Jun 13

So China is responsible for the sub-prime loan crisis as well?

Written by DJ on Friday, June 13th, 2008 at 3:08 am
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[Update inserted at the end]

The U.S. Fed chairman Bernanke gave some amazing recycled remarks to the International Monetary Conference on June 3, 2008. In that speech, he offered some gems of wisdom such as:

In the financial sphere, the three longer-term developments I have identified are linked by the fact that a substantial increase in the net supply of saving in emerging market economies contributed to both the U.S. housing boom and the broader credit boom. The sources of this increase in net saving included rapid growth in high-saving East Asian countries and, outside of China, reduced investment rates in that region; large buildups in foreign exchange reserves in a number of emerging markets; and the enormous increases in the revenues received by exporters of oil and other commodities. The pressure of these net savings flows led to lower long-term real interest rates around the world, stimulated asset prices (including house prices), and pushed current accounts toward deficit in the industrial countries–notably the United States–that received these flows. … The housing boom came to an end because rising prices made housing increasingly unaffordable. The end of rapid house price increases in turn undermined a basic premise of many adjustable-rate subprime loans–that home price appreciation alone would always generate enough equity to permit the borrower to refinance and thereby avoid ever having to pay the fully-indexed interest rate. When that premise was shown to be false and defaults on subprime mortgages rose sharply, investors quickly backpedaled from mortgage-related securities. The reduced availability of mortgage credit caused housing to weaken further.

As Mike Whitney so nicely summarized for Bernanke: “It’s all China’s fault. Really.”

Whew. That’s a pretty long-winded way of saying the Chinese are to blame for everything that’s gone wrong in the markets for the last 10 months.

<Sarcasm On>

So China, by willingly lending so much to the U.S., is the real culprit for the sub-prime crisis. The bad China is not only responsible for stealing jobs from hard working Americans, but also for kicking many of them out of the home as well. No wonder Liao Min, director-general and acting head of the general office of the China Banking Regulatory Commission, was caught in the Financial Times article “China rebukes west’s lack of regulation” eagerly deflecting the blame:

I feel the western consensus on the relation between the market and the government should be reviewed. … In practice, they tend to overestimate the power of the market and overlook the regulatory role of the government and this warped conception is at the root of the subprime crisis.

And those sub-prime crisis’ collateral damage victims all over the world, as described by Steve Clemons in “America exported poisoned financial products“, are wrong as well.

I have been on a lot of international travel lately — to Beijing, Mumbain, Tokyo, Berlin, London, Brussels, and Tel Aviv. In all of these places, I met angry and frustrated finance ministry bureaucrats, central bankers, retail bankers, investment bankers, and other fund managers.

All of them had a single message that rang a bit like the US accusing China of shipping out poisoned pet food and lead-paint covered toys. They said American regulators failed. “You exported poisoned financial products.”

<Sarcasm Off>

If nothing else, Bernanke’s speech bookends well with his boss’ words two weeks prior, in which Bush attributed the rising food price to audacity of the Indian middle class to eat better and more.

I must say that the China Vortex blog was rather prescient with the following observation two months earlier.

Now, when it comes to the credit bubble problem … the culprit is … American. For a problem of such immense proportions, which is getting bigger and bigger by the day, amazingly, no one has identified the human culprits responsible for the bad decisions. But then, accountability never been a strong point for this US administration.

[UPDATE] Daniel Gross’ take on Bernanke’s “saving glut” theory in the Slate Magazine three years ago was even more prescient:

The savings-glut meme changes the terms of the conversation about global imbalances. It’s not our fault that we rely on foreigners to fund our desire to spend in excess of our resources. Au contraire. Our extreme consumption and failure to save become something of a virtue. Somebody has to keep the world’s factories humming and absorb all the products made in Japan, China, and elsewhere. And until the rest of the world becomes More Like Us in its consuming habits, the imbalances are likely to persist.

The savings glut may be an accurate and subtle take on the world’s economic imbalances. But less subtly, it minimizes the impact of the potentially destructive monetary and fiscal policies pursued by the U.S. over the last five years. It also lays the responsibility for change squarely on the backs of foreigners and makes a virtue out of what appear to be our own failings. No wonder Bernanke is so popular at the White House.

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38 Responses to “So China is responsible for the sub-prime loan crisis as well?”

  1. Nimrod Says:

    There was an article a few days ago (can’t find it) that said Paulson was in the strange position of begging the Saudis for both more oil and for more money to pay for it.

  2. S.K. Cheung Says:

    It’s not as if Bush is world-renowned as a deep-thinker. And even when he gets it right, he’ll probably say it wrong. It seems to me, though, that the “human culprits” were actually the ones with the corporate greed, who gave out loans to bad borrowers; then the various non-institutional companies that bought the loans and packaged them into ABCP; then all the greedy fund managers and investors who bought up this stuff at the promise of double digit returns. I certainly agree the culprit is American. And I’m no fan of Bush, but not sure how this ends up as his responsibility. I just think a lot of Americans forgot about caveat emptor.

  3. Anon Says:

    So, let me get this right: Bernanke gives a long-winded speech in which he tries to explain what, in his opinion, brought on a large supply of money and thus low interest rates (can’t really argue with this) – and in passing mentions that the huge savings in China were involved in this – and you guys jump to the conclusion that what he actually is saying is that China is responsible for the sub-prime crisis…. Wow! Well done! All this expensive foreign university schooling obviously failed to give you any critical sense. While I do not agree with the actions of Bernanke on the interest-rate front, I suggest you grow up and stop taking any mention of China as an affront to its integrity.

  4. DJ Says:


    It has being painfully clear over a number of months already that the sub-prime crisis is a man made one by the greedy “let’s dream up another scheme to gamble gullible investors’ money for our bonuses” wall street bankers and abated by the do-nothing “market will take care of everything” regulators. This is why many are so angry at the U.S. for exporting poisoned financial products and causing immense damage to investors all over the world, big or small.

    Given the scale of this fiasco and the clarity of the cause, the reluctance by Bernanke to focus on the real culprits is not excusable. How could his remarks be interpreted as anything but an effort to shift the blame to someone else?

  5. Anon Says:

    DJ –

    I don’t think there is any question that the sub-prime crisis is man-made – and I am sure that Bernanke is trying to cover his and the Fed’s ass. This is not my point.

    My point is the title of the post (“So China is responsible for the sub-prime loan crisis as well?”) as well as its further suggestions that Bernanke’s remarks put the blame on China for the crisis. Nowhere in his speech is that suggested and China is mentioned en passant as a vast source of money. The post is misleading and tendencious and plays into a wider paranoia about China being constantly on the receiving end of international criticism.

  6. yo Says:

    I wouldn’t say begging but yeah, he was asking foreign entities to invest in America to shore up our cash strapped companies. I like Paulson, very pragmatic, as opposed to Bernanke. He was overly fixated on inflation and neglected this sub-prime mess. Even when it became clear that it was bad, he was still tepid in his response initially.

  7. DJ Says:


    I give credit to Bernanke for being smarter than his boss. (Well, I don’t know if that means much.) At least he avoided directly naming countries and instead used “long-winded way” to say that it was the lenders to the U.S. that paved the way for this trouble.

    So which country lends more to the U.S. than China?

  8. yo Says:

    I agree with Anon in that I don’t see that statement blaming China. While I feel that his statements are a bit dishonest, blaming China would be too strong of a phrase.

  9. yo Says:

    But then again, I don’t think guys like Lou Dobbs would hesitate to make that conclusion either.

  10. DJ Says:


    Hmm, please see my 2nd response to Anon right above yours. I assume you didn’t get to see it due to the close timing of our comments.

  11. DJ Says:

    Haa! Cross commented again. 🙂

  12. Anon Says:

    DJ –

    sorry for nitpicking but: “paving the way for trouble” is not the same as “being responsible” for trouble (as the article implies). Who can deny that the savings of the world prop(ed) up the US economy? They therefore indeed paved the way for the crisis, i.e. they facilitated it – but the responsibility for it lies somewhere else.

    It’s like saying that the existence of airports is responsible for all air-plane crashes. No, they facilitate the existence of the air industry, but they are not to be blamed when something goes wrong.

    Therefore: Bernanke’s speech outlines his views of the fundamentals of the crisis (whether we agree with it or not), but I can’t see where he lays blame at China’s feet.

  13. yo Says:

    Always refresh before you post 🙂 Yeah, let me clarify, personally, I feel “blaming” is too strong, but the implication is there(cause and effect), so people are free to draw their own conclusion. And “Captain China” Lou Dobbs might draw your conclusion, but take it somewhere else 🙂

  14. Buxi Says:

    Speaking of unreasonable international criticism and blame….

    I think this says it all:

  15. DJ Says:


    Actually, Bernanke’s precise words are:

    Much discussion of the turmoil has focused on problems that have arisen with respect to specific financial markets and financial instruments. Understanding these institutional details is, of course, essential to the task of restoring more normal functioning to the financial system. Stepping back, however, one can see–at least in retrospect–that the turmoil has been some time in the making and reflects the combined influence of several powerful, longer-term developments.

    So he was saying China “strongly influenced” the turmoil in the U.S. I guess it’s fair for you to not read it as implicitly blaming China. But can you really fault me, given the totality of his speech, to read it that way?

    I think yo really got a good line in a couple of comments earlier: “I don’t think guys like Lou Dobbs would hesitate to make that conclusion either.” That’s exactly why I am raising the issue and questioning it. Bernanke only needs to use the somewhat neutral word “influence” to influence nuts like Dobbs, who in turn would seed another “it’s always China’s fault” non-sense into the minds of the U.S. population.

  16. Nimrod Says:

    Is he blaming China or not blaming China, well you can draw your own conclusions. The subtext here is that China’s (and Japan’s) government-controlled central bank is not playing fair (as in accepting too low an interest) and is thus wreaking havoc on America’s free market.

  17. DJ Says:


    I almost wrote a post to laugh at Frank Wolf a bit after reading his rambling accusations linking a car with license plates belonging to Chinese officials that allegedly went by the home of a dissident to the “hacking” incident. The joke line “research found to cause cancer in mice” probably holds more reason and logic than he could ever offer.

  18. 3 cents Says:

    I for one read the whole speech carefully. There is nothing new in his argument. Fancy name for this line of reasoning is called “savings glut”. (Check out the reference at the end of the speech.) It goes like this: China saves too much –> China lends money to US –> US interest rate too low –> everyone borrows like crazy –> housing boom + credit boom (#1 and #2 sources for financial turmoil in his speech) –> house prices shoot to the roof, financial derivatives markets (CDO, MBS, CDS…) exploded in terms of value –> housing bubble busted, house price plummeted, financial institutions stuck with now worthless paper –> (possible in the future) waves of private bankruptcy, run on the bank(remember Bear Stearns, Northern Rocks?), stock market crashes, corporations start firing people, declare bankruptcy –> repeat last step –> we are dead, asshole!

    All because those @#$% Chinese save too much!

    Now tell me, what’s wrong with this argument?

  19. ChunZhu Says:

    I agree with Anon in that there really isn’t all that much ‘China hatin’ in Mr. Bernake’s speech.

    As for what Nimrod said about Asian country’s central banks not playing fair, this isn’t really anything new. The developed countries, such as the UK back in the day, would always try to force open the markets of the United States, which had fairly high tariffs for most of the 19th century. Sure, this is trade policy and not monetary policy, but it’s similar enough.

  20. DJ Says:

    [Come to think of it, the following comment should be an update to the post itself. And … it is.]

    It is true that Bernanke was recycling his saving glut theory that generated quite a bit of discussion three years ago. It’s interesting, in retrospect, to read Daniel Gross’ take in the Slate Magazine back then:

    The savings-glut meme changes the terms of the conversation about global imbalances. It’s not our fault that we rely on foreigners to fund our desire to spend in excess of our resources. Au contraire. Our extreme consumption and failure to save become something of a virtue. Somebody has to keep the world’s factories humming and absorb all the products made in Japan, China, and elsewhere. And until the rest of the world becomes More Like Us in its consuming habits, the imbalances are likely to persist.

    The savings glut may be an accurate and subtle take on the world’s economic imbalances. But less subtly, it minimizes the impact of the potentially destructive monetary and fiscal policies pursued by the U.S. over the last five years. It also lays the responsibility for change squarely on the backs of foreigners and makes a virtue out of what appear to be our own failings. No wonder Bernanke is so popular at the White House.

  21. Charles Liu Says:

    Right, so our policy makers in DC are not to blame. It’s not our fault that we run up a huge deficit, spend billons on a made up war.

    It ain’t easy being an empire; it’s everybody else’s fault.

  22. Buxi Says:

    I don’t think Bernanke is necessarily hating on China, he’s just trying to cover he (and his precessor’s) ass… and it’s always easier blaming the other guy than taking responsibility for poor fiscal policy.

    US Congressmen Christopher Smith and Frank Wolf, however, are hating on China, and in a pathetically transparent + uninformed way.

  23. Charles Liu Says:

    Smith is close, but THE biggest China hater in US Congress is Dana Rohrabacher. He went as far as supporting FLG and christian cult “Three Grades of Servants” that was killing people in order to bash China.


  24. ann Says:

    Kudos to people who put this blog together! Sorry that I am sidetracking a little bit. But day-to-day encounters with the pervasive anti-China sentiment in the west are hard to ignore.

    For example, the recent anti-Walmart ad by wakeupwalmart.com has been given lots of air time on the cable network. Sponsored by United Foods and Commercial Workers Union, this anti-Walmart ad inculcated an all-too-familiar menace from big-bad-China, plotting to poison Americans with its lead-tainted toys, weak safety standards, etc. As a public health professional seasoned in product safety issues, I am really disappointed by the arrogance, ignorance and stupidity of this ad. Boycott Walmart all you want, but do not dumb down the American society and people by trivializing important, complex issues, and reducing them to 15-second sound bites. The toy industry giant Mattel has formally apologized for blaming China for the recall of millions of toys. According to the report issued by the U.S. Consumer Product Safety Commission, most of the recalls were design flaws, not manufacturing problems or the lead paint issue. It would have been a hazard even if the toys had been manufactured in the states. In terms of food safety violation counts, Mexico and India are well ahead of China. Salmonella mostly found on spices, seeds and shrimps is frequently the reason to deny entry of goods from India. And filth for goods from Mexico, including candy, chilies, juice, seafood and cheese. According to FDA data, from July 2006 through June of 2007, FDA inspectors intercepted 1,763 food shipments from India, followed by Mexico at 1,480, China 1,368, Dominican Republic 828, Denmark 543, Vietnam 533, Japan 508, Italy 482 and Indonesia 460. While less than 1 percent of the Chinese food products were rejected by the U.S. in 2006, a higher percentage of substandard U.S. food was rejected by China in the same year. But it’s not sensible to fault any single country for quality problems. In an era of international trade and global capitalism, the core issue of quality control needs to be addressed by joint efforts of governments at all levels at home and abroad, not by another rev of anti-China-ism.

    Thanks again to this blog for continuing a real dialogue, and putting up with my rant! 🙂

  25. 3 cents Says:

    Bingo everyone, for rightly see through Bernanke’s trick.

    The first time I read about “savings glut” theory, it reminded me of the twisted bank robber’s logic. Why did you rob the bank? Well, that’s where money is. Why did US spend money like a drunken sailor and pile on oodles of debt? Well, because China saves too much money and those extra savings have to be spent.

  26. FOARP Says:

    I’m sure y’al have already read the brilliant article by James Fallows on the subject of Chinese lending and American debt. I f you haven’t – go read it right now, here it is:


  27. FOARP Says:

    @China – Welcome to the real world, the US talks a big talk about free trade, and then tries to slap a big tax on steel and threatens your country’s aerospace industry with sanctions. And then blames your country fo all of its problems.

  28. EugeneZ Says:

    Characterizing Bernarske’s comments as “blaming” China or even implying that him “hating” China is reading too much into it, and seems to be a sign of over sensitivity.

    Lou Dubbs is in the business of “china-mongering”, and in general, is trying to cash out on people’s dark side of emotions – fear, bigotry, and hate. He does not have a lot of credibility in the highly educated circles, though.

    US Congressmen Christopher Smith and Frank Wolf, on the other hand, are making fools out of themselves. Unfortunately, majority of the US media reports do not bother to point out how weak their assusation was, and how crazy (paranoid) and idiotic these people are. Another clear and loud example of western media bias. However, the folliwng article is good to read, and I wish that it is more publicized.


  29. FOARP Says:

    I made a comment about China becoming a superpower which I doesn’t seem to have appeared yet, but here’s some commentry from Tony Blair where he recognises (apparently ten years at least after I did, and a year after leaving power) that the balance of power was moving east:


    Money quote:

    “The other change I have got to know better since leaving No 10 is that the whole centre of gravity in the world is shifting east, that for countries like us, and Europe and America, this is a change so profound that I don’t think we yet quite understand its consequences or its implications for us.

    “When you think the industrialisation of China and India is going to be four times that of the USA, happening at five times the pace too, you can understand the magnitude of what we are talking about. We are about to enter into a new epoch in terms of power relations.”

  30. DJ Says:


    I just cannot see how this post could be interpreted as casting Bernanke as “hating” China. The central issue here is to point out that he was shifting the blame for the financial fiasco to China. So I fail to see where the “over sensitivity” is.

  31. KL Says:

    I am with you on this. I don’t think Bernanke is a China-hater but he was definitely trying to find an excuse for his incapacity. What Bernanke didn’t dare to say is:
    Save more, then we can save the economy.

    Americans needed to find someone to blame so they got Greenspan and Bernanke. Then Bernanke was scared so he found the emerging markets, to be specific, China.

  32. EugeneZ Says:


    You are right. What I meant was that if someone were to suggest (which the original post did not) Bernanke was a China-hater based his comments would be a stretch of imagination.

    One can “blame” a lot of things on the development of China and India, but the correct word is “attribute”. A lot of world dynamics today can be attributed or partly attributed to the unprecendeted rise of China and India because of the combined population of 2.5 billion people. On the other hand, no one can deny the rights to development for these people, so the angry crowds in the west need to learn to adjust to the new reality rather quickly. We live in a very interesting era, indeed.

    I recommend the book by Fareed Zakaria “Post-American World” which talks about these issues with a mostly balanced perspective and easy-to-read style.

  33. Chris Says:

    I’m sorry, but Bernake’s right. Perhaps “blame” isn’t the best word, but this stuff is straight out of ECON101. The Chinese government has done a lot of good things, but the currency regime has been a major destabilizing force for the global economy, both inside and outside of China.

    Now, it’s not only China. Japan and the oil-rich gulf states have similar policies, and it’s the net effect that has been so damn harmful. It’s also worth noting that without China we wouldn’t have had the boom either, and what tends to get lost in the whole sub-prime crisis is that at the core of the “problem”, poor people being able to afford houses is largely a good thing.

    But the fact is that the RMB for much of its history was pegged directly to the dollar, and the majority of the weight still is tied up with the USD. To keep the peg stable, China has had to buy up US government bonds with their swaths of foreign currency reserves. Basic supply and demand: when China (and Japan, and Kuwait, and the UAE, etc etc) buys lots of US government bonds, the price of those bonds goes up. And as any Finance 101 student will tell you, bond yields are inversely related to their price. Net effect: interest rates on long term government bonds plummet. And because government bonds define the risk free rate, the yield on everything (notably mortages) falls. The past decade in the United States has been one marked with very low real interest rates.

    It’s time for China to float its currency. China is the 3rd largest economy in the world, and has over $1 trillion worth of currency reserves. There will not be a Thailand-esque currency crisis.

  34. KL Says:

    Now China is also responsible for the worldwide “stagflation”.

  35. Charles Liu Says:

    Chris, here’s an article quoting a professor from Columbia:


    “U.S. credibility and the credibility of U.S. financial markets is zero everywhere in the world,” said Joseph E. Stiglitz, a professor of economics at Columbia University who has sharply criticized the Bush administration and praised China’s economic management in the past. “Anybody looking at this from the outside says, ‘There’s been a lot of hot air coming out of the U.S., so why should we listen to these guys when they didn’t know how to manage risk?’ ”

    Scapegoating the RMB is easy.

  36. Chris Says:


    What was the one feature that defined the global financial system during the boom years? Liquidity. It was because of this abundance of liquidity that ostensibly illiquid assets like CMOs and CDSs were able to find such a lively OTC market. When liquidity is flowing, every asset looks like cash. I’m not saying that the banks weren’t imprudent (they were), but from a macro-economic perspective the trade imbalances of the last decade gave them the INCENTIVE to act imprudent. Are the banks to blame? Or are the currency regimes in China, the UAE, Japan etc to blame? Well, it all depends on how you define the word blame. To use an imperfect example, who was responsible for the looting in New Orleans after Katrina? Obviously, the looters are “to blame”, but can we not also step back and say that FEMA’s failures (which caused the situation in the first place) were also “to blame”?

    I realize that that is a pretty awful comparison, but I’m tired and I hope you get the point. It’s easy to scapegoat the greedy bankers and say, “it’s all their fault! Get rid of them, and we won’t have this problem again…”, but that is a pretty naive view. There’s still an overabundance of money in the system, and until there’s some rebalancing of trade there will just be another speculative bubble, somewhere, as soon as the credit crunch is over.

    I’m not saying that it’s all China, although they’re a major player. Japan is another culprit. In many countries, there’s a systemic desire to keep a currency weak, because exporters have lobbies and consumers don’t. Over time, vested interests build.

    It’s time for China to float their currency.

  37. DJ Says:


    There is a Chinese saying that “you cannot clap with one hand.” Similarly, claiming that China (and others) have “caused the situation in the first place” (i.e., using the example of FEMA) is in itself a pretty naive view. Seriously, was it because the lenders were waving the money in the face that the U.S. ran what Daniel Gross termed “potentially destructive monetary and fiscal policies”? Or was it a case that the U.S. wanted to borrow and the lenders accommodated?

    China, by the way, was not exactly a major player in directly dumping hot money into the liquidity game, which by your logic, caused the greedy bankers to make a mess for everyone in the form of the sub-prime crisis. (Please see the Financial Times article “China rebukes west’s lack of regulation” I referenced in the post.)

  38. Charles Liu Says:

    Absolutely DJ. While the truth is probably between “all China’s fault” and “all greedy banker’s fault”, a simple comparison between market caps between China and US should leaves no doubt where the prepondrance lies.

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