The crisis leading to a Wall Street rescue exposed market risks, but also tested our determination for continuing reform in China.
By Hu Shuli – Caijing Magazine 14 October 2008
After several twists and turns, the US$ 700 billion financial system rescue plan passed the U.S. House on October 3, allowing the U.S. Treasury and Federal Reserve Board to continue playing white knight. The government also increased lending limits for commercial banks, bought unprecedented amounts of short-term debt, and orchestrated the joint cuts in interest rates by six central banks around the world.
I was traveling in the United States when the massive rescue package was unveiled. I heard complaints as well as concerns from average Americans about the outlook for the U.S. economy. Taxpayers who felt unfairly hijacked by the Wall Street bailout were bitter.
The bailout’s high cost cannot be denied. The pain is real, and it will linger for a long time. Whether the plan eventually resolves the crisis remains to be seen. But clearly, an urgent solution was needed. It could not wait for the presidential election, and has ended up adding to the force pushing the Republicans out of the White House.
The financial crisis that began with the subprime debacle taught several lessons about lax regulation and overextended credit. It showed how seeds for loan defaults and today’s liquidity shortage were planted in a real estate bubble.
It’s the responsibility of the U.S. government to take quick action to restore normal market operations. We’ve observed its carefully considered decisions to lend assistance. Commercial banks and insurance firms were targeted for help, while independent investment banks were let go. In terms of timing, the gigantic rescue plan came only after stocks in targeted financial institutions sank and their investors paid dearly. The risks to be shouldered by the government were reduced. The most optimistic view is that the value of assets bought by the Treasury will rise in better times to reward the government, as well as taxpayers, with high returns. But nobody can pin hope on that.
This action can be called a bailout, but it’s by no means a market-boosting measure. In fact, the U.S. government had no choice but to rescue Wall Street. Without government involvement, the crisis may well have spilled into the real economy, America’s so-called Main Street. It’s worth noting that congressional approval of the measure failed to stir enthusiasm on the stock markets, as share prices went against the will of politicians and continued slumping after the plan’s passage.
Perhaps the biggest loser is a belief in the free market that underpins the U.S. system. Concern about the moral hazard of the government’s action is apparent as well: the bailout does not really eliminate risk, but gathers risk elements and hands them to the government which, in turn, may further encourage reckless risk-taking. Moreover, a new “State Street” in the American economy could emerge to complement Wall Street and Main Street. This state sector would, as a money lender, control a number of financial institutions and operate as a mega-holding company.
What could be worse? If the bailout plan doesn’t work, the U.S. government will have few choices. A failure to stop falling asset values would mean that taxpayer money vanishes with troubled companies. The U.S. fiscal deficit might reach 10 percent of GDP, and the country might follow Japan into the economic doldrums for a long time.
It’s still too early to comment on the effectiveness and impact of the rescue plan. If it is only an emergency step, and the government manages to veer back onto the old track of a free market, then negative impacts will be controllable. If some measures are made permanent, the crisis could become a turning point for the U.S. economy. Looking at the history of American financial crises, the latter is very unlikely.
Rescue action is neither “socialism” or “capitalism.” This action is a last resort for a government trying to manage its economy. China should interpret it correctly: if we take emergency action as normal practice – and second-guess our belief in the free market for China – we might delay China’s own market reform.
Whatever the outcome of this rescue plan, it can’t stop a slowdown in the world economy. Now, China faces a difficult challenge. What the country needs is to push forward with market reforms, spur domestic consumption and shift the basis for its economy from external to internal demand. For the long-term benefit of China’s economy, as well as China’s capital market, this shift should be our current focus.
China will soon celebrate its 30th anniversary of market reform policy. Looking back, the journey was not without problems. But the direction is increasingly clear. The current crisis is yet another test. Can we continue the reform? Can we draw a clear line between market and government? The answer will determine China’s future.
1 comment:
America’s ‘State Street’ and China’s Future
The crisis leading to a Wall Street rescue exposed market risks, but also tested our determination for continuing reform in China.
By Hu Shuli – Caijing Magazine
14 October 2008
After several twists and turns, the US$ 700 billion financial system rescue plan passed the U.S. House on October 3, allowing the U.S. Treasury and Federal Reserve Board to continue playing white knight. The government also increased lending limits for commercial banks, bought unprecedented amounts of short-term debt, and orchestrated the joint cuts in interest rates by six central banks around the world.
I was traveling in the United States when the massive rescue package was unveiled. I heard complaints as well as concerns from average Americans about the outlook for the U.S. economy. Taxpayers who felt unfairly hijacked by the Wall Street bailout were bitter.
The bailout’s high cost cannot be denied. The pain is real, and it will linger for a long time. Whether the plan eventually resolves the crisis remains to be seen. But clearly, an urgent solution was needed. It could not wait for the presidential election, and has ended up adding to the force pushing the Republicans out of the White House.
The financial crisis that began with the subprime debacle taught several lessons about lax regulation and overextended credit. It showed how seeds for loan defaults and today’s liquidity shortage were planted in a real estate bubble.
It’s the responsibility of the U.S. government to take quick action to restore normal market operations. We’ve observed its carefully considered decisions to lend assistance. Commercial banks and insurance firms were targeted for help, while independent investment banks were let go. In terms of timing, the gigantic rescue plan came only after stocks in targeted financial institutions sank and their investors paid dearly. The risks to be shouldered by the government were reduced. The most optimistic view is that the value of assets bought by the Treasury will rise in better times to reward the government, as well as taxpayers, with high returns. But nobody can pin hope on that.
This action can be called a bailout, but it’s by no means a market-boosting measure. In fact, the U.S. government had no choice but to rescue Wall Street. Without government involvement, the crisis may well have spilled into the real economy, America’s so-called Main Street. It’s worth noting that congressional approval of the measure failed to stir enthusiasm on the stock markets, as share prices went against the will of politicians and continued slumping after the plan’s passage.
Perhaps the biggest loser is a belief in the free market that underpins the U.S. system. Concern about the moral hazard of the government’s action is apparent as well: the bailout does not really eliminate risk, but gathers risk elements and hands them to the government which, in turn, may further encourage reckless risk-taking. Moreover, a new “State Street” in the American economy could emerge to complement Wall Street and Main Street. This state sector would, as a money lender, control a number of financial institutions and operate as a mega-holding company.
What could be worse? If the bailout plan doesn’t work, the U.S. government will have few choices. A failure to stop falling asset values would mean that taxpayer money vanishes with troubled companies. The U.S. fiscal deficit might reach 10 percent of GDP, and the country might follow Japan into the economic doldrums for a long time.
It’s still too early to comment on the effectiveness and impact of the rescue plan. If it is only an emergency step, and the government manages to veer back onto the old track of a free market, then negative impacts will be controllable. If some measures are made permanent, the crisis could become a turning point for the U.S. economy. Looking at the history of American financial crises, the latter is very unlikely.
Rescue action is neither “socialism” or “capitalism.” This action is a last resort for a government trying to manage its economy. China should interpret it correctly: if we take emergency action as normal practice – and second-guess our belief in the free market for China – we might delay China’s own market reform.
Whatever the outcome of this rescue plan, it can’t stop a slowdown in the world economy. Now, China faces a difficult challenge. What the country needs is to push forward with market reforms, spur domestic consumption and shift the basis for its economy from external to internal demand. For the long-term benefit of China’s economy, as well as China’s capital market, this shift should be our current focus.
China will soon celebrate its 30th anniversary of market reform policy. Looking back, the journey was not without problems. But the direction is increasingly clear. The current crisis is yet another test. Can we continue the reform? Can we draw a clear line between market and government? The answer will determine China’s future.
Post a Comment