Did Paulson Accuse China to be a Root Cause of Today’s Global Economic Crisis?
According to yesterday’s XinHua report,
Former U.S. Treasury Secretary Henry Paulson said Tuesday that he was wrongly portrayed in a Financial Times article as claiming China is to blame for the global economic crisis.
“In the years leading up to the crisis, super-abundant savings from fast-growing emerging nations such as China and oil exporters– at a time of low inflation and booming trade and capital flows — put downward pressure on yields and risk spread everywhere,” the British newspaper quoted Paulson as saying Monday.
That, the newspaper quoted Paulsen, pushed down interest rates and drove investors to riskier assets, sowing the seeds of a global credit bubble that extended beyond the U.S. subprime or high-risk home loan market and eventually burst.
“The Financial Times reporting was wrong,” Paulson said in a statement sent to China’s Xinhua News Agency Tuesday.
“In assessing the financial market crisis, I have repeatedly and consistently targeted the vast majority of my criticism at problems in the United States, particularly our flawed and outdated regulatory structure,” Paulson said.
“Whenever I have commented on global imbalances, it has been against that backdrop and I have gone out of my way to say that no single country is to blame for the imbalances,” he added.
In his statement to Xinhua, Paulson said that “the U.S.-China relationship continues to be vital to both our nations and to the global economy.”
“To maintain a strong and mutually beneficial relationship, we must rely on direct communication rather than media reports,” he said.
When I saw the Financial Times Report for the first time last month, I didn’t think much of it. According to the report:
The US Treasury Secretary said that in the years leading up to the crisis, super-abundant savings from fast-growing emerging nations such as China and oil exporters – at a time of low inflation and booming trade and capital flows – put downward pressure on yields and risk spreads everywhere.
This, he said, laid the seeds of a global credit bubble that extended far beyond the US sub-prime mortgage market and has now burst with devastating consequences worldwide.
“Excesses . . . built up for a long time, [with] investors looking for yield, mis-pricing risk,” he said. “It could take different forms. For some of the European banks it was eastern Europe. Spain and the UK were much more like the US with housing being the biggest bubble. With Japan it may be banks continuing to invest in equities.”
This argument – already advanced by a number of economists and largely endorsed by Federal Reserve chairman Ben Bernanke – suggests that the roots of the crisis do not simply lie in failures within the financial system.
It also implies that avoiding crises in future will require global macroeconomic co-operation as well as better financial regulation and risk-management.
Am I missing something here? The report merely stated that global trade imbalance is likely one of the root causes of today’s economic crisis. Isn’t that what Paulson has been saying – even if with slightly different emphasis – all along?
In a speech Paulson himself gave last November, Paulson stated
And we recognize that our financial institutions and our markets are global, but our regulatory regimes are national, so we will examine how best to improve cooperation and information sharing to foster global financial system stability.
But let us not forget one fundamental issue which lies at the heart of our problems. Over a period of years, persistent and growing global imbalances fueled a dramatic increase in capital flows, low interest rates, excessive risk taking and a global search for return. Those excesses cannot be attributed to any single nation. There is no doubt that low U.S. savings are a significant factor, but the lack of consumption and accumulation of reserves in Asia and oil-exporting countries and structural issues in Europe have also fed the imbalances.
If we only address particular regulatory issues – as critical as they are – without addressing the global imbalances that fueled recent excesses, we will have missed an opportunity to dramatically improve the foundation for global markets and economic vitality going forward. The pressure from global imbalances will simply build up again until it finds another outlet.
Clearly (based on my reading of this speech) Paulson felt that the world’s global trade imbalance (to which China’s trade surplus with the U.S. is a part) is a problem and will ultimately cause an economic crisis – if not today, then some other time in the future.
Why is Paulson backtracking now? Why such a strong refutation?
We live in an interdependent world. Is trade one of the many thorny issues that are better discussed between governments in private behind closed doors than through the media in public using sensationalistic, emotionally laden rhetoric?
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