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3 When the big guns fail, call in
China By Julian Delasantellis
That's a frightening prospect: the
political system would require that any possible
solution travel the same route that all US
political policy issues now must do; it would have
to pass muster from focus groups in the US
heartland. That might result in a congressional
debate on whether old farmer Johnson's patented
moonshine-fueled flush toilet will solve all the
nation's ills.
Or maybe the crisis will be
solved in the same manner in which the United
States has solved all its economic problems this
decade - through reliance on
China. Michael Pettis, a Peking University
professor of finance, has suggested China's
government-run investment agency, its Sovereign
Wealth Fund (SWF). I discussed SWF in my June 22
ATol article Careful what you wish for, China may
grant it). SWF may swoop in and buy, at
the bargain prices generated by the crisis, the
discounted mortgage securities at the core of the
crisis. Then, since they're also now selling at
fire-sale prices, they may buy up some of the
finance companies themselves - a rumor circulated
around Wall Street last week that agents acting on
behalf of China's still-nascent SWF were making
inquiries related to picking up Countrywide
Financial on the cheap. As Pettis puts it, "The
large-scale shift of global reserves into what are
being called sovereign wealth funds may provide
the party with at least one more bowl of
industrial-strength punch."
This solution
makes perfect sense. The singular aspect of US
economic life this decade has been that it has
proved itself to be a society hell-bent on living
beyond its means - the 7% of US gross domestic
product represented by America's current account
deficit means that the country sees nothing very
much out of the ordinary or improper at consuming
7% more than it produces.
Much of that
excess consumption was provided for by China. In
the same manner, the current subprime crisis
started with homeowners wanting to live in more
houses than they could afford, mortgage brokers
lending out more mortgage than the borrowers could
repay, and fund managers buying up
subprime-mortgage collateralized debt obligations,
hoping to earn higher investment-portfolio returns
than their intellect and trading skills could
generate.
If the US does allow China to
bail it out of a mess solely of its own creation,
the US will prove itself less of a world
superpower and more of a poor, hapless junkie
walking into a pawnshop, desperate to sell another
bit of its hard-earned family heritage built up
over 200-plus years for just one more fix of
plasma TVs, MP3 players, Barbie dolls and all the
rest of the catalogue of cheap Chinese manufacture
on which Americans are now hooked.
In
recent years, an entire literary-theory subculture
has arisen devoted to the belief that Baum's
Wonderful Wizard of Oz was not meant to be
just the pleasant, deracinated children's fable it
is today, but a pointed allegorical tale related
to the raging economic and finance controversies
of its time.
This was the era when the
debate was between those who wanted the United
States to stay on the restrictive gold standard,
the bankers and already-rich interests of the US
east (as in the Wicked Witch of the East) and
those, such as western farmers and populists, who
wanted the US to adopt a looser, more
accommodating silver standard - just like what
Dorothy's magic slippers were made of (they were
changed to ruby in the 1939 movie).
This
is seen as Baum, a noted populist, advocating the
silver standard as the solution to the nation's,
particularly the rural and agricultural west's,
economic travails. Dorothy's perilous journey down
the yellow brick road is here seen as an
allegorical warning about over-reliance on the
gold standard. The Wizard, the potentate of the
Emerald City, provided advice that was worthless,
just as emerald-green US paper money unbacked by
physical assets was seen to be.
If future
literary theorists find an edition of The
Wonderful Wizard of Oz that they think was
first published in 2007, how will they decipher
its symbolic code?
Poor, hapless Dorothy
would be seen as representing an unfortunate
subprime-mortgage borrower, her dreams of
first-time home ownership, with its implied access
to the American dream, spinning away and lost in
the gale. The Good Witch Glinda, who tries to help
Dorothy find her way in this new maze of financial
uncertainty, would, of course, be seen as
representing none other than the US CNBC cable
network's curvaceous "money honey", financial
journalist Maria Bartiromo.
The Tin Man
with no heart would be the bankers foreclosing on
Dorothy's mortgage; the Lion with no courage would
be seen as a symbol of America's ruling
neo-conservatives, the men who sent today's youth
off to die in their wars to hide the fact that
they did everything in their power to avoid doing
the same in Vietnam. As for the Scarecrow with
straw for brains, future literary theorists would
pore through current media and conclude that he
was an obvious reference to Bush.
But the
story would need a new hero. Instead of the
hapless Wizard - Ben Bernanke - it would be none
other than the kindly, avuncular, bespectacled
Zhou Xiaochuan, governor of the Bank of China,
whose deployment of foreign-exchange reserves was
seen to have saved both Dorothy's home and the US
financial system ...
Julian
Delasantellis is a management consultant,
private investor and educator in international
business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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