to as strong as $1.2330 per euro on Oct. 28. It was at $1.2956 as of 9:27 a.m. today in London. Mundell-Fleming Model The biggest financial crisis in at least 70 years has already plunged advanced economies into “depression” and things may get worse, International Monetary Fund Managing Director Dominique Strauss-Kahn said last week. Mundell, who with Marcus Fleming created a model used to show the impact of capital flows on economies, said the Fed exacerbated the crisis by allowing the dollar’s surge last year. Rising defaults in mortgage-related securities have triggered almost $1.1 trillion of losses for financial companies worldwide since the start of 2007. Lehman Brothers Holdings Inc.’s attempts to raise cash or sell itself to cover losses failed in September last year as suitors balked at the price, leading to the bankruptcy of the 158-year-old firm. Mundell also said the U.S. should distribute spending vouchers, cut the corporate tax rate to 15 percent from 35 percent, and take over insolvent banks to remove toxic assets before privatizing them again. “The dollar appreciation overvalued U.S. dollar assets, including all fixed-income securities and mortgages, tipping Lehman Brothers and other banks over the edge,” Mundell said. “Lehman was too big to fail but the Treasury let it fail. It was a colossal mistake.”

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