There seems to be a blame game making the rounds in policy circles these days in which Asia is at fault for the credit crisis and economic downturn. The meme goes like this: “Everything was fine until the Asians started manipulating their currencies and creating excess savings to export to the West. This mercantalist policy of low domestic demand, high savings, and an export-oriented economy set up huge macro imbalances that created the debt bubble and recession we see today. Asians need to save less and buy more — and stop manipulating their currency.”
Do you buy this line of argument? I don’t. But judging from recent statements by policy makers in the U.S. and the U.K., there are any that do. Witness this article from the Times of London last week, which was reporting on quantitative easing aka printing money. The U.K. has resorted to printing money as the only way out of an economic pickle. But not without some measure of recrimination. Note the blame given to Asia, which I have highlighted in bold:
Mr King emphasised the need for international cooperation to fight a global downturn. Limiting banks’ cutbacks on lending meant cross-border action was essential. “Almost every aspect of the present crisis has an international dimension.”
He blamed the crisis on a binge of lax lending by banks, and on a wall of cheap money from Asia as a result of “global imbalances”. Urgent action was needed to tackle these problems and prevent future turmoil, including new weapons for central banks and governments to prevent excessive future build-ups of debt, were needed. Governments of big economies also needed to work together to overhaul the global monetary system.
I flagged this article when I saw it last week, but my concern about the Blame Asia Meme has only increased with time. The focus here, of course, is China. Tim Geithner, the new U.S. Treasury Secretary, has said, "Treasury has to be and Treasury will be a source of bold initiative." What does that mean? Judging from Geithner’s other statements, it might mean protectionism. The video below sums up the protectionist sentiment both in Europe and in the United States.
The most pointed exchange has been as a result of Tim Geithner’s comments during his confirmation hearings when he accused china of "manipulating" its currency. Here’s what Willem Buiter says about all of this:
Timothy Geithner, the nominee for US Treasury Secretary, has risked damaging the global economy even before his confirmation by the full Senate. In a written answer to questions from US senators, Geithner said: “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency”. In the US, the words “currency manipulation” are fighting words. If the US administration were to formally name China as a currency manipulator, a range of trade sanctions could be imposed by the US government.
The threat to world trade comes from the Omnibus Trade and Competitiveness Act of 1988. The section dealing with the exchange rate, bilateral current account balances and the overall current account balance is a monument to economic illiteracy.
Under the Omnibus Trade and Competitiveness Act of 1988, “The Secretary of the Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”
“If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage.”
I have mentioned in the past that Barack Obama does not have a consistent record on promoting free trade and many are worried, including Free Trade guru Jagdish Bhagwati, that we are about to see protectionism hit with full force. So, while the White House backpedaled from the protectionist sentiment, Geithner’s comments cannot be taken lightly.
This concept that Asia is to blame for the downturn and the massive losses at European and American banks must be rebutted before it gathers steam and creates a trade row that nobody wants.
Update 11 Mar 2009: The most recent chapter in the Blame Asia meme was written by Sir Alan Greenspan, who had a Wall Street Journal article out today defending his tenure at the Federal Reserve. The overall point was that the Federal Reserve was not responsible for the low interest rates which stoked the housing bubble. Rather, it was excess savings from Asia. Here is the important passage below.
The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier — in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments.
U.S. mortgage rates’ linkage to short-term U.S. rates had been close for decades. Between 1971 and 2002, the fed-funds rate and the mortgage rate moved in lockstep. The correlation between them was a tight 0.85. Between 2002 and 2005, however, the correlation diminished to insignificance.
As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.
So, there you have it – Asia was responsible for the bubble, not the West. And the blame game continues. See below for my original January article – Alan Greenspan is not alone here.
Mervyn King paves way to start Bank print presses – Times Online
Obama Deems China ‘Manipulating’ Yuan, Geithner Says – Bloomberg.com
When all else fails, blame China – Willem Buiter’s Mavercon
Währungsstreit: IWF-Chef fordert Kurswechsel von Peking – Financial Times Deutschland
Broader point about Geithner, Obama, China, and "manipulation" – James Fallows, Atlantic