This is something to read alongside the post I put up here a couple of hours ago.
It’s an op-ed in yesterday’s Financial Times by Arvind Subramanian, a senior fellow, at the Peterson Institute for International Economics here in Washington DC, and senior research professor, Johns Hopkins University.
Title: A master plan for China to bail out America.
Subramanian argues that the amount appropriated (and made available by the Fed) for all the US rescue plans so far may well prove insufficient. A lot more might yet be needed. He continues:
- Where will this additional money – perhaps as much as another $500bn – come from? The US taxpayer is wary. Joe Six-Pack has ponied up a lot already, and done so with no great confidence that the money was for a worthwhile cause or that it will be well spent.
Enter China. Ken Rogoff of Harvard cheekily characterised the vast Chinese accumulation of US Treasury bonds over the past five years as the biggest foreign assistance programme in history. Why not push that further? Here is a thought experiment.
- The Chinese government could offer to lend up to $500bn (from its current stock of $1,800bn) to the US government for the rescue of its financial sector. Its previous assistance – buying US bonds – was indirect and unconditional. Not so in this case.
China’s loan offer would be direct to the US government to be spent in the current financial crisis. More important, it would come with strings attached. Tied aid, the preferred mode of operation of western donors since the postwar period, would now be embraced by China.
What would be the nature of the strings – or “conditionality” as the US Treasury, a longtime practitioner of this art, has called it?
… China would impose two conditions. First, it would declare that the offer of money was conditional on the US government’s adopting a particular approach to rescuing the banks, namely to favour in the next round the use of government money to recapitalise the banks. Europe has been using this approach and evidence suggests it is the most effective way of dealing with large-scale financial crises.
The US government – like third world governments in the past – has been unable to adopt the most efficient course of action. This stems from an ideological obsession against “socialising” banks or because inducement is necessary to overcome any domestic opposition to it.
The second condition would relate to “social safety nets”, which had become standard embellishments to World Bank/IMF adjustment programmes. China would stipulate that monies be devoted to cushioning the impact on vulnerable homeowners, so that they would not be forced into forgoing the American dream of home ownership. Chinese conditionality on this front would achieve an outcome that several economists on the left and right have argued for on grounds of fairness, and also to address the fundamental problem in the housing market.
For China, this offer of help would have three virtues. First, it would be riding to the rescue of a situation partly created by its own policies of undervalued exchange rates, which led to lax global liquidity conditions. Second, its economic interest would be served because successful US efforts at rescuing its financial sector could help avert an economic downturn, protecting China’s exports, its growth engine.
Perhaps most important, it would seal China’s status as a responsible superpower willing to deploy its economic resources for the sake of protecting the world economy. And if the means for achieving that are by providing the current hegemon with the largest aid package the world has ever seen with a healthy dose of sensible conditionality, well, what could be more statesmanlike than that?
Interesting suggestion, huh?
I’m not sure that the Chinese Communist Party leaders would necessarily be up for it in quite this form. Also, they certainly do have a big need to invest more in the western interior of thier country, as I noted earlier.
Personally, if there are “social equity” type of conditions attached to any “rescue” plan, from whatever source, I’d like to see them include conditions related to rationalization of the health-care system and the physical planning system, not just the home-ownership system as Subramanian urged. Also, as i noted here September 22, President Hu Jintao has also recently established an apparent linkage between aiding the UDS economy and the question of Taiwan.
Then, just days ago, the Bush administration announced a new $6.5 billion arms package for Taiwan, and the Chinese responded extremely frostily. Yesterday, spokesmen for Beijing’s Ministry of National Defense and the Foreign Ministry urged the US to cancel the arms sale and announced that china would be canceling or postponing some long-planned visits between high-ranking Chinese and American officers. (See also VOA account here.)
The story continues…