Posted on 01/25/2009 1:47:24 PM PST by nickcarraway
At his confirmation hearings last week, Tim Geithner branded China a currency manipulator. This is a designation that the Bush Treasury Department never formally affixed to the Chinese.
It may signal a nerve-wracking shift in how the United States manages its most pivotal relationship.
Geithner is correct that China manipulates its currency. What’s more, this manipulation is arguably the most important cause of the financial crisis.
Starting around the middle of this decade, China’s cheap currency led it to run a massive trade surplus. The earnings from that surplus poured into the United States. The result was the mortgage bubble.
China’s leaders protest that they are being unfairly scapegoated. Yet while there are rival accounts of the origins of the crisis, neither has the explanatory force of the “blame China” narrative.
The first rival account is that the crisis reflected failings of US financial regulation. Such failings exist, but most have been around for years.
The mortgage bubble reached its craziest extremes in 2005-07, when China was flooding the world with cheap capital.
Moreover, regulatory failings exist not just at one regulator but many.
The Securities and Exchange Commission failed to check risks at broker-dealers such as Bear Stearns. State insurance regulators failed to prevent the collapse of AIG.
The Federal Reserve failed to see that banks were pouring capital into toxic securities that they then held off their balance sheets.
European regulators were no better, even though they had adopted a supposedly more up-to-date set of capital standards.
The lesson: Faced with a deluge of cheap money, no regulatory regime can be expected to prevent bubbles.
The second rival account of the crisis accepts that its origins lie less in regulatory failings than in economic pressures.
But it blames the bubble on two mistakes at home rather than on the glut of capital from China.
Americans should have controlled the urge to splurge, the thinking goes, and borrowed less Chinese money. And the Fed should have shut down the easy-money party by raising interest rates.
If Americans’ insatiable appetite for loans explained the flood of Chinese capital into the United States, we would have seen the evidence in a rising price for those loans – that is, higher interest rates in the bond market.
But bond rates were strikingly low at mid-decade. This strongly suggests that it was the supply of lending that went up, not the demand for it.
Chinese money flooded into the United States because of the push factor from China, not the pull factor from Americans.
Could the Fed have raised interest rates to avert the bubble? The Fed’s monetary policy was indeed too loose. But as Martin Wolf argues in his recent book, “Fixing Global Finance,” it’s not clear that higher interest rates could have prevented the trouble.
Once China decides to export vast quantities of capital, that capital has to go somewhere. Higher interest rates in the United States might have encouraged the world’s savers to park even more of their capital in this country.
So there is no getting around China’s culpability. The country relies on the sort of export-focused growth strategy that other Asian Tigers have pursued, with the difference that China is too big to go this route without destabilising the world economy.
The real question is whether it is diplomatically fruitful to push China to change. The Bush administration tried and failed. Why would the new team fare better?
The wrong answer is to say that Barack Obama’s guys will be tougher.
However egregious China’s currency policy may be, it’s counterproductive to punish Beijing with sanctions.
For one thing, a trade war is the last thing the world economy needs. For another, as Geithner explained, the immediate priority is to get global growth going, so it’s more important to persuade China to extend its fiscal stimulus than to revalue its currency.
Besides, reforming China’s exchange-rate policy is not the only way to wean the country off its high-savings, high-export model. The savings rate partly reflects China’s lack of social safety nets. If the Chinese spend some of their stimulus on pensions and health care, they will be heading in the right direction.
Still, there is an opportunity to nudge China toward currency reform, and the Obama team should take it. China’s leaders are not fools: They can see the effects of their policy not only in collapsing Wall Street banks but also in their own collapsing exports.
The bubble that China inflated has brought China’s foreign customers to their knees. Because China pushed its export model too aggressively, its export markets have cratered.
Think of it this way: China’s position is akin to that of Opec in the early 1980s. Two oil shocks taught oil producers the limits to their power: When they jammed prices up, the world economy sputtered and motorists bought smaller cars – and oil prices fell precipitously.
Opec learned to balance its lust for higher oil prices with the fear that customers might revolt. China’s leaders may be ready for the same lesson – and Geithner’s words may encourage them to learn it.
Few people understand that the Chinese government couldn’t care less about being fair or getting along.
After the legations and other humiliations China has suffered, no one is going to stop them from getting to the top and staying there.
The U.S. manipulates it's currency too.
The “mortgage crisis” has nothing to do with China.
It has EVERYTHING TO DO WITH DEMONCRATS.
It was incremental passing of laws till it got to the point where we went past a “chicken in every pot” to a house to whoever couldn't afford it.
We'd better be nice to China. They OWN OUT ever increasing DEBT that we as a NATION ran up.
Yes, China has cheaper labor than the U.S..
China is POOR country.
China does NOT have UNIONS.
China does NOT have DRACONIAN ENVIRONMENTAL LAWS.
THIS is what is killing manufacturing and SKY HIGH LIBOR rates in the U.S.. The U.S. is too STUPID to change that so MORE work will go over seas.
Exactly, the definition of spending more than you earn is DEMOCRAT.
The other side of the coin is that china better be careful, because we owe them lots and lots of money.
They can get to the top...however, not on the backs of Americans. China is dangerous. We should not be helping them make bunches of money which they will use to build weapons. Also, I would rather eat dirt then any food from China.
China has slave labor and pollutes to such a degree, most of their products are unsafe. China just plain sucks.
For one thing, a trade war is the last thing the world economy needs.So there is no getting around China’s culpability. The country relies on the sort of export-focused growth strategy that other Asian Tigers have pursued, with the difference that China is too big to go this route without destabilising the world economy.
China is already on a trade war footing. It is past time for the trade "partners" read VICTIMS to wise up.
Rather, it sees itself as a competitor, who will eventually supplant the US as the premier power in the world. People would do well to remember that.
People like you are why China moves UP in the world.
They don't have “slave labor”.
Their cost of living is low and no where near as high as the U.S.. In fact because of people WORKING and becoming more affluent as it happens with CAPITALISM, the “one child policy” is being relaxed.
China doesn't buy into your environmental religion and neither do I. More business will continue to flee the U.S. because of it.
China manufactures to the guidelines of the U.S. companies.
As for you last complaining “China just plain sucks”, that's par for the course from people like YOU.
“The other side of the coin is that china better be careful, because we owe them lots and lots of money.”
No, they’ll just unload and totally DEVESTATE our dollar. That would be WORSE for U.S.. China will continue to thrive. The U.S. is not the only country it serves.
“Exactly, the definition of spending more than you earn is DEMOCRAT.”
Try explaining that to some of the arm chair arses.
Not the only country...but the MAIN country.
nmh, China cities would consider LA on a horrible smog day to be a step up. When they had the Olympics, all manufacturing had to stop for a month in an attempt to clean the air. Also, China still uses “political” prisoners as slave labor. My friend, you have much to learn about China.
“Exactly, the definition of spending more than you earn is DEMOCRAT.”
Oh! And here I thought it was “George W. Bush” or “REPUBLICAN”. I must have misunderstood the past 8 years.
The deficit spending by the US government is, guess what, the fault of the US congress and the executive branch.
Our government goes into massive debt and finances this debt by selling it to, among others, China. Then our deficit spending spree is China’s fault because it bought our debt? That is beyond stupid.
It is way past time for congress to be blamed for running the currency printing presses at full blast for decades.
Will Senator Dodd and his cohorts have to stand in line with a wheelbarrow full of money in order to buy bread? As we will have to do when the hyper inflation hits THAT THEY CAUSED.
Is this piece saying that Chinese toy-makers rang up the bulk of the sub-prime home mortgages in the US?
The degree of absolute stupidity and chutzpah encapsulated within this article represents the apogee of Democrat blame apportioning for their own stupidity. The “its not my fault, it’s yours!” rhetorical weapon honed to a razor sharp absurdist edge.
A man who spends more than he earns, opens up multiple lines of credit, saves nothing, and then ends up in bankruptcy has no one to blame but himself.
China manipulates it currency, then again, so does everyone else. The fundamental truth is all currencies are not simply valued by the market but rather are heavily influenced by central bank policies with the U.S. dollar at the core of the global system of government manipulation.
China has not flooded the world with cheap currency in the slightest. The Yuan is not a freely convertible nor does China use it’s trade generated surplus to invest. Nearly all of it is dumped with U.S. treasuries and bonds. The capital glut was exacerbated by the Japanese Yen carry trade where investors could borrow at no cost from the BoJ due to zero interest rates and then invest it elsewhere.
Exculpating the failures of U.S. financial regulators is absurd. It’s admitting that many of them were massive failures and then turning around and saying because so many failed that they weren’t responsible for failing.
Asset value bubbles can be avoided easily, simply stop printing money and raise interest rates and presto, no more credit fueled asset bubbles. Something that Greenspan and the federal reserve were simply not willing to do.
Blaming Chinese capital for excess liquidity in the U.S. is like blaming bigfoot for you forgetting your wife’s anniversary. Interests rates were, are, and continue to be higher in China than in the U.S. which has followed a low interest rate policy as par course (it is effectively at 0% now). Only in Obamaland can someone make money borrowing at 8% in China, investing in the U.S. at 2% all at the same time the Yuan appreciates by 20% against the dollar. This kind of nonsense 2 + 2 = 5 Chewbacca Defense would be pathetic were it not so alarming that so many idiots would actually believe in it. The culture of responsibility and common sense is so sadly missing in America today.
It is exactly what it is saying. Of course the massive entitlement spending by the government and U.S. consumers at large (granite counter tops and stainless steel appliances for everyone!) should be conveniently swept under the rug and ignored lest the taxpayer gets wise.
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