In The Global Credit Crisis as History, Professor Barry Eichengreen (Berkeley) asserts that the rest of the world has not reacted as proactively as the U.S. due to a pre-existing “American” narrative regarding the importance of government intervention in preventing the Great Depression. He reaches for some interesting historical parallels – on Asia, and the emerging dynamics between Japan, China and the U.S. he writes:

It is tempting to draw an analogy between China’s reluctance to top up the financial resources of the IMF and the refusal of the United States to join the League of Nations after World War I.  Pushing this further, there is the parallel with Charles Kindleberger’s interpretation of the interwar depression – that it resulted from the inability of the declining power, Great Britain, to exert leadership and the unwillingness of the rising power, the United States, to do so.  In fact this comparison is overdrawn.  China’s economy is still less than a quarter the size of that of the United States at market exchange rates… In contrast, the United States had already surpassed Britain in absolute economic size in the 1870s… But China is not yet in the position to exert the kind of leadership that could be reasonably expected of the United States in 1929…

… But whichever route is taken, not accommodating the rising power by giving it a seat at the table and a voice in key deliberations is a recipe for disaster.

But really, what is this: “The White House press secretary, Dana M. Perino, said Mr. Bush would insist on aiding only those automakers that can survive long term. ‘Long-term financing must be conditioned on the principle that taxpayers should only assist automakers executing a credible plan for long-term viability,’ Ms. Perino said in a statement.” The NYTimes article is here.

Isn’t the fact that they need financing an indicator that they are not viable? What does a “credible plan” look like? They haven’t done a fabulous job of planning thus far, why will they do it now that they know the government won’t allow them to fail?

The financial crisis has afforded an excellent opportunity to witness numerous retreats to ideological preconception; broadly divided between asinine generalities like: “Bush did it!” / “government intervention caused the crisis!” / “corporate stooges are evil!” Being a member of the corporate stoogery school of thought, these events have forced a painful evaluation of deeply held beliefs. Instead of nuance though, perhaps subscription to a new mantra is in order.

Niall Furgeson has an excellent article in Vanity Fair (who knew there was a reason to subscribe to Vanity Fair other than to impress guests with your acute cultural awareness?) One line that’s been appearing over and over again is the crisis’ intimate connection to rapid growth in Asia in the past decade. Even if not the single most important reason, the narrative still dovetails with a Sino-centric world view:

The benefits for the United States were manifold. Asian imports kept down U.S. inflation. Asian labor kept down U.S. wage costs. Above all, Asian savings kept down U.S. interest rates. But there was a catch. The more Asia was willing to lend to the United States, the more Americans were willing to borrow. The Asian savings glut was thus the underlying cause of the surge in bank lending, bond issuance, and new derivative contracts that Planet Finance witnessed after 2000. It was the underlying cause of the hedge-fund population explosion. It was the underlying reason why private-equity partnerships were able to borrow money left, right, and center to finance leveraged buyouts. And it was the underlying reason why the U.S. mortgage market was so awash with cash by 2006 that you could get a 100 percent mortgage with no income, no job, and no assets. 

There have been a lot of posts regarding China’s coming crash. Tyler mentioned a few weeks ago that the financial crisis would become extremely severe if the China bubble simultaneously popped. Optimists note that China has much more room to maneuver than others. Notably, Beijing is sitting on top of a massive war-chest of USD ($1.9 trillion, forecast to reach $2.7 trillion by the end of next year). Pessimists point to extensive trash-loans, dubious evaluations of fiscal fundamentals, demographic problems, the environment…

The recently (here at least) introduced ‘cooling global economy’ meme has been cited as the prime reason for rapidly deepening rural land reforms. This can, they argue, increase domestic demand to prop up China’s economy even if exports decline dramatically. Maybe in five years? These are smart, clever Communists – not the idiots of my fantasies – so why are they focusing time and money on *rural* reform? My feeling is that there were a significant number of CCP members that opposed further rural reform (especially after removing *all* national agricultural taxes last year), but who have been sufficiently frightened by the prospect of declining exports. Though there’s no chance of this having any impact immediately, the crisis seems to have served as a wake-up call of sorts. So long as the slowdown isn’t too extreme (less than ~8.5%) or prolonged, this may be a very good thing. More to come once I sort out thoughts.

“Well, you see, at the time we thought that by employing sophisticated non-linear-fractal portfolio theory and securitizing debt we could reduce institutional risk while simultaneously maximizing available liquidity, thus allowing for more efficient allocation of resources and capital.”

我们错了。
wǒ men cuò le

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