Foreign Reaction to Gulliver's Travails
An article from Bloomberg explaining the "why" behind King Henry's in-progress coup d'etat:
Asia Needs Deal to Prevent Panic Selling of U.S. Debt, Yu Says
By Kevin Hamlin
Sept. 25 (Bloomberg) -- Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.
``We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''
An agreement is needed so that no nation rushes to sell, ``causing a collapse,'' Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations.
China, Japan, South Korea and others should meet soon to seal a deal, said Yu, a former academic member of the central bank's monetary policy committee. The talks should involve finance ministers, central bank governors and even national leaders, he said.
``Whether some kind of agreement between them to continue to hold Treasury bills is viable, I'm not sure,'' said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. ``It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it's something to be avoided.''
The global credit crisis, triggered by a housing slump in the U.S., has saddled financial companies with more than $520 billion in writedowns and losses, collapsing Bear Stearns Cos. and Lehman Brothers Holdings Inc. in the process. Insurer American International Group Inc. and mortgage giants Fannie Mae and Freddie Mac also were rescued by the government.
U.S. Treasury Secretary Henry Paulson is urging Congress to pass a $700 billion plan to remove devalued assets from the banking system. Federal Reserve Chairman Ben S. Bernanke said Sept. 24 that the U.S. is facing ``grave threats'' to its financial stability.
China's huge holdings of U.S. debt means it must bear a large proportion of the ``burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ``couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added.
``China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.''
Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.
``It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ``China knows what to do. We don't need your intervention.''
The U.S. financial crisis had taught China a lesson and that was: ``Why are we piling up these IOUs if they may default?'' China's economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.
``Our export-growth strategy has run its natural course,'' he said. ``We should change course...."
Remember this Treasury Department listing of foreign holders of US IOUs?
Say "hello" (in the appropriate language, ignorant peasant) to your new overlords.
Meanwhile, here's Germany's answer to King Henry's bail-out plan:
In a speech before parliament on Thursday, German Finance Minister Peer Steinbrück said the effects of the financial markets crisis would be felt in economies and labor markets worldwide for years to come. "The world will never be the same as it was before the crisis," the Social Democrat said, adding," the US will lose its status as the superpower of the global financial system."
He blamed the current crisis partly on Wall Street's "blind drive for double-digit profits" and massive bonuses for executives and bankers. He also called for greater regulation in financial markets and a ban on short-selling, and he suggested a role for the International Monetary Fund as a global markets watchdog. He said the unbridled "race for profits" had to be stopped, and that banks should only be able to conduct high risk transactions if they have sufficient capital resources and they report the risks in their balance sheets.
Steinbrück said the crisis would lead to lower economic growth in Germany as well as negative developments in the labor market. "Our economy will also suffer," he said, though he said it would be difficult at this point to estimate what impact it could have on Germany's federal budget. For the time being, he said, tax revenues are stable.
"An American Problem"
The minister reiterated his rejection of calls from Washington for Germany to create a bailout fund for failing financial institutions based on the US model. With a proposed $700 billion bailout package, the US government is hoping to stop the banking crisis. "More than anything, the finance market is an American problem," Steinbrück said.
He also accused the US of serious failures, saying the Americans had been hesitant to introduce stricter rules requiring larger capital reserves at banks. "The US is the source of the crisis and it is the focus of the crisis," he said. The finance minister also blamed an investment banking system that had not been sufficiently regulated, as well as supervisory bodies in the US that were deeply fragmented. "In large parts, this system is insufficiently regulated, and now it is falling apart," he said.
He also criticized Washington's position that the state should take a hands-off approach to regulating and instead leave things up to market forces. This "laissez-fair position" created the crisis, which he said has triggered an "earthquake in the international financial architecture with unimaginable write-offs." Steinbrück spoke of write-offs totalling $550 billion. At some US banks, he said, they have found that they don't even have a sustainable business model...
And the Germans also don't seem that interested in King Henry's request that foreign governments help buy fecal American securities so as to help the King's Wall Street pals:
It's not a call for assistance; it's a scream for help.
US Treasury Secretary Henry Paulson is asking other countries to help buy up bad US debt. The US government is putting up $700 billion in taxpayer money in the hopes that the measure might restore stability in the financial system. Some countries are planning to help. But the German government has answered this call quickly and clearly: no.
Economics experts think that's the right response. As they see it, in the long run, those responsible for the crisis -- who have been cashed out with high salaries and bonuses for years -- will not be penalized for billions "but will be let off the hook like everyone else," says Carsten Meier of the Kiel Institute for the World Economy (IfW). According to Meier, by injecting capital into the market, the US government is putting everyone who speculated and lost back on their feet and thereby standing in the way of a market cleanup.
Paulson has stated that the US government will pay a fair price for the bad debt, which Meier sees as sending "precisely the wrong signal," adding that "people shouldn't be rewarded for taking such high risks." Meier also finds Germany's decision to sit out any bailout operation to be the right move. "The financial crisis is primarily a problem in America," Meier says. As he sees it, the fact that Germany and Europe are far less affected that the US justifies European reluctance. "The stability of the German banking system is not in danger," Meier points out as he explains why he believes Europe shouldn't provide any funds. "The world shouldn't have to bear the burden for America's lapses."
Germany Shouldn't Have to Bear More Burdens
Still, the financial crisis has already reached German shores, and banks here have had to announce write-downs of nearly €40 billion ($58.5 billion). "German banks are already sufficiently involved in the calamity," says Stefan Kooths of the German Institute for Economic Research (DIW) in Berlin. Either way, experts estimate that half of America's bad loans were sold abroad -- and a large part of that was assumed by Germans. And now the money is gone. "There's no reason why Germany should have to bear even more burdens," says Kooths.
Experts have also criticized the American rescue package for a number of other reasons. Diemo Dietrich from the Halle Institute for Economic Research (IWH) doesn't think the plan is well-balanced: "The government is only buying bad risks and, in doing so, nationalizing the losses." Dietrich adds that taxpayers won't share in any of the profits that the government hopes the stabilized market will bring about in the long run...
Good analysis, even if it stings, coming from friends since 1945....
Meanwhile,the ChiCom government is ready to do what it must to protect Chinese interests:
On Wednesday, Vice-Premier Li Keqiang emphasised that Beijing would respond to ensure stable growth in the face of global uncertainties, although he did not give details. "China will enact economic control measures in accordance with the circumstances so as to maintain stable economic growth," Mr Li told visiting Venezuelan President Hugo Chavez.
"We will make efforts to increase the dynamism and power of the economy by fully leveraging our huge growth potential to sustain stable, rapid growth in the long run."
The latest People's Daily commentary focused on the need to pursue domestic reforms that would spur spending at home. "As the international market softens, this may create a production capacity glut," it said, urging increased investment in social security, medical care and education to lift domestic consumption...
And our nearest neighbor to the North?
The Bank of Canada loves King Henry and his plan.
Fortunately, the next Administration will take these matters firmly in hand, I'm sure:
Heaven help us all.