Tuesday, September 16, 2008

How NOT to Teach China a Lesson

"It is the government's duty to intervene. Now we have a very good example that it is acceptable."    -- former Chinese government advisor

What is this government official referring to? Could it be the Russian invasion of Georgia? The latest move by Venezuelan strong-man Hugo Chavez to nationalize more of his country's industry? Not at all. The official refers to Treasury Secretary Paulsen's decision last week to effectively nationalize the U.S. mortgage industry.

As fellow blogger, Gallileo articulated last week, this nationalization was simply making a long standing situation explicit. However, this very public act serves as a demonstration of how far away from the free market the US has actually strayed, and how badly we undercut our efforts to influence other nations' policies.

From a Wall Street Journal article, "U.S. Plan serves as Template For China to Bolster Its Markets"

Still, over the past 30 years, China has studied the U.S. economic model and cherry-picked elements to introduce little by little. It has adopted U.S.-style financial principles to build a market-based system for trading stock. It has invited U.S. financiers to help, with cash and advice, transform its banks into consumer-focused firms with mortgages and private lending. America-focused economic courses are popular at Chinese universities.

U.S. officials have often called on China to cease heavy-handed interventions and occasionally lectured Beijing on financial issues such as how it manages its currency. With the U.S. having to increase its own market intervention, foreign calls for liberalization are likely to be received more cynically in Beijing.

"I think the Chinese regulators will learn the wrong lesson from this," says Liu Jing, professor of accounting and finance at the Cheung Kong Graduate School of Business in Beijing. "Both systems have problems. The problem in China is too much government control, not too little. And they will end up thinking that they should control even more."

The Federal bail-outs, nationalizations and liquidity injections over this crisis are some of the largest interventions in the financial sector since the Great Depression. They are an example of statism, and statist moves. But as this example points out, the US is seen by others as trumpeting the free-market, as an example of how to run free markets, and it is the name of the free market that will be sullied instead of the true cause here, statism.

As Yaron Brook effectively points out in his recent Forbe's op-ed, "The Government Did It," the blame for this financial crisis is to be laid squarely at the doorstep of big government and statist policies. This not an example of the free market mismanagement, but of statism, using an altruist philosophy, run amok.

Again, the The Wall Street Journal article,

Overall, however, the U.S. housing crisis has raised questions about the wisdom of adopting too much American-style capitalism that aren't likely to dissipate soon. The U.S. mortgage crisis is "sobering" for Chinese, who are used to believing "that American financial markets are the best regulated and best managed," says Mr. Zhou [Zhou Dunren, deputy director of the Pudong Institute for the U.S. Economy].

What other nations get wrong when they see this example is that this is a case of American-style statism, not capitalism. True American-style capitalism takes one form, lasseiz-faire, and it would do America some good to once again start practicing it.


Kendall J said...

Just as a follow-up comment, I am always surprised to see economic issues only marginally addressed by my fellow OBloggers.

I don't believe that the abrogation of property and property rights in this country as evidenced by taxation and government interference in the economy has really shifted much since the 60's and the Great Society. Taxation is steadily becoming more progressive and economic interference more redistributive, essentially weighting down the productive Atlases of the nation. The difference today is that with the partial liberalization of other economies, business has somewhere to go, and America is for the first time threatened with a real and continual decline. I believe it is this trend that has the greatest potential to destabilize the nation, and I'd sure like to see more of my Oblogger friends begin to discuss it.

Galileo Blogs said...

Postscript: The U.S. government has just nationalized AIG, the world's largest insurer. In exchange for providing $85 billion in emergency financing, the government gets warrants equivalent to 80% of the company's equity. The government is now the de facto new owner of AIG.

When does it end?

It is particularly disturbing to see the U.S. go the route of nationalization, a route taken by the British after World War II. Even during the Great Depression, which was a far greater financial crisis than this one (so far), the government did not go there. Instead, it opted for massive increases in taxation and novel, egregious regulation, which was bad enough.

Once nationalized, it is very difficult to de-nationalize. It took Britain several decades and a remarkable woman, Margaret Thatcher, to accomplish that.

America is ratcheting tighter the screws of statism, now of a socialist variety to complement the fascist road we are still on. Once tightened, those ratchets will be very hard to loosen.

We are facing a new New Deal combined with British socialism.

Of course, it is always possible to reverse these trends. In fact, the U.S. avoided widescale nationalization during the savings and loan crisis. Banks were liquidated and their assets were sold back into the market. This time seems different, though. Government appears to be bailing out AIG to prevent a liquidation.

Kendall J said...

Thanks GB. Your comparison of govt handling of this crisis relative to previous crisis also indicates the seriousness of this particular one. The Executive Branch is choosing the absolute wrong policy to deal with the situation. What was caused by government controls is ending with even more government controls. A recipe for future disaster not stabilization.

The best course would have been to allow banks to fail, and consolidate according to the free market, and most importantly to break up and privatize Fannie and Freddie.

I've found even among a few objectivists the notion that a failure or bankruptcy somehow destroys the underlying assets of a corporation. In fact the underlying assets will remain and be revalued. Only the financing entities change. Equity holders will lose most or all of their value, debt holders will also lose or become new equity holders and new debt financing will be obtained, but under terms that appropriately value the company. A bank failure is not an end of the world senario.

The Garbage Goal Guru said...

Or maybe your wrong and it really is free market gone amok as suggested in this article:

Whenever you allow big, impactful, global companies make bad, bad decisions you are setting yourself up for a crisis of epic proportions.

Renee Katz said...

We don't have a free market. We have a mixed economy, i.e., a mixture of capitalism and socialism. The capitalist part automatically gets blamed for everything bad, because socialism has worked so well in the past, right? How could it possibly be the cause of any economic problems?!

Kendall J said...

Renee said, "We don't have a free market. We have a mixed economy, i.e., a mixture of capitalism and socialism."

Right there is the crux of the issue, Renee. You know that. I know that. But the conventional wisdom is that America is the torch bearer for "capitalism" so capitalism gets the black eye when the blame gets tossed out.