Tuesday, May 17, 2011

Why Hank Paulson will rescue China but not Lehman Brothers

Richard Spencer

Richard Spencer is one of the Daily Telegraph's Middle East correspondents. He was China correspondent for six years before moving to Dubai, where he lives with his wife and children, last year.

My favourite friend of China, US Treasury Secretary Henry “Hank” Paulson, has decided not to rescue Lehman Brothers. What has his decision got to do with China? Nothing and everything and a delicious irony, as far as I can see.
This news is news because the American government is saying “enough” to intervention. All through the credit crisis, it has been popping around in a very-unlike-Katrina way, injecting billions of cash into the system here, bailing out a mortgage giant there, giving direct subsidies to cash-strapped home-owners all over.
The British government is not innocent of this un-free market-like activity either, meditating deeply on rescue plans for Northern Rock before finally nationalising it.
There have been the odd cries of “Shame!” from the free market ideologues - though not many, since few advocates for self-reliance would actually stand by stroking their beards if they saw their neighbour drowning, particularly if their neighbour also owed them money. But there have been surprisingly few people, even on the left, as far as I can see, and even in Asia, who have pointed out another seeming contradiction.
When other countries find themselves in a debt crisis, as happened across Asia a decade ago, America and world institutions like the International Monetary Fund argued strongly for free market, monetarist solutions: take the pain, cut subsidies, stop bail-outs.
When America (and the West more generally) finds itself unable to pay its debts, on the other hand, the pain must be alleviated by government action – even up to the point of nationalisation of giants like Freddie Mac and Fannie Mae and the giantly ambitious Northern Rock.
Why is the anti-globalisation left not up in arms about this double standard?
And here’s another question.
It brings us back to Mr Paulson and his role as friend of China (for those new to this story, Mr Paulson used to run Goldman Sachs, the investment bank which has made enough billions out of cosy deals on Chinese government-run companies not to have to worry too much about the credit crunch).
Most people seem to agree that one reason for the crunch was that credit both for institutions and individuals in the western world was too easy for too long, allowing individuals to take on too much debt and institutions too much leverage. If this is so, then the economic rise of China almost certainly played a part.
It played a part because the huge rise in low-cost imports from China kept headline inflation rates in the western world unnaturally low and thus allowed central banks to maintain lower interest rates than rises in asset prices – houses, shares, leveraged mortgage investments – would ordinarily suggest to be sensible.
And there is little doubt that Chinese government intervention played a part in this: it kept the yuan low against the dollar, rather than allowing it to float – thus keeping those imports cheap. It dealt with the huge consequent trade surpluses by buying US currency, using its dollars to invest in bonds. Buying bonds is another way of saying lending money, which is to say that the Chinese irresponsibly injected huge quantities of unnaturally cheap credit into the whole bloated system.

So in this case why is the anti-China, pro-free market right not up in arms about that? (I add in “pro-free market” because there is also the anti-China left, but they are not so pro-free market).
Well, here are some answers.
The anti-China, pro-free market right is largely an American phenomenon, and naturally enough will in this year’s presidential election vote largely Republican. And the curious fact is that it is a Republican administration that has overseen the extraordinary interlinking of American free market capitalism with Chinese communism – or state capitalism, as some prefer to call it.
Among the biggest buyers of bonds in Freddie Mac and Fannie Mae is the Chinese government, via the People’s Bank of China. In other words, the American financial establishment arranged for millions of  ordinary Americans unknowingly to take out their mortgages with the Chicoms, as the neoconservative bloggers love to call the folks in Beijing.
And that is just the symbolic icing of the cake of the close relationship between the two economies.
Does the anti-China right want too much stress to be laid on the fact that Mr Paulson, a standard-bearer now for both the administration and Wall Street, was helping his friends in the Chinese government just as much as he was American home-owners when he nationalised FM and FM? No, I thought not.
What about the anti-globalisation left? Unfortunately, the unwinding of first the Asian credit crisis and then the Western credit crunch has revealed much that does not quite fit their picture of social justice as applied to developing and developed industrial states.
One of their arguments was that the experience of the Asian tigers showed that government intervention in industry, including some protectionism, far from being a drag on economic growth as the western free marketeers argued, gave a step boost to modernisation. They pointed to the active roles played by governments in places like South Korea and Taiwan and argued that abandoning these policies because of the antics of bond-sellers and currency speculators was to learn just the wrong lessons from the relative benefits of neo-liberal and interventionist economics.
The trouble for them is threefold: it’s a right-wing, Republican government that is now intervening; it’s intervening because of economic imbalances partly caused by a Chinese protectionism of the sort of which they might well approve, and which could possibly have been avoided if the “currency speculators” had been allowed to speculate with Chinese currency; and above all, because the “government intervention” employed in places like South Korea has been somewhat discredited by the constant allegations of, and convictions for, corruption that have ensued in the fall-out. It hardly behoves those who attack the “political-industrial complex” in America for promoting crude free market economics to start boasting the virtues of systems where the political-industrial complex is firmly institutionalised.
I do not want to suggest myself, by the way, that along with lip-synching schoolgirls, Tibet crackdowns etc we have to start rounding on the Chinese as being “to blame” for the credit crunch. In these great interlocking patterns of globalisation, policy-makers all over the world get into ruts where collisions are impossible to avoid and in the absence of marked roads it is hard to say one driver is more responsible than the other. The American central bank, the Fed, clearly lost control of some of the fundamentals of its economic management, which is its primary responsibility, while promoting its own industrial strength is the proper role of the Chinese government.
But the jolly decision of South Korea in recent months to let off the corrupt leaders of its most important chaebols, or industrial conglomerates, on the grounds that you can’t send to prison the founding fathers of the country’s economic success does make a nice balance. On the other side of the “pond” – the Pacific is the new “pond” – the authors of strange financial instruments designed to engineer fortunes out of the dangerous imbalances created by, among other things, huge east Asian trade surpluses are not being punished either, but at worst being sent off to well-padded early retirement in the Hamptons.
Perhaps the real reason east Asia doesn’t need to sneer at America for its debt problems is that it can laugh at the irony.
In the end it didn’t do too badly out of IMF reconstruction packages. A crisis engineered by state capitalism was ultimately cured by a dose of free market medicine; meanwhile, an excess of free market esprit de folie is being cured by the heavy hand of nationalisation in Wall Street.
It’s too good to be true, really, except for all those from Pasadena to Pusan who lost their homes on the way from one ideological extreme to the other.

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