"SUPERPOWER AMERICA" AT WORLD'S MERCY FOR MONEY

China state paper lashes US monetary policy

8 Oct, 2008, 0637 hrs IST, REUTERS

BEIJING: The "tsunami" in the US financial system was touched off by short-sighted monetary policy and lax regulation, a leading Chinese state newsp aper said on Wednesday.

The front-page commentary in the overseas edition of the People's Daily is the latest in a stream of critical articles that have lashed US policy even as the Chinese central bank has said it endorses a Washington bailout plan.

"Throughout the sub-prime crisis, each step appears to have been reasonable and proper, but in fact each one was expanding and accumulating risks," said the commentary by Yi Xianrong, an economist at the Chinese Academy of Social Sciences, a leading government think-tank.

The People's Daily is the ruling Communist Party's official paper, and the overseas edition is a small offshoot of the main domestic edition. Its commentaries do not necessarily directly reflect leadership positions. But this commentary and previous ones have reflected dismay with US economic policy and debate over how China should respond to Washington's financial straits.

"Due to the government's short-sightedness or short-term behaviour, there was no formulation of monetary policy from a long-term strategic perspective," Yi wrote. "At the same time, government departments were seriously remiss in oversight and management of financial innovations."

The commentary offered no prescriptions for how Beijing should respond to the global crisis. But it stressed the dangers of venturing into derivatives and other complex financial products that many have blamed for the turmoil.

In another official newspaper, however, Yao Zhizhong, an economist at the Chinese Academy of Social Sciences, said Beijing should put some of his financial muscle behind the US bailout. If China and others with big foreign exchange reserves do not help, Washington may resort to dangerously inflationary monetary policy, Yao told the Chinese-language International Finance News, which is also run by the People's Daily.

"China will certainly sustain losses from this financial crisis, and now we have to think up ways of lowering those losses," he said.

China might not necessarily support the bailout using its foreign exchange reserves to buy US bonds, he said. China could "along with other countries, provide various kinds of cooperation for US financial interventions", he added.

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A futile bailout as darkness falls on America

By Paul Craig Roberts

America has become a pretty discouraging place. Americans, for the most part, will never know what happened to them, because they no longer have a free and responsible press.

The 20th century proves that the market is likely to know better than a central planning bureau. It was Soviet Communism that collapsed, not American capitalism. However, the market has to be protected from greed. It was greed, not the market that was unleashed by deregulation during the Clinton and George W Bush

The Paulson (the former CEO of Goldman Sachs) bailout transfers the troubled financial instruments that the financial sector created from the books of the financial sector to the books of the taxpayers at the US Treasury.

This is all the bailout does. It rescues the guilty. The Paulson bailout does not address the problem, which is the defaulting home mortgages.

The defaults will continue, because the economy is sinking into recession. Homeowners are losing their jobs, and homeowners are being hit with rising mortgage payments resulting from adjustable rate mortgages and escalator interest rate clauses in their mortgages that make homeowners unable to service their debt.

Shifting the troubled assets from the financial sectors' books to the taxpayers' books absolves the people who caused the problem from responsibility. As the economy declines and mortgage default rates rise, the US Treasury and the American taxpayers could end up with a $700 billion loss

Since Paulson's bailout of his firm and his financial friends does nothing to lessen the default rate on mortgages, how will the bailout play out?

If the $700 billion bailout is based on an estimate of the current amount of bad mortgages, as the recession deepens and Americans lose their jobs, the default rate will rise. The $700 billion might not suffice. The Treasury will have to go hat in hand to its foreign creditors for more loans. ( Like China, Japan and Europe and Russia)

As the US Treasury has not got $7, much less $700 billion, it must borrow the bailout money from foreign creditors, already overloaded with US paper.

At what point do America's foreign bankers decide that the additions to US debt exceed what can be repaid? This question was ignored by the bailout. There were no hearings. No one consulted China, America's principal banker, or the Japanese, or the OPEC sovereign wealth funds, or Europe. Does the world have a blank check for America's mistakes?

This is the same world that is faced with American demands that countries support with money and lives America's quest for world hegemony.

Europeans are dying in Afghanistan for American hegemony. Do Europeans want their banks, which hold US dollars as their reserves, to fail so that Paulson can bail out his company and his friends?

The US dollar is the world's reserve currency. It comprises the reserves of foreign central banks. Bush's wars and economic policies are destroying the basis of the US dollar as reserve currency. The day the dollar loses its reserve currency role, the US government cannot pay its bills in its own currency. The result will be a dramatic reduction in US living standards.

Currently Treasuries are boosted by the habitual "flight to quality," but as Treasury debt deepens, will investors still see quality? At what point do America's foreign creditors cease to lend? That is the point at which American power ends. It might be close at hand.

The Paulson bailout is predicated on cleaning up financial institutions' balance sheets and restoring the flow of credit. The assumption is that once lending resumes, the economy will pick up. This assumption is problematic.

The expansion of consumer debt, which kept the economy going in the 21st century, has reached its limit. There are no more credit cards to max out, and no more home equity to refinance and spend. The Paulson bailout might restore trust among financial institutions and enable them to lend to one another, but it doesn't provide a jolt to consumer demand.

Moreover, there may be more shoes to drop. Credit card debt could be the next to threaten balance sheets of financial institutions. Apparently, credit card debt has been securitized and sold as well, and not all of the debt is good.

In addition, the leasing programs of the car manufacturers have turned sour. As a result of high gasoline prices and absence of growth in take-home pay, the residual values of big trucks and SUVs are less than the leasing programs estimated them to be, thus creating more financial problems.

Car manufacturers are canceling their leasing programs, and this will further cut into sales.

According to statistician John Williams, who measures inflation, unemployment, and GDP according to the methodology used prior to the Clinton regime's corruption of these measures, the US unemployment rate is currently at 14.7% and the inflation rate is 13.2 percent. (I'm not sure I agree with this...but there are others who know more about this methodology than I, gg)

Consequently, real US GDP growth in the 21st century has been negative. This is not a picture of an economy that a bailout of financial institution balance sheets will revive. As the Paulson bailout does not address the mortgage problem per se, defaults and foreclosures are likely to rise, thus undermining the Treasury's estimate that 90 percent of the mortgages backing the troubled instruments are good.

Moreover, one consequence of the ongoing financial crisis is financial concentration. It is not inconceivable that the US will end up with four giant banks: J.P. Morgan Chase, Citicorp, Bank of America, and Wachovia Wells Fargo. If defaulting credit card debt then assaults these banks' balance sheets, who is there to take them over?

Would the Treasury be able to borrow the money for another Paulson bailout? An alternative to refinancing troubled mortgages would be to attempt to separate the bad mortgages from the good ones and revalue the mortgage-backed securities accordingly.

If there are no further defaults, this approach would not require massive write-offs that threaten the solvency of financial institutions. However, if defaults continue, write-downs would be an ongoing enterprise.

Clearly, all Secretary Paulson thought about was getting troubled assets off the books of financial institutions. The same reckless leadership that gave us expensive wars based on false premises has now concocted an expensive bailout that does not address the problem, which will fester and become worse.

Paul Craig Roberts is coauthor of The Tyranny of Good Intentions. He can be reached at: PaulCraigRoberts@yahoo.com