Paulson Scolded China for Controlling It's Capital Markets (and Other Tales of Whoa)

By Lee Russ

Thursday, September 25, 2008 at 02:02 PM

Think the Chinese are laughing now? According to a Bloomberg article yesterday, the valiant Hank Paulson (emphasis added):

...told an audience at the Shanghai Futures Exchange that China risked trillions of dollars in lost economic potential unless it freed up its capital markets.

``An open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention,'' Paulson said.

Wow. Doesn't that engender all kinds of confidence that big Hank, little Ben and littler George will be able to lead us out of this nightmare? Think Paulson's looking forward to meeting those folks again, perhaps as he comes hat in hand asking for their financial aid?

In any case, the recent fiasco in our country has China rethinking the wisdom of using the US as a model as it continues to expand and modernize it's economy. From the same article:

That advice rings hollow in China as Paulson plans a $700 billion rescue for U.S. financial institutions and the Securities and Exchange Commission bans short sales of insurers, banks and securities firms. Regulators in the fastest-growing major economy say they may ditch plans to introduce derivatives, and some company bosses are rethinking U.S. business models.

"The U.S. financial system was regarded as a model, and we tried our best to copy whatever we could," said Yu Yongding, a former adviser to China's central bank. "Suddenly we find our teacher is not that excellent, so the next time when we're designing our financial system we will use our own mind more."

The recent moves by Paulson, the former chief executive officer of Goldman Sachs Group Inc., contradict what the U.S. told Asian governments over the past decade. Thailand, South Korea and Indonesia were urged to let unviable banks fail during the 1997-98 Asian financial crisis.

You certainly don't hear much about it in the major US media, but numerous folks on the international scene are pointing to this disaster as the tipping point in a move "to the left" at least in the sense that free marketeerism is clearly taking a major hit to its already shabby reputation. In the Bloomberg article, Andy Xie, an independent analyst who formerly served Morgan Stanley's chief Asia economist, is quoted as saying:

It's the end of an era...In 1989, when the Berlin Wall fell, socialism was discredited and the whole world turned right. Now financial capital has been discredited and the whole world, including the U.S., is turning left.

That's pretty much in accord with the views of Didier Cossin, banking and finance professor at Switzerland's IMD business school, set forth in an article from China Daily(emphasis added):

Challenging the argument that the current financial crisis is the result of failed regulation, Didier Cossin, a professor of banking and finance from Switzerland's IMD business school, claimed that the crisis is about a culture of greed rather than a lack of regulation.

He said that the nationalization of a triple-A insurance company is more telling than the fall of a leading investment bank like Lehman Brothers.

"Everyone knows that investment banking is a risky business," said Cossin. The fact that AIG was highly regulated but still failed points to a culture of greed in the financial sector.

As to how long the current financial crisis will last, the professor refused to forecast but insisted that the cost of credit will rise.

"And the long-term consequence of the crisis may be the end of the free-market way of thinking," added Cossin.

Even the Wall Street Journal carries a story today in which the head of the Chinese Banking Regulatory Commission says that the American Problem started with the trashing of the Glass Steagall Act:

According to Mr. Liu, the chief regulator for China's banking sector, "the problem started a good 10 years ago, when people over there [in the U.S.] thought, 'We've got to boost innovations. So the Glass-Steagall Act is just the last stumbling stone on our way ahead. Move it away.'"

Mr. Liu isn't "100%" in favor of the Act, which separated commercial and investment banking in the post-Depression era. (The U.S. repealed the law in 1999, under the Clinton administration.) But he maintains that this separation is good for China, where, he says, the capital market is the capital market, and the banking industry is the banking industry.

As proof, he points to the difference between the health of China's banking sector and its capital markets. Aggregate net profits for Chinese banks in the first half of this year are up 67% year-on-year, according to a recent report by Fitch Ratings. Meanwhile, China's Shanghai stock market, where investors are anticipating a coming economic slowdown, is down almost 60% this year to date.

"When China's capital markets went up . . . we called a meeting" of all the financial institutions, Mr. Liu says. The regulator told them: "'Keep away from capital markets. . . That's your task, and your mission.' Then we launched a huge campaign . . . to check their credit disbursement, and trace the money," to make sure banks weren't lending money to speculators, he explains.

There was even a rumor last night that China's Banking Regulatory Commission had prohibited Chinese banks from lending to American banks, but this morning the head of that Chinese agency denied this. The confusion may--I emphasize "may"--stem from the fact that the head of that agency, according to a Chinese news agency, warned China's banks to:

..guard against liquidity risks, market risks and operation risks in response to the U.S. subprime crisis, Liu Mingkang, chairman of the China Banking Regulatory Commission, said on Thursday.

The shareholding commercial lenders also need to actively avert credit risks brought about by the economic slow-down, Liu told a bankers' meeting in Beijing.

He urged banks to boost corporate governance and internal control, closely watch the major developments in the global financial sphere and improve the ability to predict and avert international risks.

It is entirely possible that "guard[ing] against liquidity risks, market risks and operation risks in response to the U.S. subprime crisis" would be interpreted by Chinese bank heads as meaning stay the hell away from US banks. Yes, the US may now be viewed as the planet's financial Typhoid Mary.

The Bush and the Bandits crew is really something else. They launch an invasion of Iraq to show people in that area, especially Iran, that the US is not to be messed with. The result is a clear demonstration that our strength has severe limits, and we strengthen Iran.

They flip off all or most of Europe and deride them as irrelevant, only to clearly demonstrate that these countries are essential to our getting much done around the world.

They harp on tax cuts, tax cuts, tax cuts like its a mantra, insisting that the lower the txes, the higher the government income, only to leave office as the poster boys and girls for the biggest, most incredible, mind bogglingly large deficit.

The undertake a mostly clandestine attack on government agencies, trashing regulation after regulation, all the while pushing the ideology that "the market" is all you need to accomplish anything, only to demonstrate pretty clearly to the world and to the poos souls living here that "the market" is, in fact, what it has always been: a theoretical construct with severe and consistent flaws that will eat you alive if you don't keep a careful eye on it.

And John McCain/Sarah Palin agree that we need less government regulation.

Be honest: back in 2000, did you ever in your wildest dreams imagine that you would have to live through something like this in the US? Too bad Milton Friedman died before he could get a first hand look at what his cockamamie theories wrought.