Friday, February 27, 2009

Brad Setser's "China Yoke" Theory - replete from direct quotes

Here’s one link to Brad Setser’s analysis on what led to the ongoing crisis:
According to Brad Setser, the People's Bank of China encouraged Americans to "turn a home into an ATM":
“Absent a large savings surplus in Asia and the oil exporters, rising US rates would have choked off the housing bubble much earlier. High long-term rates aren’t conductive to rising home prices — and without rising home values it is hard to turn a home into an ATM.…Central banks reserve growth in the savings surplus countries carried this surplus to the US. … The process that led to the boom in risky assets was indirect: Central bank demand for safe assets drove down the return on safe assets and encouraged private sector risk taking. Private banks, famously, didn’t want to sit out the dance.”
APART from blaming the PBoC for the mortgage boom (you need to closely follow each of his essays to know that he’s actually referring mainly to the PBoC in the above paragraphs) Brad Setser also blames the United States Public Debt on imports from China here:
“Remember this the next time someone argues that the US will be borrowing more from the rest of the world to finance its fiscal deficit: the total amount the US borrows from the world is defined by the current account deficit and the current account deficit clearly went down in the fourth quarter even as the US fiscal deficit (and the Treasury’s borrowing need) soared.”
Here Brad Setser revises economic history by claiming that the excessive lending by private banks that weren’t regulated properly by the Federal Reserve was actually a result of China’s exchange rate policy. Excerpts:
“By holding US interest rates down and the dollar up, China’s policies discouraged investment in tradables production in the US while encouraging investment in the interest-rate sensitive sectors that weren’t competing with Chinese production. This isn’t too say that the US didn’t already have a slew of policies in place to encourage investment in housing. It did — from the Agencies to ability to deduct mortgage interest from tax payments. But the surge in demand for US bonds from the world’s central banks reinforced those policies.…More money was allocated to home construction (for a time) and less to investment in the production of goods for export than otherwise would have been the case.…Those who attribute the growth of the past several years solely to the market miss the large role the state played in many of the world’s fast growing economies. Conversely, those who attribute all the excesses of the past few years to the market miss the role that governments played in financing many of those excesses …”
Me: So you see, Brad Setser also blames China for the fact that there wasn’t much investment in industrial production facilities in the US the last several years. Either you need to follow Brad Setser’s “China Yoke” theory of the crisis, or get down to brasstacks and fix some simple lending norms for retail loans in the US to prevent this sort of thing from happening again.

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