The U.S. president, congress, and the world in 2010

I was at a meeting in Washington on Thursday where we were discussing the effects that the Democrats’ drubbing in the November 2 mid-terms could be expected to have on the so-called Israeli-Palestinian “peace process”. Most of the participants were understandably glum. (This was just after the news came out about Netanyahu’s Wednesday-night meeting with the GOP’s incoming House Majority Leader, the dreadful Eric Cantor. See Glenn Greenwald’s excellent commentary on that, here.)
My interest did get kind of piqued, however, when one fairly senior retired diplomat spoke up toward the end of the discussion, and said, “I disagree. I think we will see Obama liberated after the midterms, to conduct foreign policy as he sees fit. He will no longer feel he needs to look over his shoulder to keep his congressional followers behind him– because he won’t have any.”
Well, it was an interesting theory. The speaker went on to talk about how, back in 1994, Pres. Clinton had also had a horrible time in the first midterm elections of his presidency, losing the House to the GOP– but had then gone on to pursue a very successful and imaginative foreign policy.
Um, yes. Maybe. I think I disagree quite a bit about Clinton having pursued a great foreign policy. Weren’t those the years in which, fatally, and at Dennis Ross’s urging, he dropped the ball on nailing down the deadlines to complete the final-status Palestinian-Israeli peace agreement? Did he have to go on and bomb Serbia? Etc., etc.
But even if we “grant” Clinton some success… the world of 2010 is still very, very different from the world of 1994.
In 1994, the United States stood effortlessly astride the whole international system. A U.S. president could make bold moves in foreign policy (even though Clinton really didn’t do very much of that)… But he could have, both because all the other actors around the world were still much punier than the U.S., and because here inside the United States, the legacy of the Cold War and of many decades of custom before that meant that people really did act as if “politics stops at the water’s edge”… That is, even the most partisan critics of the president at home did not do anything that might undermine his ability to conduct an effective diplomacy on the world stage.
How things have changed– in both regards. Example number 1 of the latter shift is Eric Cantor himself, with the assurance he gave to Netanyahu in which, as reported by his office, he “stressed that the new Republican majority will serve as a check on the Administration… ”
But the balance has changed a lot internationally since 1994, as well. Even the most cursory reading of the reports from the past week’s G-20 summit Seoul shows that.
In a good report on the FT website yesterday, Alan Beattie wrote,

    President Barack Obama arrived in Seoul at this week’s G20 summit chastened by the Democrats’ drubbing in the midterm elections. If he thought that he would find peace by retreating to the rarefied heights of international summitry, he was sadly mistaken.

He went on to note the tide of criticism that has been rising internationally (including among all other 19 members of the G-20), since the U.S. Federal reserve announced its policy of renewed “quantitative easing” (QE2,also known as “printing more dollars”) two weeks ago.
He commented,

    To be fair, Mr Obama’s administration, although few doubt it is highly sympathetic to QE2, cannot control the Fed and does not comment on monetary policy. Still, American policymakers have shown a curious reluctance to defend the US more generally in public. It was just this Thursday, more than a week after the Fed’s QE2 decision, that Tim Geithner, Treasury secretary, went on TV effectively to rebut the widespread international charge that it was pursuing a weaker dollar.
    Once, this reticence would not have mattered. In the heady days of the late 1990s when Mr Geithner was last at the Treasury and the department often appeared to be running global economic policy single-handed, it generally had the financial and reputational clout to get its way at international meetings without having to orchestrate the mood music beforehand. But being the strong, silent type only works for those powerful enough to let their strength do the talking.

Interesting observation…
Bottom line: Once upon a time, the U.S. was so powerful internationally that a U.S. president could almost always portray himself as successful if he took actions on the world stage… and many U.S. presidents used this power with some success to try to counteract the erosion of their political support at home. (Think of Nixon on his farewell tour to Paris; or earlier, going to China.)
Now, though, that card suddenly doesn’t seem available for a U.S. president. Indeed, Washington’s international clout is so diminished– in part because of the disastrous policies pursued by Pres. G. W. Bush, in part because of other, longer-term processes, including the country’s apparent inability to escape the shackles of heavy, longterm military spending– that today, if a president launches any significant initiative overseas he runs a serious and probably increasing risk of appearing even weaker at home because of the way his initiative gets dissed abroad.
…And so the world turns.

On bank governance: A modest proposal

I couldn’t help but be struck by the photo at the top of this article in today’s NYT, showing the CEO’s of the US’s 19 major banks lined up to await the results of Geithner’s ‘stress test’.
They are all men. Nearly all “white” men, though with a couple of ethnic South Asians there as well. Some preening, some looking slightly worried, all in white shirts and oozing opulence. (No surprise there.)
My proposal: Sack the lot of them. Sack all the male senior managers at each of these banks until you get to the highest-ranking women working there, and then make them into the CEOs, CFOs, COOs, etc.
There is more than enough evidence now out that shows that guys are just over-confident when it comes to assessing financial risk, and get more caught up than most women in risky behaviors that have a competitive edge. Just do a Google Scholar search on “gender risk finance”, and you’ll see the wealth of material that’s now available.
The article whose title I like best is “Boys Will be Boys: Gender, Overconfidence, and Common Stock Investment” (PDF here).
So why do the boards of these banks still consistently hire people with a Y chromosome into the top ranks of their management? Gosh, I’m still trying to figure that one out.
The results, though, have been clear: an excess of competitive risk-taking and an almost total disregard for the common good.

A Turning Point?

from President Obama‘s press conference on the results of the recently concluded G20 Summit Meeting in London:

    Earlier today, we finished a very productive summit that will be, I believe, a turning point in our pursuit of global economic recovery. By any measure, the London summit was historic. It was historic because of the size and the scope of the challenges that we face, and because of the timeliness and magnitude of our response.

The G-20 is made up of the finance ministers and central bank governors of 19 countries plus a representative of the European Union, established in 1999 “to bring together systemically important industrialized and developing economies to discuss key issues in the global economy”. The G20 had high hopes for its recent summit meeting in London.

    The G-20 will need to send a strong signal that it is prepared to take whatever further actions are necessary to stabilise the financial system and to provide further macroeconomic support.

What happened? Was it really a turning point? Here are comments on the major G20 promises from me and others.

Continue reading “A Turning Point?”

Milanovic: ‘The crisis of maldistribution’

note: I am very happy to publish the following short essay on the economic
crisis by the distinguished economist Branko Milanovic, a senior associate with the
Carnegie Endowment for International Peace and for a long time a lead economist
in the World Bank’s research department. Milanovic is
an expert on income and wealth distribution both within and among countries,
and was the author of Worlds
Apart: Measuring International and Global Inequality
(Princeton UP, 2005.)
Like all JWN content, this essay is published under a Creative Commons License. ~HC.

The crisis of maldistribution

By Branko Milanovic,

Carnegie Endowment for International Peace

The current financial crisis is
generally blamed on feckless bankers, financial deregulation, crony capitalism,
and the like. While all of these elements may be true, this purely financial
explanation of the crisis overlooks its fundamental reasons. They lie in the
real sector, and more exactly in the distribution of income across individuals
and social classes. Deregulation, by helping irresponsible behavior, just
exacerbated the crisis; it did not create it.

To go to the origins of the crisis,
one needs to go to rising income inequality within practically all countries in
the world over the last 25 years. In the United States, the top 1% of the
population doubled its share in national income from around 8 percent in the
mid-1970s to almost 16 percent in the early 2000s. (Piketty and Saez,
2006).  That replicated the
situation that existed just prior to the crash of 1929, when the top 1% share
reached its previous high watermark 
In the UK, the top 1% receives 10% of total income, a share greater than
at any point since World War II (Atkinson, 2003, Figure 3).  In China, inequality, measured by the
Gini coefficient (the most common measure of inequality), almost doubled
between 1980 and 2005. The top 1% of the population is estimated to garner
around 9% of national income. Even more egregious were developments in Russia,
where the combined total wealth of thirty-three Russian billionaires listed on
the Forbes list in 2006 was $180 billion as against total country’s GDP of
about $1,000 billion that same year (Guriev and
Rachinsky, 2008).  Just before his
downfall, the richest oligarch, Michael Khodorovsky
had an estimated income equal to average Russia-wide incomes of 250,000 people.
(The same number for Bill Gates and the United States in 2005 was 75,000.)
Think of it. With his income alone, that is without touching
a penny of his wealth,
Khodorovsky could create (if need be) an army of
quarter million people. No wonder the Kremlin took notice, and Khodorovsky
ended up in jail. But the time of oligarchs in Russia did not end with him.
Similarly, in Mexico, Carlos Slim’s wealth, prior to the crisis, was estimated
at more than $53 billion. Assume a conservative return of 7% on his assets, and
that gives an annual income of $3.7 billion with which, given Mexican GDP per
capita in the same year, Slim could command even more labor than Khodorovsky:
440,000 people. These are only a few examples. But they were replicated, albeit
on a smaller scale, in practically all countries of the world.

What did it mean? Such enormous
wealth could not be used for consumption only. There is a limit to the number
of Dom Perignons and Armani suits one can drink or
wear. And, of course, it was not reasonable either to “invest” solely in
conspicuous consumption when wealth could be further increased by judicious
investment. So, a huge pool of available financial capital—the product of
increased income inequality—went in search of profitable opportunities
into which to invest.

But the richest people and the
hundreds of thousands somewhat less rich, could not
invest the money themselves. They needed intermediaries, the financial sector.
Overwhelmed with such an amount of funds, and short of good opportunities to
invest the capital, as well as enticed by large fees attending each
transaction, the financial sector became more and more reckless, basically
throwing money at anyone who would take it. Eventually, as we know, the bubble

But its root cause was not to be
found in hedge funds and bankers who simply behaved with the greed to which
they are accustomed but to large inequalities in income distribution which
generated much larger investable funds than could be profitably employed. The
under-consumptionist explanation of crises, of course, has a long history.  When the times are good, such theories
are covered by oblivion and often held in disrepute. But when the economy
implodes, people remember them. Keynes in 1936 brought them back from
semi-obscurity in which they vegetated between the early 20th
century (when they were used to explain European colonial expansion) and the
Great Depression.  Begrudgingly, he
granted them a measure of respectability. But, in the roaring 1990’s, they were
forgotten.  Moreover, as underconsumptionism had an unmistakable Marxist pedigree,
it always seemed suspect to those brought up in the Marshallian tradition, and
later to neoclassical economists.

But today, when we face the need to
explain the crisis, there are, it seems, only two possible culprits: to lay the
entire blame on the human factor and greed (which would be rather odd for the
economists to do since they routinely praise greed as the spiritus movens of all change), or to look for structural causes
of the crisis. It may not be entirely  coincidental that Robert Lucas,
a Chicago economist and the recipient of the Nobel prize in economics, was the
man who both declared in 2003 (as we were recently reminded  by Paul Krugman) that “the central
problem of depression-prevention has been solved”, and a year later,  poured scorn on all these concerned
with rising inequality by writing that “of the tendencies that are harmful to
sound economics, the most seductive, and …the most poisonous, is to focus on
questions of distribution.” If you do not understand why income distribution
may be important, it seems natural not to get it that crises are not a thing of
the past.


Robert Lucas (2004), “The Industrial revolution: past and
future”, Federal Reserve Bank of Minneapolis, pp. 5-20. 2003
Annual Report Essay.
Available at

Atkinson, Tony (2003), “Top incomes in the
United Kingdom over the Twentieth Century”, December 2003.

Thomas Piketty and Emmanuel Saez, “Income Inequality in the
United States, 1913-1998”, Quarterly Journal of Economics, February 2003.

Thomas Piketty and Emmanuel Saez (2006), “The evolution of
top incomes : a historical and international
perspectives”, American
Economic Review
, vol.96, no.2, 2006, p. 200-2005.

Sergei Guriev and Andrei Rachinsky (2008), “The evolution of personal wealth in the
former Soviet Union and Cental and Eastern Europe”,
in James B. Davies (ed.), Personal Wealth from a Global Perspective, Oxford, UNU-WIDER
Studies in Development Economics, 2008.

G-20: When ‘Seven’ just isn’t enough

Pres. G.W. Bush may, as two NYT reporters wrote today, have been the first to insist that this weekend’s economic summit in Washington should include the leaders of all the “Group of 20” nations, not just the “G-7” or “G-8” that France’s Pres. Sarkozy originally suggested. But regardless of its authorship, it was an excellent idea.
The G-7 comprises the US, four European nations, Canada, and Japan. The G-8 (which may or may not be moribund at this point, after the Ossetian war of last August) includes those seven plus Russia. The G-20 includes those eight plus: Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Saudi Arabia, South Africa, South Korea, Turkey, and the EU.
Given the scale and the unequally distributed effects of the present crisis, including these additional heads of state in the current confab makes a lot of sense. The effects of the financial crisis have been the greatest on economies that had deregulated their financial systems and substantially opened them up to contagion by western-originated toxins before the onset of the crisis last year. As I noted here at the end of October, one analysis of the macroeconomic vulnerability of various “developing” nations to the effects of the crisis showed that Brazil, Russia, India, and China (aka the BRIC countries) all had relatively low vulnerability. That is just one reason why many analysts are now, quite correctly, saying that if the global economy as a whole is to be spared the worst effects of the current crisis, then this will have to be achieved through the leadership efforts of the non-G-7 countries.
The authors of today’s NYT article give some indications of the degree to which US supremacy of the world system has declined under Bush. They quote Adam S. Posen, described delphically as someone “who advises foreign governments on economic coordination” as saying of Bush:

    He’s going to be much more the host and much less the chairman than he realizes… He’s going to be providing the snacks and the venue and making sure everybody’s comfortable, but he is not going to be driving the agenda; that’s the reality. The agenda-setting is with Gordon Brown and Nicolas Sarkozy and Hu Jintao.

Actually, contra Posen, I’d say that it will be Hu and all his fellow leaders of the BRIC countries who will be driving the agenda along with Brown and perhaps Sarkozy. Both Britain and France have been badly affected by the financial crisis.
It was apparently also Bush who insisted that the G-20 meeting be held in Washington rather than New York, which was Sarko’s original suggestion.
That might not have been such a good idea.
I suppose Bush’s original aim was to try to demonstrate that Washington DC is the still the center of the universe, rather than Turtle Bay, NY, home of the nefarious (in his view) United Nations…
But I think the main effect of his decision will be to demonstrate to everyone concerned just how lame (or dead) of a duck he has become in his own national capital.
Doubtless all the foreign leaders flocking to DC will be most eager of all to connect with anyone who has the ear of the uber-charismatic president-elect, rather than paying much attention to GWB.
The O-man, for his part, is sitting pretty in Chicago, in furtherance of his quite appropriate insistence that the country only has one president at a time, and that the current mess the economy’s in still sits firmly on GWB’s doorstep, not his.
Obama is sending two unofficial “envoys” to the meeting, in the shape of Madeleine Albright and former GOP Congressman Rep. Jim Leach. The choice of those two throwbacks to the 1990s is pretty sad. Leach, in particular, was one of the named authors of the 1999 Gramm-Leach-Bliley Act– the legislation that abolished New Deal-era reforms of the federal banking system.
Oh well, they’re only “unofficial.” The Obama administration still hasn’t been officially born, remember.
Meanwhile, this weekend, watch for the degree to which the BRIC leaders– particularly Pres. Hu– start getting taken much more seriously as leading voices in global economic governance.

Differential effects of the financial crisis

I’ve been arguing for a while now that the present crisis of the western world’s “casino capitalism” will have much less of a total impact on China, India, and other big economies that have not yet taken the (as we now see) extremely risky step of deregulating their financial systems and thereby allowing/encouraging the growth of highly leveraged and often quite non-transparent derivatives markets.
On Friday, the NYT had a fascinating graphic that seemed to illustrate this point excellently. (Sorry I can’t embed it right now. I’ve forgotten how to do the resizing that would be needed.) It’s a scatter-chart produced by the London-based investment bankers Dresdner Kleinwort, plotting various “emerging market” countries according to DK’s estimation of their “financial vulnerability”, along the x-axis, and their “macroeconomic vulnerability”, along the y-axis.
Anyway, even a cursory glance at the graphic shows that DK’s analysts judge that Brazil, China, India, and Russia all have low “macroeconomic vulnerability” to the crisis. Those judged to have a lot are Mexico, Czech Republic, Hungary, Estonia (at the very top of the chart), Latvia, and Iceland.
Regarding financial vulnerability, Russia and India have notably more than China or Brazil.
I wanted to find out more about the methodology the DK analysts used in composing this chart– and I hoped they also had one that gauged the MV and the FV of the world’s big developed markets, too.
Actually, DK itself has fallen prey to the financial vulnerability of both Germany and the UK, where it has significant operations. Back in early September it got taken over by Germany’s largest bank, Commerzbank, which immediately fired DK’s chief exec and announced that 1,000 more of its 2,000 London-based employees would soon also be facing the chop.
I noodled around DK’s website a bit more, looking for some more open-source research products. I found none at all. The press page still contained links to many slightly outdated, very self-congratulatory plaudits about how deeply DK had been involved in various sectors of the derivatives markets. The press page is headed by a fashionably cropped image of a tulip.
Tulip, huh? Prescient or what?
And regarding another item in the “rise of China” file, I see that in 2012 China is set to overtake the US in the number of patents filed annually.

China to the rescue?

This is something to read alongside the post I put up here a couple of hours ago.
It’s an op-ed in yesterday’s Financial Times by Arvind Subramanian, a senior fellow, at the Peterson Institute for International Economics here in Washington DC, and senior research professor, Johns Hopkins University.
Title: A master plan for China to bail out America.
Subramanian argues that the amount appropriated (and made available by the Fed) for all the US rescue plans so far may well prove insufficient. A lot more might yet be needed. He continues:

    Where will this additional money – perhaps as much as another $500bn – come from? The US taxpayer is wary. Joe Six-Pack has ponied up a lot already, and done so with no great confidence that the money was for a worthwhile cause or that it will be well spent.
    Enter China. Ken Rogoff of Harvard cheekily characterised the vast Chinese accumulation of US Treasury bonds over the past five years as the biggest foreign assistance programme in history. Why not push that further? Here is a thought experiment.

Continue reading “China to the rescue?”

Financial crisis and world power shifts, pt.2

In this recent (introductory) post on this topic I wrote, “The US financial system’s current woes have accelerated the decline in American power in the world that has already been underway for several years now.” I think it’s important to specify that this decline has occurred both in the level of raw economic power the US can wield in the world and in its reputational or ‘soft’ power.
Regarding soft power, yesterday the folks at the Pew Global Attitudes Center sent out a report (Hat-tip Jim C) stating that,

    even before this fall’s financial crisis, a 24-nation Pew Global Attitudes survey conducted in March-April 20081 found that many in other countries already felt the U.S. economy was having a negative impact on their own country’s economy.

The figures they use to illustrate this are persuasive. If you scroll down to the second figure they have in the text there, “U.S. Economic Influence”, you’ll see that in no fewer than 18 of the 23 non-US nations surveyed, a significantly greater proportion of the public judged the US’s economic influence on their country to be negative, than those who judged it positive.
In some cases, the disproportion was huge. Look at Turkey (70% ‘negative’ vs. 4% ‘positive’) or Argentina (50% ‘negative’ vs. 4% ‘positive’.)

Continue reading “Financial crisis and world power shifts, pt.2”

And that $25 billion for Detroit…

In all the publicity around the $700 billion bailout for wall Street that became law last Friday, the fact that Congress last Tuesday also appropriated $25 billion to prop up ailing US-based carmakers passed almost unnoticed in the US.
But it was not unnoticed overseas. (A hat-tip, indeed, goes to Frank al-Irlandi, who drew this to our attention earlier today.)
Of course, this bailout considerably distorts the global “free market” in cars– not that any such thing ever actually existed. Non-US carmakers, including those who operate production lines within the US, are reportedly furious. The FT reported on Saturday that German car-makers are already lobbying to be allowed access to these funds.
The FT reporters there note that European and Asian banks were successful in their efforts to gain access to the federal bailout loans being made available to the US-based (but often foreign owned or foreign funded) banks.
Regarding access to the car industry loans, they write:

    While the aid package does not specifically exclude foreign carmakers, one European executive said it was “clearly a bail-out” of the Detroit-based industry.
    The loans would help carmakers modernise their plants to build more environmentally friendly vehicles. They are available only to plants that are more than 20 years old, excluding all but a handful of foreign-owned facilities.
    Stefan Jacoby, the US head of Volkswagen, said lobbying had already started, with Tennessee and Virginia – the two states where the German carmaker has a US presence – also taking part.
    The Department of Energy has yet to flesh out the legislation with detailed regulations in a process that will take at least six and maybe as long as 18 months.

I wrote last night that as the current crisis continues we have to guard against “any signs of surging economic nationalism, nationalist greed, jingoism, or a desire for the supposed solaces of a ‘cleansing’ act of war.”
Obviously in these tough times there will be some significant degree of economic nationalism, as we have already seen. Indeed, the WTO in its current form may well be one of the major casualties of the crisis as it evolves. However, I still believe that the crisis can be dealt with and overcome by the world’s nations in ways other than war. To the three reasons for relative optimism that I listed yesterday I would certainly add the fact that today, 63 years after 1945, all the world’s major nations have long experience of working together in a rules-based system that addresses issues in the economic, political, and security arenas.
Also, after all the experience of warfare the world has had since 1939– from Hiroshima to Iraq– no responsible leader could realistically today think that going to war will “solve” any actual problems.
We are not in the 1930s. Reason, calm, and a sense of fairness can prevail.
But it depends on us all having informed and fair-minded publics, as well as wise leaders…

The financial crisis and world power shifts

The US financial system’s current woes have accelerated the decline in American power in the world that has already been underway for several years now. This is so for a number of reasons:

    1. The crisis has revealed the degree to which the US government and other American institutions have become indebted to non-US creditors, and therefore the antecedent (pre-crisis) reduction in the US’s ability to wield economic power in the world, as well as its current and ongoing reliance on the goodwill of non-Americans if the effects of the crisis are to be minimized.
    2. It has revealed the weakness and dysfunctionality of a whole series of American institutions, ways of doing business, and habits of mind that previously were thought to be successful and worthy of emulation. (Among these are the extensive de-regulation of the financial markets that has occurred in recent years; the rise of the myth of the financial “Masters of the Universe”, barely accountable to shareholders or anyone else; a glaring dissonance between personal incomes and social utility; etc.)
    3. Finally, the way the elected leaders in Washington have handled the crisis to date has shown a president who is now beyond even “lame-duck” status– “dead duck”, perhaps?– a congressional leadership that has had its mindset formed far more by political donors from among the mega-bucks high-flyers than by the constituents whom they are supposed to represent, and the lack of any discernible voices speaking credibly about what it means to be “a national community” in America today and stressing the mutual obligations that in any democratic country all citizens reciprocally owe to each other.

These failings matter. They matter, firstly, because the weakest and most vulnerable among our fellow-citizens– and among non-citizens– will be those who are hurt the hardest by the crisis in the bricks-and-mortar economy that still lies ahead.
They matter, too, in a different way, because our country has until now been the world’s sole “Uberpower” (to Josef Joffe’s vivid and evocative term.) So the contagion from our woes has already started to infect several other parts of the world– most particularly, Europe. Also, this financial crisis and the way it has been handled further assault the already-battered “brand” or reputation of the US around the world, making the descent of the US from Uberpowerdom much steeper and more rapid than it would otherwise have been.
I welcome this shift. Uberpowerdom was never either moral or sustainable and the US and its rich-world allies have inflicted grievous harm on the low-income world over the past 15-plus years. However, all such large-scale power shifts are unsettling and carry the potential for dislocation and violence. The fact that the present power shift is accompanied and accelerated by a financial crisis that will almost certainly morph into a much broader economic downturn within and outside the US makes such reactions more likely… We all need to be very vigilant in the coming period to watch for, and try to tamp down, any signs of surging economic nationalism, nationalist greed, jingoism, or a desire for the supposed solaces of a “cleansing” act of war.
There are, however, several reasons for hope at the present turning point– most of them coming with a distinctively Chinese accent:

    1. The whole world is more densely and complexly intertwined at the economic level than ever before. This has meant, yes, that the contagion from Wall Street’s woes has spread elsewhere. But it also means there really is a high degree of inter-dependence among the world’s major power centers. Some people write about the high prospect of “wars” for resources. There are, and will continue to be, contests for resources among the major powers, yes. But I see these being waged overwhelmingly through non-military means. Washington’s experience of war in Iraq– a war in which access to oil was certainly one key factor– showed the limited utility of the weapon of outright war. And thus far, the major non-Iraqi beneficiary of post-2003 Iraq’s oil agreements has been China, not the US!
    At a broader level, though, the economies of China, Russia, India, or other “rising” powers” are too tightly tied to those of the US and other trading partners for the rising powers to want to break those ties through outright war against the fading Uberpower and its allies.
    2. China may anyway be able to escape the worst ravages of the economic crisis to come. Although the People’s Bank of China and the China Investment Corporation have lost some money through (as it turned out) unwise investments in US entities, still Beijing has been successful in (a) keeping most of its economy protected from too many internally generated financial woes– precisely because of the under-development (in US terms) of its domestic financial structures, and (b) winning at least some protection from Washington for the $400 billion investments in Fannie Mae and Freddie Mac which remain, I think, by far the largest of its non-T-bill investments in the west.
    If China is indeed able to keep its economy significantly insulated from the downturn in the west, then its continued economic growth may–even at lower growth rates than the hard-to-sustain 10%-plus rates we’ve seen recently– end up being a considerable continuing engine for the world economy and may even help lift the battered “west” out of its doldrums over the years ahead.
    I see that today, Premier Wen Jiabao described the country’s financial market as “safe and stable with generally adequate liquidity.” A statement from the central bank welcomed the US House of Representative’s passage of the Wall Street bailout Friday noting that “China and the US share common interests in … a stable financial market.” And Wen said that “Maintaining ‘steady and fast’ growth is the largest contribution China can make to help the world overcome the current financial crisis stemming from the United States.”
    3. It is also worth noting here, once again, that China’s rise onto the world scene in the past 15 years has occurred in a quite unprecedented way. China has not emerged as a world power through force of arms outside its own borders or through arms-racing. (Its nuclear arsenal is, at an estimated 200 warheads, many times smaller than those of the US or Russia. It truly looks like a “minimum deterrent” force.) It has emerged onto the world scene instead by buying into the existing rules system as embodied in the United Nations and its institutions and the institutions of global economic governance– all of these institutions having been established by the US in the post-1945 period. The peaceful, rules-respecting manner of China’s rise is a cause for considerable reassurance for everyone who will be (is being) affected by it.

Here are a few of the other things I’ve found interesting to read recently, on topics related to the above:
Bloomberg told us that today the German government agreed to a $68 billion bailout for Hypo Real Estate Holding AG, a commercial property lender. Here is some more commentary from Calculated Risk, who says the underlying problem may not be as bad as it seems: “this sounds more like a liquidity issue rather than a solvency problem.”
Here is a piece by the FT’s Wolfgang Munchau looking at some o0f the tricky economic governance issues, at this time of crisis, for a Europe that is still only partly coordinated on the relevant matters. (The crisis might have a deep affect on Europe’s governance questions– and that could happen in either direction, I think.)
Here is a piece of geopolitical analysis from the very pro-US French commentator Dominique Moisi. It is titled “A global downturn in the power of the west” and says:

    First, the shock reinforces the relative decline of the US and the passage from a unipolar to a multipolar world. Whoever is its next president, America will not only have to face more diverse and complex challenges but will have fewer means with which to confront them. The interaction between the infectious greed of its financial class and its politicians’ dereliction of duty has impoverished the country. The torch of history seems to be passing from west to east. It is true that China and India are also affected by the financial turmoil; less so Japan, a country whose financial conservatism is the product of bitter experience 20 years ago. But to paraphrase French President François Mitterrand: growth is in the east and debts are in the west. Furthermore, fear is in the west and hope is in the east, so we are equipped in very different ways to face this crisis.
    The meltdown has also revealed the depth of an identity crisis, not just in America but also in Europe. Nationalisation may have been the initial American response to the crisis. But it is nationalism that is the main obstacle facing Europe. The temptation of the “to each his own” mindset was present in Europe in the good times, but has become irresistible in bad times. Nicolas Sarkozy, French president of the European Union, may be mounting a brave and gallant fight to produce a “European answer”, but his activism is not sufficient to hide deep divisions among member states.

And here is an assessment from China’s Xinhua titled “Impact of global financial turmoil on China seen as limited.” It includes this:

    “We feel China’s financial system and its banks are, to the chaos developed in the U.S. and other parts of the world, relatively shielded from those problems,” said senior economist Louis Kuijs at the World Bank Beijing Office.
    He told Xinhua one reason was that Chinese banks were less involved in the highly sophisticated financial transactions and products.
    “They were lucky not to be so-called developed, because this (financial crisis) is very much a developed market crisis.”
    A few Chinese lenders were subject to losses from investing in foreign assets involved in the Wall Street crisis, but the scope and scale were small and the banks had been prepared for possible risks, Liu Fushou, deputy director of the Banking Supervision Department I of the China Banking Regulatory Commission, told China Central Television (CCTV).
    Chinese banks had only invested 3.7 percent of their total wealth in overseas assets that were prone to international tumult, CCTV reported…
    Kuijs… expected an impact on China’s banks coming via the country’s real economy, as exports, investment and plans of companies would be affected by the troubled world economy and in turn increase pressure on bad loans.
    Wang Xiaoguang, a Beijing-based macro-economist, said the growing risks on global markets would render a negative effect on China in the short term but provided an opportunity for the country to fuel its growth more on domestic demand than on external needs.
    He urged while China, the world’s fastest expanding economy, should be more cautious of fully opening up its capital account, the government should continue its market reforms on the domestic financial industry without being intimidated.
    Chinese banks had strengthened the management of their investments in overseas liquid assets and taken a more prudent strategy in foreign currency-denominated investment products since the U.S.-born financial crisis broke out, CCTV reported.

Well, I expect that things are not quite as rosy in China’s economy as this reporting makes it sound. Here’s a recent FT assessment– registration required.