The Chinese Marshall Plan
It was always obvious late last Summer that Hank Paulson’s decision to fully backstop Fannie Mae and Freddie Mac was driven by bullying from China. Today’s Wall Street Journal just puts a bow on it by giving us the tick-tock on the hand wringing in Beijing:
The alarm for Chinese leaders started ringing loudly in July and August as problems deepened at Fannie and Freddie. Senior Chinese leaders, who hadn’t been apprised in detail of how China’s reserves were being invested, learned for the first time in published reports that the country’s exposure to debt from those two alone totaled nearly $400 billion, say people familiar with the matter.
Fearing that the U.S. government might not fully back the companies, China demanded and received regular briefings throughout the peak of the crisis from high-level Treasury Department officials, including Mr. Paulson, on the market for U.S. debt securities — especially those of the mortgage giants. [ . . . ]
While Mr. Paulson was in Beijing for the Olympics in August, he dined with Mr. Zhou, the central bank chief, at the Whampoa Club, an upscale restaurant that serves modern Chinese cuisine in a traditional courtyard building near the city’s Financial Street.
On Sept. 7, Mr. Paulson announced that the U.S. government would seize Fannie and Freddie, but Chinese officials remained concerned.
What’s interesting to see in this story, especially the top where the Chinese leaders give American institutions a well-deserved tongue lashing, is the way the Chinese fail to see that they’ve already had the benefit of their investment in American mortgage-backed securities. In fact, the recycling of Chinese profits into American mortgage debt is beginning to look like a 21st Century Marshall plan gone awry.
By investing in the US, the Chinese primed a consumption pump that created demand for their goods. That demand absorbed the huge number of workers coming to the cities over the last decade and accelerated China’s growth. In other words, the Chinese encouraged and enabled the irresponsibility of American households because it created demand for their goods.
After World War 2, the US faced a crisis of productive over-capacity. The solution was to send a lot of money to Europe that would then be used to buy American goods. In the case of the original Marshall plan, the sorry state of post-war Europe gave the plan a humanitarian glint. But that shouldn’t mask the real value of the Marshall plan or its intent.
Flash forward fifty years and you have China eager to raise the standard of living at home. Only this time, North Americans are tapped out, not because of a devastating war but because of devasting dotcom bubble bursting. There’s no way to dress this one up as the good guys coming to the aid of their fallen cousins.
That’s a shame. I don’t know what the final accounting was on the Marshall plan loans. I’d be curious to know. But in reading these stories, I’m beginning to think the Chinese are being a little disingenuous when they keep demanding that their investment in US securities be safeguarded.
Source:
Chinese Premier Blames Recession on US Actions
By JASON DEAN in Beijing, JAMES T. AREDDY in Shanghai and SERENA NG in New York
Wall Street Journal; January 29, 2009
http://online.wsj.com/article/SB123318934318826787.html
January 30th, 2009 at 12:41 am
We should not have backed Fannie/Freddie. With those debts added, I’m afraid the US won’t avoid default (be it explicit or implicit via inflation).
January 30th, 2009 at 5:03 am
The Chinese should start buying tractors buy the boatload and give it to all their poor farmers. That would make the production of agriculture in China hyper efficient, drive down food costs and shut the farmers up. Not only that but it would create tons of jobs for tractor makers, fertilizer companies etc. and it might even solve the world food crisis.
They have all this extra money. They should invest in the very basic of the basic. Not in mortgages in the U.S. Once their breadbasket is built and producing at maximum efficiency then everything else will follow. Fill people’s bellies cheaply, they will get healthy and then they will build your society
January 30th, 2009 at 6:21 am
Interesting comparison. But this seems to frame the question whether to safeguard chinese investments in the US as a moral question: “are we morally obliged to safeguard them?”. That question should be answered piecemeal: are we morally obliged to safeguard their GSE investments? Here clearly yes. There was an implicit government guarantee explicitly touted by the GSE’s themselves and not denied by the government. Not guaranteeing what you promise to guarantee is breaching an obligation. Really not very complicated. Safeguarding their investments in the banks is another matter.
But beyond that, there is the prudential question: is it in our self interest to safeguard such investments? Here the question is a matter of predicting the level of losses and likely backlash from China. That’s a bit more complicated and also a bit more interesting.
January 30th, 2009 at 11:10 am
@HTCMSI
Your idea mostly makes sense. The problem is that once people are well fed, they will start demanding flat screen TVs and Britney Spears videos.
The long term solution is to decrease population so there is more stuff to go around (not just in China — worldwide, including here in the U.S.A.). Interestingly, that also solves the climate change problem: less people = less carbon.
January 30th, 2009 at 5:08 pm
Otto,
I strongly disagree. Every time the government and GSEs talked they said that there was no government promise to back the GSEs. Now no one believed the government and in then end by acting as if their was an implicit guaranty they actually made themselves one. They made themselves too big to fail. But don’t forget that there were verbal explicit warnings that the GSEs were NOT government backed. Nor should they ever have been. They should be let to fail.
January 31st, 2009 at 1:03 pm
hum – had to log in again – cross tabs no window close
Thanks for the history – interesting post and comments
aypay … I’m wonder’g if some dork like me long back started the GSE logo and it stuck
http://en.wikipedia.org/wiki/Government_sponsored_enterprise
On agriculture and social culture – China has been at it a long time. They’ve been doing something right to get to the point of 1 child per family per in-country space available. Britney Spears videos – that may scare them most of all.
Lastly – I believe they were forced to follow for a time the industrial revolution or face/fear annihilation. Now they’re here, there’s no going back.
ps – love the Google spelling helper and wiki
http://en.wikipedia.org/wiki/Annihilation
February 1st, 2009 at 4:09 pm
>> There’s no way to dress this one up as the good guys coming to the aid of their fallen cousins.
Who was or is trying to dress it up like that? Can you provide a link to someone notable that suggested China was trying to be charitable?
They probably thought they were getting or eventually going to get something of value in return for their goods.
February 1st, 2009 at 6:18 pm
wunsacon,
You’ve got the idea backwards. The Chinese didn’t buy our debt as an act of charity. They bought our debt because it was the only safe place to put their profits from selling us goods. They bought GSE debt because the budget surplus of 2000 caused the end of the 30yr. bond. Greenspan et al. told the Chinese to buy GSE debt because it was as good as a treasury which is what forced Paulson to follow through last year and guarantee that debt.
What I am saying is that the “savings glut” that Greenspan used to talk about keeping interest rates so low acted as an effective subsidy from the Chinese to the American consumer allowing us to buy their goods, build their factories and emply the huge numbers of workers coming in from the countryside to the cities. Without the Chinese buying our GSE and Treasury debt, Americans would have had to face their fiscal reality six years ago. Coming to terms with the US budget deficit, entitlements and infrastructure needs would have put a huge clamp on consumption and denied the Chinese the opportunity to build those factories and raise standards of living.
When you think about the Chinese loaning money to Americans to allow them to buy Chinese goods, it bears similarities to the Marshall plan. Except, the Chinese didn’t do it overtly, nor did they have a supposed humanitarian reason for loaning us the money. They did it out of self-interest. And I’m trying to point out they it was to their benefit to offer us the cheap money. We committed financial suicide on their easy money.
But without us, they’re just as screwed as they would be if we repudiated the debt. So I would suggest that the Chinese stop whingeing about their potential losses on the bonds they hold and start worrying about their own fate if they can’t sell us their crap.
February 1st, 2009 at 11:50 pm
>> You’ve got the idea backwards. The Chinese didn’t buy our debt as an act of charity.
Thank you, Marion. Well, I said I didn’t think they did it for charity. I was just curious to learn how much to read into the your phrasing, which originally made me wonder whether anyone had ever suggested otherwise. (From your response, it seems the answer is “no”.)
>> I would suggest that the Chinese stop whingeing about their potential losses on the bonds.
Absolutely agree… The USG isn’t going to sell them top-notch military hardware. We refused to let them buy oil reserves. Before we make their Treasury holdings worthless (by issuing many more of them), China should start buying products from Caterpillar, drill ships from Noble Energy, or business units from J&J. At least, if I were them, those are among the items I’d take a serious look at…
February 1st, 2009 at 11:52 pm
>> those are among the items I’d take a serious look at…
…because those items can help feed, heat, and heal their citizens.