Commentary on China with an economic flavor

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Ezra Klein on Wall Street

From Ezra Klein:

There’s a lot to dislike about Wall Street. The pay. The culture. In many cases, the people. But that doesn’t explain what happened in 2007 and 2008. A lot of observers understood we had a housing bubble — Dean Baker, for instance, had been sounding the alarm for years — but few of the housing skeptics saw everything going on behind the bubble: That the subprime mortgages had been packaged into bonds, that the bonds had been sliced into tranches, that the formulas being used to price and rate the tranches got the variable expressing correlation wrong, that an extraordinary number of banks had purchased an extraordinary amount of insurance against getting that correlation wrong from AIG, that AIG had also priced the correlation wrong and would be unable to pay its debts in the event of a meltdown, that a meltdown would freeze the mostly unregulated shadow market that major financial institutions and players used to fund themselves, that the modern financial system was so fragile that an uptick in delinquent subprime mortgages could effectively crash the global economy.

Read the whole thing.

The rentier class is not what it used to be

Steve Randy Waldman says:

The most organized and active agents of the rentier class are, of course, banks …
But it didn’t have to be this way. Banks, after all, are not only creditors. They are also the economy’s biggest debtors. In theory, bank loyalties ought to be mixed…On the one hand, banks prefer deflationary, zero-forgiveness tight-money policies, to maximize the real value of their assets and of the lending spread from which they draw profits and bonuses…

On the other hand, troubled banks are very happy to support loose money and expansionary policy, even at risk of inflation…

When we committed to a policy of “no more Lehmans”, when we made clear via TARP and TGLP and the Fed’s alphabet soup that big banks would have funding on demand and on easy terms, when we modified accounting standards to eliminate the risk that bad loans on the books would translate to failures, when we funded their recapitalization on the sly, we changed banks. We transformed them from nervous debtors into pure rentiers, who see a lot more upside in squeezing borrowers than in eliminating a crippling debt overhang.

This analysis seems wide of the mark to me. Where is the evidence that banks are among those pushing for deflation/austerity?

Even considering only traditional banking activities — in a slump, surely banks holding significant numbers of mortgage and loans worry more about credit risk than inflation / yield curve risk? Even if the government has sworn to protect bank creditors (the meaning of “no more Lehmans”), that doesn’t mean their equity can’t be wiped out.

And our biggest megabanks (the ones who are “organized and active” in the political system) are even less likely to support monetary or fiscal austerity. These banks earn a very significant portion of their revenues from highly cyclical investment banking activities.

Brad Delong made the point (in response to a Krguman article) last fall that there is no natural domestic hard money lobby nowadays. I agree. Today’s hard money lobby consists not of rentiers in the usual sense, but an axis of foreign creditors and opportunistic politicians.

What values?

Lanxin Xiang at the Graduate Institute of International and Development Studies in Geneva has an article in today’s SCMP proposing that deteriorating in U.S. China relations as a result of conflicting values  between the U.S. and China:

But for the US, seeing China as a newly rising power or “emerging market” leads to the logical conclusion that China’s “rise” and its negative consequences must be contained by forcing it to embrace Western value systems. Thus, the reasoning goes, since China has embraced the market economy that originated in the West – a notion that is itself problematic – political democratisation must follow.

The problem with this sort of logic is that it implicitly assumes that authoritarianism is somehow part of the Chinese “value system” — rather than the result of (often brutal) imposition of rulers’ will on the ruled.

In reality, neither Chinese or Americans choose their system of government based on their present-day “values” — it is instead a result of historical happenstance.  But Americans do, at least, choose their current government.  The same cannot be said for China, so where is the evidence that the current Chinese government has anything  to do with Chinese values?

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