mpettis.com China Financial Markets

http://mpettis.com/2010/07/what-do-banking-crises-have-to-do-with-consumption/

China Financial Markets
China’s financial and monetary links to the world
HomeAboutSelected articlesRSSWhat do banking crises have to do with consumption?Jul 4th, 2010 by Michael Pettis
Posted in Balance of payments, Banks, Consumption and production, NPLs

Tags: Consumer demand

Just three days after returning to Beijing from New York, I had to leave again, this time to a series of conferences in Torino, Italy, so it is hard to do much writing for my blog, especially since I won’t spend my free time in the hotel when there is so damned much food out here that urgently needs sampling. Still, I did want to write a hurried note about a topic of conversation that came up a lot while I was in the US and even more here in Italy.

For the next several years, as Keynes reminded us in the 1930s, savings is not going to be a virtue for the world economy. It is more likely to be a vice. In order to regain growth the world desperately needs less savings and more private consumption, but I think it is not going to get nearly enough to generate growth. Why? Because in all the major economies the banking systems are largely insolvent, or about to become so, and desperately need to rebuild capital. For reasons I discuss below, this will have a large adverse impact on private consumption.

Let’s go through the major banking systems. First, the crisis started in the US and, perhaps as a consequence, US banks have already identified a lot of their problem loans and have been the most diligent about rebuilding their capital bases. They nonetheless still have a long ways to go, even though a large part of the bad loan problem was directly or indirectly transferred to the US government. By the way, transferring bad loans to the government may be good for the banks but will have the same adverse impact on consumption. I try to explain why below.

Second, in Japan, during the past twenty years the Japanese government and the beleaguered Japanese household have been tasked with keeping the banking system alive. I don’t know whether or not the banking system has finally been cleaned up, but for the purpose of my calculations it doesn’t really matter. The Japanese government has been saddled with a huge nominal debt burden, which is only bearable because interest rates are kept artificially low. Forcing down the interest that depositors and bondholders receive means that borrowers are getting (albeit not visibly) substantial amounts of hidden debt forgiveness funded by household depositors.

Third, in China, even if you believe that all the NPLs currently in the banking system have been correctly identified (a claim which few Chinese bankers believe), no one doubts we are about to see a surge in NPLs thanks to the out-of-control lending expansion of the past two years. But things are even worse than the nominal numbers imply. As I discussed in my April 6 entry, when we are trying to estimate the cost of a banking crisis we need to think about more than simply the ability of borrowers to meet current obligations.

This is because, as in the case of the Japanese government obligations, when borrowers are able to benefit from artificially low interest rates, the effect is of hidden debt forgiveness which must be paid for by the net lenders, who are, as in the case of Japan, the beleaguered households. In other words, if you want to know how much real bad debt there is out there that must be cleaned up, you need to calculate what share of the loans would go bad if interest rates were raised by at least 300-400 basis points, the minimum needed to bring Chinese interest rates in line with an appropriate rate. This suggests that the Chinese banks, if obligations were correctly counted, might have much larger amounts of bad debt than any of us realize, and this needs directly or indirectly to be cleaned up.

Finally, Europe probably has the biggest banking problem of all. European banks are stuffed with bonds issued by Greece, Spain, Portugal, Italy and a number of countries that are either insolvent for all practical purposes or dangerously close to becoming so. The numbers are so big that the only reason we are likely to pretend that these countries aren’t insolvent is because recognizing the obvious would mean throwing the banks of Germany, France, Spain, and most of the rest of Europe into the trash can.

Who will clean up the mess?

So what does this have to do with consumption? A whole lot, unfortunately. Like it or not we are going to spend the next several years cleaning up the major banking systems of the world, and guess who gets to pay to clean them up? Let’s go through the clean-up options:

1. In order to prevent a collapse of the banking system, the government can effectively assume the bad debt and take it on the government balance sheet. They can do this by buying the debt at well above their true market value, or by giving the banks gifts of capital, or by a number of other mechanisms the net effect of which is the same: these bad loans now become the obligations of the government. How are these obligations serviced? Basically there are three ways governments can treat the cost of the debt.

Governments can default or restructure their debt, and receive significant debt forgiveness. This does not resolve the debt problem so much as pass the burden on (in the form of losses) to banks and investors. In the case of countries like Greece, much of the burden will go abroad to German and other European banks.
Governments can raise taxes to repay their debt. In this case the burden of cleaning up the banking system goes directly to taxpayers, who are ultimately households (corporate taxpayers of course pass the cost on to households). Raising household taxes reduces disposable income, and so will directly reduce future household consumption.
Governments can hide the taxes by forcing down the borrowing rate. This effectively grants the government debt forgiveness and passes on the cost to net lenders. This doesn’t work in market economies in which investors have savings and investment alternatives to bank deposits, like the US, but it is the preferred way that countries like China and Japan use to cover the cost of government borrowing. This just means that the cost of the government debt is passed on to net savers – of course the household sector – and so reduces their wealth. As I discussed in an April 20 post, the wealth effect in China of a reduction in interest rates means that Chinese consume less and save more.
2. They can force the banks to recapitalize. Again there are a few ways they can do this:

The can force the banks to raise money in the capital markets, but this is only a partial solution at best since investors are not willingly going to provide the capital needed to clean up the NPLs. They will only invest to the extent that the true losses are borne by others.
The most powerful way of raising bank capital is for the monetary authorities to set interest rates so that banks can make money easily. In the US and Europe, the typical way is to engineer a steep yield curve, with very low short-term rates. Since commercial banks are in the business of mismatching maturities, they can profit from an artificially steep yield curve at the expense, of course, of depositors. This is basically how US money center banks regained solvency during the LDC Debt Crisis of the 1980s. Of course the cost of this policy is borne by net short-term lenders, who for the most part are household depositors.
In countries like China and Japan, there is a much more powerful way to do the same thing. Since the monetary authorities set both the lending and deposit rates, they can very simply set the minimum spread between the two. In China, the maximum deposit rate is 300 basis points or more below the minimum lending rate. Combine this with an upward sloping yield curve, and Chinese banks make a huge profit on the back of their suffering household depositors, who have few alternatives to bank deposits.
Households, of course

Astute readers will have noticed that every solution to a banking crisis eventually boils down to the same solution: force households to clean up the banking system, either in the form of explicit taxes or in the form of hidden taxes. Before we get too cynical about this, it is worth remembering that there are huge benefits to having a functioning banking system, so that the high costs of cleaning the banks up are probably worth paying.

But one way or the other, banking crises lead to increased claims on future household income and wealth. By reducing future disposable income, this also automatically leads to downward pressure on future household consumption.

So here is the problem. Surplus countries like Germany, Japan and China save too much and already have significantly deficient domestic consumption. They rely heavily on foreign net demand to absorb their excess capacity and, for reasons I have discussed many times, they are going to find it very difficult to change the structure of their economies to rebalance demand. On the other hand, as I explain in my May 19 entry, deficit Europe will see a collapse in its net consumption as it struggles to maintain positive net capital inflows. This means that the US remains as the only large economy that is providing net demand, but high unemployment will ensure that it attempts tor reduce the amount of demand it provides to the rest of the world.

One way to think about this excess savings is to think about the pressure for exporting capital. China, Germany and Japan export huge amounts of capital and desperately need to continue to do so or else they will see their export industries collapse. Deficit Europe used to import huge amounts of capital, but these capital imports are set to collapse and may soon even become capital exports. The US is the only large importer of capital left, and it wants desperately to reduce these capital imports. So even before we worry about the impact of the banking crises, we have to wonder who is going to absorb all these savings?

But the banking crises make matters much worse. With all of the major economies facing banking crises, they must clean up the banks by forcing the household sector to pay the bill. This will put downward pressure on household disposable income and wealth for many years. But we are all betting on the consumer – and inexplicably enough (to me, anyway) many of us are betting most heavily on the hapless Chinese consumer – to come surging back and bring us the growth that we so desperately need.

I am pretty skeptical that this will happen. There is an awful lot of banking mess that households are going to need to deal with first, and only after the mess is cleaned up will consumption come roaring back. Look at Japan. For twenty years Japanese consumption growth has limped along at well under 2% on average while Japanese households dealt with (i.e. paid for) the consequences of their banking crisis. China too provides a worrying story. Chinese consumption dropped from a very-low 45% of GDP ten years ago to an astonishing 36% last year just as — no coincidence — Chinese households were forced to clean up the last banking crisis.

Why should the future be any different? Until the banking messes are cleaned up, I think we shouldn’t count on household consumption to save us. The only solution I can think of for this problem is if governments — especially China, Germany and Japan — use their resources of wealth to clean up the banking mess without forcing households to do it. How? they need to privatize their vast holdings of assets and use the proceeds either to clean up the banks or to prop up household wealth. This will require a major political reform, especially in countries like China, but I have no doubt that eventually we will get there.

Privatization is sort of a bad word today, especially in places like China, but I bet it will become eminently respectable again in a few years. But until then, and as long as the banks are in such bad shape, do not expect consumers to ride to the rescue.

« What might history tell us about the Greek crisis?51 Responses to “What do banking crises have to do with consumption?”
on 04 Jul 2010 at 4:13 am1Dave


As a layperson in this field I’d be grateful if in some future post you expanded on this

“How? they need to privatize their vast holdings of assets and use the proceeds either to clean up the banks or to prop up household wealth. This will require a major political reform, especially in countries like China, but I have no doubt that eventually we will get there.”
on 04 Jul 2010 at 4:30 am2Tweets that mention China Financial Markets » What do banking crises have to do with consumption? -- Topsy.com


[...] This post was mentioned on Twitter by bill. bill said: China Financial Markets » What do banking crises have to do w consumption? http://bit.ly/9HxFCq not really connecting the dots re US bailout [...]
on 04 Jul 2010 at 4:50 am3Interest Rates » China Financial Markets » What do banking crises have to do with …


[...] Read the rest of this great post here [...]
on 04 Jul 2010 at 5:02 am4Mark


There is a better solution:

analyze the major capital formations among bank capital holders, investors etc., and then do a restructuring that has minimal effect on the economy. For example: bankrupting investors who just hold billions of bank capital and who just damage a society’s cash flow by extracting money by interest would have a primarliy beneficial impact….
on 04 Jul 2010 at 5:15 am5How To Fix A Sovereign Debt Crisis Without Killing Consumer Spending | SHOUTing GORIlla


[...] Read more at the author’s blog –> [...]
on 04 Jul 2010 at 5:32 am6How To Fix A Sovereign Debt Crisis Without Killing Consumer Spending « Finance Blog


[...] Read more at the author’s blog –> [...]
on 04 Jul 2010 at 6:03 am7Abhishek


India’s Banking System is very healthy compared to the others.India’s Central Bank has done a fabulous job during the entire Financial Crisis with almost all of India’s private and govt owned banks in the pink of health.The growth rates of some of the private banks have been exceptional with low NPLs which is reflected in the stock prices of the companies touching all time highs.The Financial Regulator is not resting on its laurels with the savings deposit rate also being in the process of being liberalized.
on 04 Jul 2010 at 6:06 am8Rien Huizer


Michael,

Hats off!

“The numbers are so big that the only reason we are likely to pretend that these countries aren’t insolvent is because recognizing the obvious would mean throwing the banks of Germany, France, Spain, and most of the rest of Europe into the trash can.” I am not so sure anyone can make that kind of statement with a lot of confidence, but, allright, it helps making the main point of your argument, that is that China needs to privatize (or if that is too difficult, at least distribute those accumulated useless profits to consumers, if necessary their own workers). And you have my sympathy if you need the drag far less guilty Europeans into this so that China does not have to feel isolated…
on 04 Jul 2010 at 7:08 am9marcus


I always learn reading this site. How would the financial burdens of health care and pensions impact a) the governments ability to privatize resources in their current demographic environment? and b) consumption?
on 04 Jul 2010 at 7:14 am10silly things


Prof Pettis,

Is there a good reason not to invest in banks?
on 04 Jul 2010 at 7:34 am11VC


Years of malaise…Let’s party like it’s 1929. At least we’ll have the benefit of your razor sharp analysis to stimulate our modes of logic. Cheers Professor Pettis.
on 04 Jul 2010 at 7:39 am12Beth


Thanks very much for your analysis — it is very informative to me.

Beth
on 04 Jul 2010 at 8:08 am13jt utu


Great post.
Related to (1). After government/central bank expands their balance sheet, aren’t they also effectively off-loading the debts onto their currency? Effectively, the US consumer will pay for it with higher import prices if the currency depreciates. But, then if China maintains a peg, then again the Chinese consumer will pay … but only if the US defaults on Tsys or we somehow introduce capital controls so they can only buy our TARP assets!
on 04 Jul 2010 at 12:38 pm14Robert Smart


Reading this excellent analysis one would hardly guess that money isn’t real wealth, and that the banks and other financial entities are merely facilitating the real economy. So what is going on in the real economy. Spending is a mix of people with the money (ex-savers) and people who intend to earn (who will be in debt after the spending). Also production is a mix of production for immediate consumption and creation of infrastructure for future production. The job of the financial system is to keep the balance between these things optimal. The situation today is that oil is getting harder, otherwise we wouldn’t be drilling at unmanageable depths. So we are perforce changing infrastructure (which started long ago when we stopped using oil for large electric power plants). So the optimal balance of activity needs to be skewed away from immediate consumption and towards creation of new infrastructure. It rather seems that our current financial system’s (unconscious) plan is to completely destroy the economy then rebuild it. Is this really necessary, or desirable?
on 04 Jul 2010 at 3:03 pm15CSTEVENS


Michael”

We all know that all currencies are fiat, further that unless Gold were to rise to unimaginable heights, as was proved by the 2004 GCC Gold Dinar report, thereby making the US and Indian Women the richest people on earth, that there really isn’t a replacement for the system, but agreed, there will be hopeful modifications moving out over the decades, as anything too soon will lead to undesirable occurences as history has shown. Anyuway, I wonder if you have any thoughts on the utility of focusing medium and longer term growth on energy, food and water security, essentially green on a new driver of global growth, utilizing more resource efficient closed loop manufacturing systems, coupled to enhancing the role of other forms of capital such as human, environmental, technological, natural in measures of GDP to keep the necessary growth machine rolling forward. Any thoughts? Surely, as different nations, regions and groupings of nations come to weather the likely coming era of slower growth, it might be time to include such alterations. Also, I wonder the role Africa might play in serving the sheer overdevelopment of capacity that currently plagues the system. When all is said and done, it should be noted that strengthening institutions, at the regional, national and global level should be of the utmost importance.
on 04 Jul 2010 at 3:14 pm16john c. halasz


Prof. Pettis:

I don’t quite understand your point about privatization as a means of restoring savings and incomes. O.K. in the case of China where all the land and much of the economy is still under state ownership, such a case can be made. But in developed industrial capitalist countries like Germany or Japan, you must be talking about privatizing or selling off infrastructure and other public goods to financial interests. How is that so different from the various financial schemes involving derivatives or public/private finance initiatives which serve already to disguise the fiscal condition of public budgets by pledging future tax revenues to raise current funds, thereby lowering the future tax base? And wouldn’t privatizing public goods actually be lessening overall real economic efficiency, as private profits would then be added to their costs and private monopoly rents would also be created, which would effectively be a tax on the rest of the economy, whereas public goods investment by governments is actually a spur to further private investment, enhancing its efficiency and opportunities?

On the other hand, bad debts that can’t be repaid won’t be, but must be written off as losses, whether they were incurred as excess investment or speculation in housing lot rent inflation and other asset bubbles or incontinent consumption loans/vendor financing associated with such “wealth effects”. It’s simply a question of who is to take the losses, and the (re)distributive effects upon aggregate consumption and investment demand. Shouldn’t the bondholders of insolvent financial institutions be converted into equity and made responsible in a good bank/bad bank arrangement for recoveries on bad debt, while the sovereigns can publicly recapitalize the banking system and restore effective lending? Wouldn’t that be the most functionally efficient “solution”, insofar as sovereigns both control their over currency supply and have much longer-term risk-bearing horizons? If the burden of bad debts is placed on the poorer wage-earning majorities of the population, as workers, tax-payers and savers, then the effect on consumption demand is far worse than if the wealthy rentiers take the hit for their own bad investments, even if there are secondary hits on pension and mutual funds. After all, the huge debt-loads and imbalances both between and within countries are themselves ultimately an effect of inadequate distribution to wage-based demand and excess accumulations of “savings”/investable funds by the wealthy (or powerful), which needs to be redressed to restore investment demand. Are you somehow still clinging to verstiges of orthodox dogma in relying solely on privatization, which has all along been a key tenet of neo-liberalism in leading up to the global crisis and with a dubious track-record in itself?
on 04 Jul 2010 at 3:47 pm17Cuca


Professor Pettis, thanks for your precious time on putting this entry, which reminds people again the tough time ahead of us. It is indeed hard to be optimistic.
And it makes me reconsider the recent tide of regulations (i.e., Obama’s financial bill) on banks and what effect the tighter regulation would bring in the short term. Large banks in almost all major economies are required to shore up their capital and strengthen their risk control, which is one of the few consensus of little controversy among regulators internationally. Although this might be necessary to prevent the next crisis, I feel it actually could be seen as an “international consensus” of bank recapitalization,which also would constrain household consumption through the several mechanisms you concluded. Maybe I’m a bit too cynical, but I do think the world is kind of kidnapped by banks (not bankers).
Btw, I would like to ask for you help (and also from other readers) to recommend a few books, papers and any other materials of Hyman Minsky. I feel more obliged to read his stuffs to help gain a better understanding of how things had evolved to the current situation. Thank you very much, and nice trip in Italy!
on 04 Jul 2010 at 7:51 pm18Miguel99


Thanks for this thought provoking piece.

I see what you are saying – one way or another the costs of the clean up of the bad debts are going to fall on households, which is going to cause consumption to fall. But as you elucidate, governments and central banks have choices to make that will determine WHICH households bear the brunt.

So far the US Treasury and Fed have mainly:
1. effectively assumed bad debts by taking them on the government balance sheet. For example, obligations of AIG, Fannie, Freddie, Bear Stearns, Citi, BofA, GM, numerous small banks, etc., have been assumed by the government.
2. forced banks to raise private capital.
3. engineered a steep yield curve so banks can make easy money.

What the US needs to do more of, as a matter of justice and fairness, is to see that more of the cost is bourn by the banks and investors (and their households) who put up the capital for these bad loans. I agree with those who’ve said that a broad sharing of the losses is essential and fair, but so far it seems to me that the irresponsible lenders and reckless investors who chose to fund these bad loans have managed to shift almost all of their losses to taxpayers and households broadly, and that is just wrong.

You mention almost in passing that governments can default or restructure their debt. That should be part of the solution: haircuts on AIG debt, and Fannie and Freddie bonds and MBS, for example.

Also, tax increases on capital gains, dividends, and all income over $200k/yr. You say that “banking crises lead to increased claims on future household income and wealth”. Yes, but much of the wealth from which the losses ought to be deducted exists now, and is even still in the hands of the bankers and investors who put up the money for the bad loans that inflated the bubbles, but got to keep their capital because the government assumed the bad debts. The government can and should target that existing wealth for “restructuring”.

If the government decides to pursue these more just and equitable options, they’ll need to have detailed contingency plans in place for resolving any financial institutions that fail in these circumstances, and ensuring that the basic transactions part of the banking system remains open for business. Surely Timothy, Ben, Larry, Chris and Barney have had enough time to make those contingency plans, no?
on 04 Jul 2010 at 10:13 pm19baychev


I entirely disagree with you that it is beneficial to have a banking system that must be purged of bad investments every 5-10 years by forcing households to pay up the bill. Those banks should be run as for-profits not as an extension of the government reach. And this leads me to my last remark: sovereigns contrary to reality should face higher borrowing costs than corporates because they are being run as for-loss rather than for-profit as corporates are. There isn”t even a single government that persistenly has achieved budget surpluses, let alone profit margins of 10% or above. Maybe it is time to critically reconsider where the risk is and where the profit is.
on 04 Jul 2010 at 11:06 pm20FT Alphaville » Further reading


[...] – Banking crises ruin consumption. [...]
on 04 Jul 2010 at 11:56 pm21Further reading | Beyond Brics | FT.com


[...] Michael Pettis asks: What do banking crises have to do with consumption? [...]
on 05 Jul 2010 at 12:06 am22Hwang


If money is the root of all evils, wouldn’t barter economy works better? All financial crises are due to uncontrollable fiat money creation isn’t it?
on 05 Jul 2010 at 12:50 am23Houhui


Speaking of the last banking crisis. I noticed a few days ago that the 160billion “bad bond” issued by China Orient AMC to BOC was rolled for another 10 years. I think that is the 3rd such rollover so far… The last bank clean-up in China STILL hasn’t been resolved. And as Prof pettis says, it is the MOF (the taxpayer) who is now clearly liable for all those bonds…
on 05 Jul 2010 at 1:17 am24Simon


Privatization of government assets… A lot of that was done in New Zealand in the mid eighties when our government debt was deemed to be unsustainably high. It was a very popular move with the rich right wing, many of whom seemed to be able to scoop up public assets at prices that later seemed to be a bargain.

It is ironic that those powerful exporters of capital that have been so admired by us all now potentially have very difficult economic problems. It turns out that they needed their large banks to loan the money to their prospective purchasers.

China did it by buying vast quantities of $US, keeping it’s interest rates very low, targeting the US consumer who dutifully obliged restocking its American Dream with goods made in China logged as a loan against a house financed by capital also made in China.

Germany did it in much the same way. It’s banks stoking a property bonfire of the vanities in Europe’s Mediterranean states the owners and developers of which dutifully purchased the obligatory Mercedes Benz to go with their new found prosperity.

Japans case very similar to the other two but dating from an earlier time.

Now Michael says they should not force their households to take on the debt burden of these now insolvent banks instead the banks should be bailed out by means government asset sales. It’s still taxpayers money since government assets are national assets. It just won’t require the household to be subjected to the burden of low interest rates and high taxes. Thus allowing consumption be sustained in these surplus nations.

The banks are getting bailout again and yet it was these problematic institutions and their private and political governors that caused this whole mess in the first place.

The end result of their irresponsible philandering being global capital missallocation on a monumental scale. Why can’t they be thrown in the trash can?

Asset sales make good sense where China is concerned. For Germany I don’t know. My opinion is that the banks need to be restructured. Nationalized. Purged. A sustainable system of international trade that prevents an out of control financial sector facilitating massive capital malinvestment for its own pleasure and reward. We need Bretton Woods 2010 except it should probably be Bollywood 2010.
on 05 Jul 2010 at 1:38 am25Links 7/5/10 « naked capitalism


[...] What do banking crises have to do with consumption? Michael Pettis (hat tip reader Don B) [...]
on 05 Jul 2010 at 2:18 am26Rien Huizer


John Halasz,

I have been racking my tiny brains to find German state assets (and Spanish, Greek, Portuguese, Italian, French, Ruritanian, etc) But it is quite hard. Things like the Bunde*****ahn come to mind, but that would not be worth anything relevant. I even suspect that the vast bulk of German state “assets” (that is, state businesses, real estate may be different, but I guess very few people know whether there is much value there) are actually not worth a lot: State Banks? Sparkassen? Remaining Treuhand assets? Social housing in fmr East Germany? Bunde*****ank reserves? The Nefertete bust? The same goes for Greece: the attractive assets have been sold a while ago, like the Port of Pireaus. France may be in a slightly better position. Lots of palaces, cathedrals and museums…

China is a different story. The SOEs have been squirrelling away (and probably squandering/doling out to mates) assets that The Whole People actually owns. What have those CPC officials been doing? Weren’t they supposed to protect the interests of the Proletariat?
on 05 Jul 2010 at 3:49 am27Sergei


Wow. You say: “Basically there are three ways governments can treat the cost of the debt”

There is a forth way. It is called “DELETE” button connected to the BIG computer at central bank or ministry of finance. Nothing happens to this world when this button is pressed. No buildings are destroyed, no lives are killed, noones income is lost.
on 05 Jul 2010 at 5:30 am28Tom Hickey


Curtailing consumption (demand), hence investment in productive capacity (supply/growth), may be just what the doctor ordered for reducing carbon emissions to address global climate change. See, for example, China Fears Consumer Impact on Global Warming.
on 05 Jul 2010 at 7:32 am29Sid


Professor, can I ask you a personal question that has been haunting me for some time?:) Is your surname properly pronounced as [P?ttis] or as [P?tti], in French manner? Sorry if the question sounds stupid, but I really want to know:)
on 05 Jul 2010 at 7:54 am30CSTEVENS


All:

Well, although the present occurrence is, perhaps, shocking, it should noted that it is not different, ie before the present occurrence of global excesses there were a millenia of financial crisis’ which the Reinhart and Rogoff paper, This Time is No Different quite usefully illustrated. As to the gentleman that profferred barter instead of the current system there is no way that way could replace the complex set of interactions that currently are exhibited in the system; in fact, barter would make the system much more complex if not entirely unable to work, at least unstable and inefficient. There is a place for barter in every economy, especially in developing the livelihoods of people in rural areas, but could not replace the complex set of global interactions that are required to provide a modern lifestyle, or anything close to it.

Moving back to the present crisis, and the financial system in general, it should be noted that the complex web of global interactions, movement of capital, goods, information and labor are enabling, and have enabled, the advance of living standards that we have recently seen and are currently experiencing globally. Not that much doesn’t need to be done to advance the standards of living of the billions of people globally who are undernourished and who survive under very difficult conditions, as had man for millenia in the past. Really, what we should be looking for is a system which CAN continue to advance the standards of living as we have witnessed over the last several decades, despite how the power of recent data consumes the mindset of men.

It should be understood that each economy in the world is a mixed economy, that fully socialist states failed to provide the standards of living required for their people in a sustainable way and that the only fully capitalist nation is a failed state with private militias and similar. Truly, a happy medium needs to exist between the extremes of the two while ensuring that systems globally do not vary so greatly as to create opportunities for an arbitrage of sorts which will eventually lead to breakdowns in the system.

A balance that enables mankind to move forward on a stable, sound, and sustainable path should be the goal. As we move forward, we must understand that each nation and person has a certain amount of responsibility to each other, and even a duty to themselves. There are many problems confronting man in the future, most importantly these issues are most pronounced in the developing world where population growth control and resource security should be of the utmost importance as a responsible global citizen.

In the developed world, its participation in continuing to produce and purchase products globally, although this does lead to some concentration of wealth in the upper echelons of each society should acknowledge what it has been doing;
building bridges, roads, employment opportunities and similar in the developing world if people in the developing world are still vastly undernourished, served, and lacking in material possessions when compared to the rest of the world
if the upper echelons of individuals in developing world do benefit disproportionately.

So, as I believe Michael to have been arguing for a middle way, a way that ensures that we continue to advance the livelihoods of people while mitigating against the excesses that plague the system. For most likely, the losers will not be the most likely suspects in such a situation and certainly the bulk of humanity will suffer in such a case.

So we should ask ourselves how we can be better, more empowered, local and global citizens and not simply decry the present system, especially as to how minds become mired due to the power of recent data. We should ask ourselves how we can work to mitigate the great problems facing the coming humanity and not simply the present such as continued population growth, dwindling and debased resource supplies, divisive ideologies and their use by vested interests, in addition as to how we can meet the expectations of global populations desirous and deserving of greater standards of living.

With that said, it should be noted that there will and should be alterations to the present system that has enabled the redevelopment of Europe, the redevelopment of Asia (and the new development of some areas for which there had been little relative historical experience). But truly that that should develop stably over an extended period of time where most likely were anything to change too quickly then outcomes would be far different than supposed by those desirous of change. Further, that current excesses in the system, which can lead to difficulty in managing domestic constituencies (or stakeholder groups) in nations and regions need to be carefully addressed understanding that the present era needs to be carefully managed lest it lead to retrenchment on a global scale which would decidedly work against the interests of the bulk of the worlds people.

At present all should be considering these issues rather carefully over a longer term time projectory and not simply be decrying the low hanging fruit; excesses in the financial system, misdeeds by bankers, the evil machinations of systems institutions and other rubbish which blinds us from the longer term issues that we need to face as a global community.
on 05 Jul 2010 at 9:48 am31Niraj


as the banking system is a generator of credit not money so it must take care to keep the overall credit within manageable limits always – that means bound by some proportion of money. the legitimate worry of govts on inflation means that money cannot be printed at will. hence credit must be limited too.

also one must understand that credit means a promise to pay money at a future date. so if banks advance too much credit (which incidentally means households are availing of it too freely) there is bound to be a future crisis for households. here we must remember that all credit availed by companies is ultimately for the households — if they produce more TVs for example by availing cheap credit then they will price it lower too and that is lapped up by the households.

so the predicament for households that Pettis has outlined is not only inevitable, it is also justified.

so one may ask – if all is there to it, what possible role can govts and banks play to mitigate the crisis in future and if possible in present too ?

there are a few solutions -

1. at the time of high consumption or big booms, do not keep interest rates suppressed artificially just to keep voters happy. this means central banks all over the world must keep interest rates tightly regulated. this also would entail a global cooperation of all the central banks.

2. the above is necessary also to have a buffer of safety when recessions strike. at the time of recession, the interest rates (or equivalently CRR/etc) can be relaxed to some extent … only for a short period.

3. now for the present. since households are already going to be burdened, it doesn’t make much sense to suppress interest rates down for long. after all the current crisis came because of exactly such a practice — sweet sickness cannot be treated by sugar. i am not advocating outright austerity but there must be a determined roadmap of interest rate hardening and must be strictly adhered to.

4. it is also time to quarantine the sickest ones. that means Greece/Spain/etc must bear the maximum brunt. why should Germany suffer for excesses of Greeks. that means some tough pill to swallow and some hard nosed international negotiations – it may also mean souring of relations. what exactly to do may be a matter of opinion but the bad loans portion of Greece must somehow be forcibly dumped onto them. it may also mean economic sanctions on the worst offenders. remember that Japan has suffered in silence for its excesses for the last twenty years and the crisis never proliferated out of it so certainly there are ways of quarantine – if only there is a political will.
on 05 Jul 2010 at 10:25 am32Costard


From my perspective it is the desire to spare households that has proven to be the impetus for this entire mess. Consumer investment – and indebtedness – has been effectively divorced from the fallout of poor decisions. The average American rightly realizes that, so long as he is not an isolated case, his investments will be protected from any adverse “systemic” situations, such as bank failures, asset deflation, and rising interest payments. The result is that little due diligence is performed: depositors do not concern themselves with the quality of their bank; holders of capital assets place their trust in a motivated federal reserve; and borrowers rely upon inflationary policy and an obliging government. Such a situation only ensures that poor financial decisions will be compounded, and that the longer such a policy of federal middle-man is followed, the more bankrupted households be when the government at last finds itself unable to raise its shield.

Privatization is no great solution. It is first and foremost a one-off fix; it cannot be repeated unless industries are nationalized during the next boom, in which case the government is buying high and selling low. Secondly, privatization has a very bad track record with respect to benefits enjoyed by the average household. This has less to do with evils of the marketplace and more to do with the inability of government to fully disassociate itself from industries it formerly owned, which tend to be burdened by extraordinary regulations and political caprice, and back-lined by implicit guarantees since they perform a “necessary” function. Fannie Mae and Freddie Mac were ostensibly privatized, and they became the worst sort of chimera, combining the risk-taking of a private enterprise with the blind faith of a governmental institution (a status that too-big-to-fail has essentially extended to much of the banking industry). so what we call privatization tends to create problems rather than address them.

A higher savings rate is the only cure. All debt – private, financial and governmental – ultimately falls onto the household balance sheet, and there is no way to repair the damage done by the bubble-and-bust without a period of frugality, however unpleasant and politically inexpedient this fact may be. Policy dug us into this hole and a shovel won’t get us out.
on 05 Jul 2010 at 11:31 am33Otro artículo sobre la crisis « Variacioncompensada's Blog


[...] 5, 2010 Pero este artículo es bastante claro y deprimente. Según el autor, hay y habrá un déficit de demanda agregada mundial, pues en todos los países [...]
on 05 Jul 2010 at 5:07 pm34fred


Deliberately misleading analysis. You correctly note that all costs ultimately pass through to households, while omitting to mention that all benefits also pass through to households. All households are not alike. If we spend, and spend, and spend to clean up the banks now, only exceptional households–namely, those who own bank stocks and bonds–benefit. To ensure fairness, when we tax, and tax, and tax to pay off the government debt incurred during the spending phase, we must make sure to direct the taxes against these same exceptional households who benefitted previously. Really quite simple.
on 05 Jul 2010 at 8:21 pm35Rien Huizer


Michael,

A few more serious remarks. Any policy proposal needs to be feasible and take into account “initial conditions” (for instance differences in state wealth, politics, monetary sovereignty (the US has a very high level, the UK a bit, Germany less, Greece none) etc). Second, as said earlier, there is no world government and there is not going to be one for a while. In a world with a single government there would be a wider range of solutions and fewer risks.

What we have is several distinctive styles of political economy, with varying degrees of institutional development, democratic control (or “self government”), and varying values re microeconomic intervention. The only thing all these countries have in common is that even in the most laissez-faire ones, the public punishes politicians for inactivity which then leads to a variety (depending on the type of pathology associated with the “financial crisis” (whatever that may mean) of measures that tend to be justified by reference to “keynesianism”, an economics school that was in disrepute (for very valid reasons) for a long time until only a few years ago. One of those reasons was that intervention was considered to be generally inefficient and “too hard” based on more recent achievements in microeconomic theory as applied to politicians and their self interest. One way to look at the public spending response to the problems in the financial sector (themselves causes by severe misallocation in especially the US resulting from poorly designed policies and regulatory failure) is that politicians have tried to avoid a riot of voters, who politicians believe to be irrational. At the same time policymakers are advised by economists who rely on models strongly influenced by the work of Lucas.

The keynesianism is still flawed and the different styles of political economy are a source of instability by themselves, especially given different attitudes among voters as well as gvts.

Now to your “remedy” for the financial sector’s lack of capacity to accomodate growth/recovery. There are basically three ways to channel more spending capacity to consumers (and in many cases this refers to consumers who had gotten themselves into inappropriately high levels of debt, in their current perception at least) and often for speculative (houses) puposes. One: creating new entitlements (short term handouts will be saved, unless the economy picks up exogeneously as just happened in Australia, but that is a rare exception). Two: spend gvt funds with a very high multiplier (eg remove infrastructure bottlenecks where private activity has been far below potential (private activity will then follow up by creating jobs). Three: lower (permanently) inefficient taxes. Giving the banks much more capital as well as liquidity will not make people consume more unless they believe that they will be able to repay some day. So it does not matter too much whether those banks are solvent or not (except where banks do not want to lend to business that would ceteris paribus be creditworthy, but that could be cured by having a smart state guarantee system for SMEs).

The trouble with all three policy options is that they increase (at least initially and for the first permanently) the deficit that is already considered large in relation to the gvt’s long term debt service capacity and that would tend to defeat the purpose, since voters/consumers would rationally expect that taxes would go up in the case of entitlements and in the other two cases if projected economic developments would fail to materialize wchich would lead to a risk-based wedge.

Hence it would be an interesting idea if the state used its balance sheet, rather than its cash flow, to make those transfers to the private sector, since that would not cause higher taxation in the future. Unfortunately, state wealth in OECD countries tends to be small and hard to privatize (and where would the money come from? And I recommend following the discussion around the Deutsche Bahn case). Also, rating agencies rely mainly on flow factors but would take the state balance sheet into account, so the countries with wealth tend to be less affected by the crisis as their debt tends to be more expensive than their peers on a flow basis. However, rating agencies also take into account unfunded pension liabilities, which are very large in some European countries (and in many US States)

China and Japan (maybe, consider the hidden liabilities of the state assets) may have a much higher level of state wealth. And China has a fourth way to “permanently” increase consumption capacity: SOE wages, residency, agricultural prices, etc. Would that make a difference for the world economy? Perhaps. I would certainly be a better use of State resources than stockpiling iron ore or real estate speculation.
on 05 Jul 2010 at 10:17 pm36Don Clarke


I’m confused by para. 1. You talk about “the government” assuming the bad debt by buying it. I thought at this point you meant the government of the country where the creditor banks are (e.g., Germany) who are holding (e.g.) Greek government debt. They buy this debt, an asset, by overpaying for it. So far so good. Let’s call them “C-government”. But then you start talking about how governments are going to *service* the debt, which means you must be talking about the debt as an obligation (i.e., from the debtor’s point of view), not an asset. So it looks like you are now talking about a different “government” – i.e., the governments who issued the debt, not the ones who just bought it from the banks. Let’s call them “D-government”. If D-governments resolve their debt by getting debt forgiveness, you say this burden is borne by banks and investors. But by hypothesis, C-government now holds the debt, not banks and investors. Can you clarify?
Thanks.
on 06 Jul 2010 at 12:00 am37Dale Megenity


Professor Pettis,
I have been reading your posts for over a year and I’m totally convinced that you understand the Macro economic issues of our world. I’m a retired Oklahoma farmer with a question that I would be thrilled to get you to answer.
Given your thesis that the best way to solve this current world wide crisis is to privatise government owned assets, is correct. Yet you do not mention that solution for the largest consumer economy in the world, the USA.
Why would’t our economy and by extension the economy of the rest of the world benefit, if the US and certain states with excess lands, would sell as much of their real estate and buildings as they could without drastically damaging local markets? I’m especially thinking of all the federal and state owned lands in the western US. This money would be used by the Feds and the States in place of raising taxes. At the same time it would place the resources sold into more productive hands.
Dale
on 06 Jul 2010 at 12:05 am38Dave G


Dr. Pettis,

Brilliant analysis of the situation, especially for a hurried note.

It sounds familiar.

Isn’t the conclusion you reach that creditor countries will have to (eventually) forgive debtor countries the same argument I made in the responses on your old site two or three years ago? I think I argued that it would be better if this process happened sooner rather than later.

I’m glad you’ve come to the same conclusion as I.

Thanks for the well reasoned post & continue the great work.
on 06 Jul 2010 at 1:42 am39Simon


Let them fail.

http://www.youtube.com/watch?v=_ziWPPMdlqs&feature=player_embedded
on 06 Jul 2010 at 8:29 am40Denny


Dale Megenity,

Serious, are you suggesting that we sale our kids inheritance(public lands) in order to pay for the bailout of the banksters?

Mr Pettis, you wrote:

“Before we get too cynical about this, it is worth remembering that there are huge benefits to having a functioning banking system, so that the high costs of cleaning the banks up are probably worth paying.”

A banking system that seems to need ever increasing bailouts at ever decreasing intervals is NOT A FUNCTIONAL SYSTEM!
on 06 Jul 2010 at 2:34 pm41China’s massive banking problem « Wasatch Economics


[...] Pettis at Peking University explains that (bolds [...]
on 06 Jul 2010 at 7:33 pm42curt


i completely agree that the household sector will bear the brunt of the debt repayment/restructuring. But I agree only because the household sector is the only legal entity that owns anything! The corporate sector is just a legal pass through vehicle by which the ultimate owner is the household sector. The government sector is also just a pass through vehicle for ultimate legal ownership by the household sector.
The real issue that needs to be discussed is WHO in the household sector will pay for this debt repayment/restructuring. We could break this down into who should vs who will.
All debt is just the debtor’s name for what the lender calls an asset. The two extreme methods of handing this debt problem is 1) the debt overhang is worked out between the debtor and the lender class with each transaction handled individually. 2) the other method is for the debtor and creditor classes to be treated as aggregated entities and the debt overhang worked out at the class level.. The second option has the political advantage of making it seem like no one in particular is going to lose assets, but it is highly unfair to many individual creditors. The second method is usually implemented by the government. Now the government can implement this in a variety of ways; each on a spectrum of unfair->fair. It would be naive to think a government controlled by a rich elite is going to sanction a solution which treats them fairly (they bear the brunt of the asset loses). We should be demanding the government to impose asset taxes and use the taxes to deal with the debt overhang.
on 06 Jul 2010 at 11:05 pm43David


Michael,

So essentially, economics not being a zero-sum game means that sometimes, as now, the sum is a difference and each country is incentivized to push the loss on to another.

My poor understanding of economics tells me that if a trade war starts it will make things net worse for everyone. If so, how much worse? And do trade deficit countries benefit from a trade war, even if it’s net worse for everybody?

And what is there to do? Would there be some value to an international currency and interest rates accord? What can the world do to minimize the net damage of this bad situation? If you had the ear of Obama, Sarkozy, Merkel and Hu Jintao, what would you ask them to do?

Regards,
David

P.S. Good luck to Spain tomorrow!
on 06 Jul 2010 at 11:31 pm44Ronnie


There is one more important angle to this discussion.

This business of keeping interest rate paid to lenders (households) low has been going on in a country like India for a very long time. This has partly resulted in a situation whereby there is a HUGE PARALLEL economy that runs outside the banking system and the tax system. Loose law enforcement aids this “Black economy” in India.

This “solution” that households have found to avoid paying for the costs of higher NPLs in the banking system works very well. The back economy features a fully developed underground system where you can purchase significant assets, make loans and of course spend money ALL OUTSIDE the purview of banks and taxes.

So, the value that the banking system provides to households maybe overated. Sure you won’t be able to buy stocks, derivatives and the like. But you can buy houses, used cars, make loans, do the normal things that household do…. and not get burned with higher taxes or lower interest rates.
on 07 Jul 2010 at 9:35 am45Baltazar Suarez


A very interesting article
Your saying that it will be taxpayers ( households) that will end up paying for the bad debts, which will in turn put downward pressure on their (our)incomes and wealth which will cause consumption to fall. I agree, and would like to point out that the problem goes beyond the structure that has been set for financial institutions. Let’s take a look at what has happened thus far.
We know the Fed and Treasury have taken onto their balance sheet the obligations of several failed financial institutions. Including Citi, F &F, Bear Stearns, Bofa, GM, etc. The existence of this government safety net which has perhaps prevented a larger financial interruption for the time being has created a climate for risky behavior by financial institutions and an increasing moral hazard problem for people to deal with. In essence the choice these private financial institutions have been given can be summarized in a flip of a coin, “Heads I win, Tails taxpayers lose!” (Mish kin)
It’s clear that there is inequity in the current structure, this inequity may stem from many places but one definite cause is incomplete information. Asymmetric information allows for non-frugal lenders and investors who put up their money to reap astronomical profits. However when events turn for the worse, as they have, they are insured by being allowed to shift the risk and losses to taxpayers and households. What needs to happen is that instead of taxpayers bearing the entire burden, the banks and investors who took the risk in the first place should take losses. A sharing of losses would be much more desirable democratic and future generations having to pay sky high taxes. Had we perfect symmetrical information the government could see were all this wealth has gone and use some that is still in bank hands to repay instead of placing the loss on the layperson. Having better information in the future would also help prevent lenders and investors from making such bad investments.
It is difficult to be optimistic when there are such major fundamental problems in the way financial institutions are protected by the government. It seems the Feds easy fix interest rate Keynesian control is not working as perfectly as it should. While Keynes was a brilliant man, and his ideas beyond his time, there are defiantly flaws that will have to be worked out. Government has become too big for our own good these days. Is too much credit being given to Keynesians in both Government and Academic institutions and not enough to the Austrian perspective? Inequity runs rampant today, not only in who gets government tax breaks and “bailouts” but from an Ideological standpoint as well as. Situations usually get worse before they improve, and our government has disallowed a contraction to occur. It is productivity, not consumption that allows for economies to grow yet I don’t think the fed acknowledges this.
on 07 Jul 2010 at 11:30 am46CSTEVENS


All:

I know I had said this before, but really, in so far as debt and assets, production and consumption, wealth and poverty, growth (coupled to inflation or deflation), equality and inequality, power and need for empowerment, security and insecurity, and the host of issues related to the forward progression of man…..all these should be considered in the mix toward moving man forward on a progressive path, a realistic and stable path. Certainly, what should be of the utmost importance is ensuring that we have as many people congnizantly pulling the rope in the right direction. Surely, power elites on all sides of each political spectrum do the most to bind people to their perspective while reaping the fruits. Not that fruits shouldn’t be reaped at a somewhat unequal level to ensure a domestic capital base, or that domestic stability isn’t also enhanced by increasing the size of the slice of the pie eaten at the lower levels of society. Assets and wealth, credit and debt are all tools to build a better society and simply that. Competition is healthy, Entrepreneurship is necessary, and the strengthening of all forms of capital are necessary in ensuring that man doesn’t eat his way through the entire planet, as he would were all assets to be equally distributed. We are not in a zero sum game because we share the same water, the same air, the same oceans, the same planet, where were chaos theory to hold true, where each and every action holds a subsequent impact, each and every impact impacting all others. The most important thing, absent a global government with a singularity of rule sets, strong institutions, and a maximum of equality (one that doesn’t destroy the capital base) is to move forward in ensuring that our human family endures, with a mix of cultural nuisances, all the better.

With that said, although we get lost in balance sheets, as we must, and certainly where capitalism is the most fairest of systems, when designed properly for fairness (mind you not equality), then we have the best possibility to address the greatest issues facing our race; the survivability of our species and planet. The greatest problem facing man, is the exponential growth in populations that has occurred over the last few centuries due to the explosion in productive methods. Where we hope to provide a higher standard of living to all global citizens, our duty, we must also address on a personal, national and global level our expectations, belief structures (and constructs), and our responsibility toward future generations. Really, the slings and arrows of outrageous fortune, and the oscillations in financial, asset, wealth and similar markets, while truly necessary toward the forward progression of man, are but a part of the overall process. Truly a middle path, with a longer term time horizon, while ensuring that issues of the day, weeks, month and quarters are not neglected. Truly, GDP is a terrible measuredue to the variance in measures reported, the different items reported, and the different time frames in which they are reported between countries, it always has been. Other forms of capital (Social, Natural, Economic, Technological, Institutional) need to be enhanced to ensure a forward progression of our race. CSR, Social Entrepreneurship, More Marketing Models Geared toward reaching the needs of the lower strata of society, Empowerment of people along the Lines of Mohammed Yunus, Greater empowerment of the lower strata of society via strengthening institutions, the legal rights and titles to property among the lower strata of society via the work of Hernando de Soto, and advancing the standards of our production methodologies along closed loop manufacturing systems while valuing natural capital and cooperating regionally to ensure that biological systems are sustained are of the utmost importance. This, all done in mixed economy, understanding that is, and never has been a fully socialist or capitalist country, while understanding that entrepreneurship and facilitating the creative energies of an empowered and enfranchised man, is paramount.
on 07 Jul 2010 at 1:16 pm47ScottP


Ronnie,
That is a very interesting point. In essence what you are describing in India is a “shadow banking system” for the masses; as opposed to the “shadow banking system” that was constructed by multinational financial institutions that has resulted in the economic crisis that is occurring now.
on 07 Jul 2010 at 6:24 pm48Wu Chien Lung


The problem with Michael Pettis reasoning is that economics override all other issues. This often results in unsustainable policies. The core issue for China is to alleviate the poverty of another billion citizens as soon as possible. All government policies should and are being formulated towards this goal. Calls for China to act to maintain the lifestyles of the west are simplistic when you consider that chinese peasants survive on 10% of the consumption of an average american. (average annual wage of U$3000 compared to U$60,000). If China goes into a deficit scenario, the rescue effort will not last long given the scale of the ponzi schemes and mislocation of resources in the west. The current chinese policies are directed towards increasing the economic well being of the masses. Together with the progress being made in the emerging nations, such prudent policies will result in a more stable and balanced international economy in the future.

While we sympathise with the self inflicted woes of the G8 nations, we question why they retain obscene levels of military expenditure and relatively insignificant in global warming mitigation projects. A decent increase in taxation on the rich, curtailing military and energy expenditures will go far towards solving their deficits.
on 07 Jul 2010 at 11:42 pm49Ronnie


ScotP,

I am detailing this out in a bit of grotesque detail, simply because it is usually outside the purview of clean cut economics. The parallel economies exist in significant measure in quite a few countries with loose legal infrastructure. If Pettis’s analysis is correct- these unorganized money transactions could get larger, stronger, more frequent in countries where they are not so prevalent. There is a very dark side to it because it has links to organized crime. The black economy is unorganized and illegal in India- but it is thriving. The way it works is:

1) For a lot of real estate deals (houses, commercial property, etc) there is a “cash” component of the deal, which is paid off the record and not included in the deal value registered with the government. The brokers, buys and sellers are usually in the know of the “going” rates or prices- and do not refer to the “registered value” of the deal as a price for the property.

2) You can make forex transactions, usually at rates which are better than the ones offered by banks- through people referred to as “Hawala traders”. They are efficient and trustworthy are able to make payments within a day two in most places (at your door or chosen place).

3) Used cars, other goods or services- get transacted without an invoice. Entire chains of transactions happen without bills or invoice and are paid in cash.

4) Loans are usually made by traders or high net worth individuals to others. These are guaranteed by local “lords” or “goons” or “franchise owners”. The interest rates are higher than what you get from banks- part of which is compensation for high credit risk- part of it may be due to the fact that these loans escape “financial repression as described by the good professor in his previous articles”.

5) Households earn unaccounted money either through business (buying and selling in cash), real estate or other asset sales. Government employees make “black money” through corruption.

There is a limit to which financial repression can take place. There is a limit to which banking losses can be subsidized by households. Beyond which, people find a way, which may not necessarily be legal. Once households loose trust in the system and are free from morals (Nationalizing banking losses helps in achieving this). They just see the economic benefit and make decisions based on better pay offs.

The parallel economy in India is estimated to be worth almost half the legal or organized economy, and creates enormous challenges for law enforcement and economists alike. It is free from most regulations…. and might be responsible for creating a free market in India decades back when none existed.

This will be a very regressive future if more countries were to follow this example. But with such financial repression- it is a distinct possibility.
on 08 Jul 2010 at 4:56 am50China’s banking sector Serious Problem with Bad Loans « FiNETIK – Asia and Latin America – Market News Network


[...] Pettis at Peking University explains that“in China, even if you believe that all the NPLs currently in the banking system have been [...]
on 08 Jul 2010 at 5:26 am51Houhui


Wu Chien Ling, i think you have missed the point. But following the wind of the argument, as Plato taught…. if the Chinese government is so committed to helping the suffering billion who are in poverty, why would they spend billions of dollars (US dollars i mean) on space missions which so far have basically only recreated scientific experiments the results of which have already been in the public domain for decades? Not a word about opportunity cost from any newspaper in China.

The answer, as I think many know, is that the ultimate desire is to increase military capabilities up there, trying in vain to catch up with the US. Ask yourself when righteously defending the poor : Which is worse, the (as you point out) RICH West spending obscene amounts on their militaries (btw, only the US spends “obscene” amounts, as usual for a nationalist you have decided that all the WEST, with its numerous countries, is the same), or a country with most of its population in poverty spending anything but the bare minimum on military matters / Space programmes?
Trackback URI | Comments RSS

Leave a Reply
Name (required)

Mail (hidden) (required)

Website




Michael Pettis’ book
China Financial Markets © 2010 All Rights Reserved.
design.DavidGarlitz.com