trade protectionism is a public enemy

Is there any similarity between the scenario of the power shift at the international stage in the 1930's and the current tendency that China seems to be in the position to replace the US as the world economic leader? Harold James, a historian at Princeton University, argues in an essay of FP that it is, and the problem is that the transition from an American to a Chinese model of capitalism will not be easy for the world to accept. 

But Prof. James' argument seems to be rather problematic, as it links China's withdrawal from further investment on Lehrmen Brothers directly to the financial crisis.

The initial stages of the credit crunch in 2007 were managed so apparently painlessly because sovereign wealth funds (SWFs) from the Middle East, but above all from China, were willing to step in and recapitalize the debt of U.S. and European institutions. Between November 2007 and March 2008, the SWFs provided $41 billion of the $105 billion injected into major financial institutions. Had this process continued, the events of 2008 would have included problems with U.S. real estate and a severe stock market decline, but no meltdown of financial institutions.

How strange? It seems to me Prof. James teleologically links China's withdrawal of further investment on buying Lehman Brothers as the major reason for the financial meltdown. He even goes further that 'China Investment Corp's turning back will be held up in the future as a moment when history could have shifted in a different direction.' 

It's hard to believe such a scapegoating approach to the historical discourse, really. Again and again, the argument goes like China is prone to protectionism, but we all know that a major benefactor of the globalization, China surely will advocate open trade policy.  

Otherwise, Prof. James has an objective judgement on the prospect of reforming international institutions that which is 'a key issue in deciding whether the coming geopolitical alterations will be crisis-ridden, abrupt, and disruptive, or whether a more gradual and peaceful path of adjustment can be achieved.'

Seems that there are a lot of uncertainties ahead indeed, as Jonathan Holslag puts in from an European perspective, 

None of this is to say that the Beijing Consensus guarantees a more stable world order. Far from it. A concert of powers is only as strong as its weakest player. If economic turmoil worsens, nationalism in one country or another could reduce the scope for pragmatic bargaining. Overlapping spheres of influence and frozen conflicts could once again lead to major conflict. And if, as some observers expect, China emerges from the crisis as the big winner, it won't be long before zero-sum thinking again replaces win-win cooperation as the order of the day.   

We all know line-shape is not a stable form; triangular shape is. But alas, at this critical moment, EU is still divided from within although a lot of efforts have been devoted to bridge its internal gaps. Criticising the American style stimulus measures as 'the way to hell' certainly is not productive, as it shows that less than one week for the Summit, some European countries still couldn't reach general consensus. It has prompted Timothy Garton Ash to lament on how the EU has wasted 10 years to become a more politically integrated entity. 

Looking back, one begins to see that Europe has spent the best part of 10 years failing to get its act together. A decade that began with ambitious plans for a European constitution ends with the fate of a much more modest Lisbon treaty hanging on a dubiously democratic attempt to persuade the Irish to alter their "no" to a "yes". If we had spent half the time we wasted in that constitutional debate simply co-ordinating our actions better, under the existing treaties, we would be in a better position today. Europe talks the talk but does not walk the walk. 

Putting aside all these power politics, one would see now how danger the world would become if the rich nations turn to protectionism, as today NYT's editorial warns that 'protectionism thrives in economic crises as people seek scapegoats abroad for their troubles and demand protection for domestic jobs.' 

We all should have a watchful eyes on that. 

a super-sovereign currency being considered

Zhou Xiaochuan, the central bank governor of China, has proposed to create a kind super-sovereign currency to replace sovereign currency such as the dollar to minimise the financial risks. The original text is on the website of the People's Bank of China.

It's firstly reported by WSJ and interpreted as the offensive gesture, 'backed by other emerging economies such as Russia in making clear they want a global economic order less dominated by the U.S. and other wealthy nations.'

WSJ report quotes some experts opinions on Zhou's proposal. 

John Lipsky, the IMF's deputy managing director, said the Chinese proposal should be treated seriously. "It reflects officials' concerns about improving the stability of the financial system," he said. "It's interesting because of China's unique position, and because the governor put it in a measured and considered way."

China's proposal is likely to have significant implications, said Eswar Prasad, a professor of trade policy at Cornell University and former IMF official. "Nobody believes that this is the perfect solution, but by putting this on the table the Chinese have redefined the debate," he said. "It represents a very strong pushback by China on a number of fronts where they feel themselves being pushed around by the advanced countries," such as currency policy and funding for the IMF.

While acknowledging the positive side of Mr.Zhou proposal, FT's editorial is a bit nuanced in pushing back the frontline. 

Mr Zhou’s proposal is useful and constructive – but China should still raise domestic consumption. It must not just replace its mountain of dollar assets with heaps of other currencies. ...China has acted wisely in the recession, expanding demand with government spending. Beijing now wants to play an active role in reshaping the world monetary order. This outward-looking view should be welcomed. But China still has work to do at home.

On the benefit of the dollar as the world's reserve currency, this Time's blog is quite frank,

The advantage of having your country's currency as the world's reserve currency is that you don't really have to play by the rules: You can run big deficits financed by the rest of the world, you can spend more than you earn, and to a certain extent you can escape the consequences of your profligacy by devaluing your currency when you run into trouble. The obvious disadvantages are that running big deficits and spending more than you earn aren't really great long-term economic strategies.

So, surely it would not be easy for the US to give up more sovereignty to IMF, because it means the sacrifice of its national interests. 

What can China do then?   

Toosie rolls soothe souls

'Americans worry about the economy in part because of the infusion of hundreds of billions of taxpayer dollars, not in spite of it.' - WSJ 

In Geithner's new strategy to deal with toxic assets, liquidity is the first priority, but WSJ is still quite cautious about it. 

'So in essence this is an attempt at a slow-motion bank workout without a fight over a new resolution agency or having to ask Congress for more money.' 

How to attract private investors, and whether banks will sell enough toxic assets to make difference, are all quite uncertain. The largest risk, as it's been identified, is still to the tax payers, that WSJ warns that 

'the Obama Administration is instead leveraging the balance sheets of the Federal Reserve and Federal Deposit Insurance Corp., which will lend to the new public-private entities to buy the toxic assets.' 

Watchful eyes indeed!

What Obama can do? There is a review on NYT regarding a TV program called 'Frontline: Ten Trillion and Counting', 

'Now it is Mr. Obama who will have to make the case for sacrifice, though the Iraq war is winding down, and the one in Afghanistan is somewhat murky in the public mind.'

But as it's said, 'it's hard to sell a message of pain to Americans'. 

Ghee, is that the US we have perceived in our mind?

Perhaps in such a hard time, sweetie is something that one can turn to for the consolation, as this 'Tootsie Rolls Soothe Souls' indicates. 

Daily political economy! (1)

Quite an extraordinary announcement of Swedish government that it will not bail out the ailing Saab, one of the iconic brands of Sweden. The so-called Swedish model to deal with the crisis in banking section by nationalizing banks, recapitalizing and selling them is treated somehow as a beacon in the US, but its right leaning government certainly doesn't want to interfere too much the market economy. NYT reports, 

'Swedish officials have condemned what they see as protectionism by other European countries that have pledged to prop up their own failing car industries. They have also been scathing about General Motors, Saab’s owner, and the last thing they want is to seem to be bailing out a despised foreign company. '

Meanwhile, the current practice of GM and Chrysler sounds not so healthy as one of FT's comments questions, 

'It is one thing for companies to cut prices and suffer the consequences when they and their competitors are all playing by the same rules. It is quite another when the businesses in question are being kept alive with public money – $17.4bn between GM and Chrysler so far, with much more to come.'

Concerns about globalization and free trade has been raised up again, we all need to be cautious about the trend of protectionism.

“The U.S. is in such great danger of backing away from free trade,” said Kenneth S. Rogoff, a professor of economics at Harvard. “The next two years could be a disaster for free trade.”- quoted from this report. 

On the issue of regulation, while Obama's stand is still mischievous, European leaders have agreed to be pro-regulation either at the pan-European level and at the G20 level. 

'Gordon Brown, UK prime minister, agreed that a stronger system of pan-European financial regulation, based on the report of Jacques de Larosière, the former IMF managing director, be set up. The Europeans will also back action at the G20 level on regulation of systemic risks from hedge funds, private equity and alternative investment vehicles, and closer regulation of credit rating agencies.' -- FT editorial 

The repercussion of AIG case is still on, as Clive Crook of FT laments on the seemingly unconstitutional law the House of Representatives passed to void bonus,

'The US president has vacillated between stoking the outcry and trying to calm people down. He should have condemned the House’s bill of attainder. If his financial repairs are to succeed, the president must foster a more calculating, less self-destructive mood. Regardless, AIG should remain at the front of the government’s mind as it considers longer-term regulatory reform.'

Are you optimistic about such a regulatory reform? 

ECB should do more, Wolfgang Münchau appeals again, 

'As European leaders focus on tax havens and hedge funds, it is hard to detect a sense of urgency in dealing with the wider crisis. They seem to think that they did enough last October, when they issued blanket guarantees on bank debt and offered voluntary recapitalisation schemes.'

On what actions ECB should be taking, he prefers buying up the underpriced bonds of various Eurozone governments to quantitative easing. In another appeal on the demand side, Kermal Dervis argues that  

'Two things need to happen for demand expansion – driven in the past by asset bubbles and US consumers – to resume, but in a more sustainable fashion. In the immediate future, current account surplus countries, including Germany and Japan but led by China, must play a greater role in the expansion of demand. In the longer term, the distribution of income inside countries and worldwide must shift towards less concentration at the top, supporting a broad-based expansion in consumer demand.'

Sounds like a cliche now, the problem is that changing the living pattern of Germany, Japan and China is really a long term issue. It's a cultural issue, instead of economic issue. The change probably can be nudged to some extent, but certainly can not be engineered.