Why do Asian investors depend on American capital markets? Given the near
breakdown of key sectors of the American market, one might expect Asians to
bring their money home. Quite the opposite has happened: Asian currencies have
fallen sharply against the American dollar.
On my desk is a draft paper by a prominent Asian politician, sent to me
privately for comment. It calls on Asians to take charge of their own financial
destiny and invest their money in Asian markets rather than into the maelstrom
of American markets. Privately, I advised the leader in question not to publish
it. It will
do no good. Asian capital markets cannot absorb Asia's savings.
What does America have that
Asia doesn't have? The answer is, Sarah Palin -
not Sarah Palin the vice presidential candidate,
US$, June 2-Oct
South Korean Won
Sarah Palin the "hockey mom"
turned small-town mayor and reforming Alaska governor. All the PhDs and MBAs in
the world can't make a capital market work, but ordinary people like Sarah
Palin can. Laws depend on the will of the people to enforce them. It is the
initiative of ordinary people that makes America's political system the world's
America is the heir to a long tradition of Anglo-Saxon law that began with jury
trial and the Magna Carta and continued through the English Revolution of the
17th century and the American Revolution of the 18th. Ordinary people like
Palin are the bearers of this tradition.
Outside of the United States, the young governor of Alaska has become a figure
of ridicule - someone who did not own a passport until last year and who
quaintly believes that her state's proximity to Russia gives her insights on
foreign policy. How, my European friends ask, was it possible for such an an
ignorant bumpkin to become a candidate for America's second-highest office?
They don't understand America.
Provincial America depends on the initiative of ordinary people to get through
the day. America has something like an Education Ministry, but it has little
money to dispense. Americans pay for most of their school costs out of local
taxes, and levy those taxes on themselves. In small towns, many public
agencies, including fire protection and emergency medical assistance, depend
almost entirely on volunteers. People who tax themselves, and give their own
time and money for services on which communities depend, are not easily cowed
by the federal government or by large corporations.
Palin's career may look like a poor imitation of a Preston Sturges script, but
films such as Hail the Conquering Hero (1944) struck a chord with
Americans precisely because the character type of the ordinary man or woman who
takes on entrenched interests is instantly recognizable in America.
Palin really did take on the American oil companies and turn the scoundrels out
of office. Her predecessor, Frank Murkowski, appointed her to the state oil and
gas commission in the apparent belief that a small-town mayor and former beauty
queen would rubber-stamp corrupt deals between the state and the Big Oil
Shades of Jimmy Stewart in Mr Smith Goes to Washington, Palin ran
against Murkowski and took his job. That does not qualify her to be president,
to be sure, but it does show cunning and strength of character. Palin is
qualified for high office by temperament if not by education, and is preferable
to candidates whose education has made no improvement on their characters.
The fact that ordinary people safeguard their rights and have the means to
challenge established interests does not exclude the possibility of fraud on a
Asian investors were cheated by a conspiracy of the financial industry and the
ratings agencies, which sold them ostensibly low-risk securities that turned
out to be toxic. The just-approved US$700 billion support package for American
banks sets America back to a regime of oligarchy, according to New York Times
columnist David Brooks. Despite this fraud and its attendant humiliation, and
despite the deterioration of governance in American markets, Asian investors
are putting more rather than less money into America, judging from the decline
of Asian currencies against the dollar in the course of the crisis.
One doesn't see demonstrations by wronged peasants in the small towns of
America. There never were peasants - American farmers always were entrepreneurs
- and the locals avenge injury by taking over their local governments, which
have sufficient authority to make a difference. At the capillary level, school
boards, the Parent Teachers' Association, self-administered religious
organizations and volunteer organizations incubate a political class entirely
different from anything to be found in Asia. There are tens of thousands of
Sarah Palins lurking in the minor leagues of American politics, and they are
the guarantors of market probity.
"Hockey Moms," to be sure, may not be the optimal promoters of America's
future. One for one, the "Piano Moms" of China are cleverer people and produce
smarter offspring. China's 30 million students of classical piano are one of
the two great popular movements in the world today: the other is the House
Church movement in Chinese Christianity. Children who play hockey will grow up
to get coffee for children who study piano. As a pool of talent, nothing
compares with the educated segment of the East Asian population that has
embraced and mastered Western culture. Nonetheless, Asia still can't invest its
own money at home, and seems farther than ever from that objective.
It is true that Asian economies depend on American consumers and an American
recession is bad for Asian currencies. But why don't Asians consume what they
produce at home? The trouble is that rich Asians don't lend to poor Asians in
their own countries. Capital markets don't work in the developing world because
it is too easy to steal money. Subprime mortgages in the US have suffered from
poor documentation. What kind of documentation does one encounter in countries
where everyone from the clerk at the records office to the secretary who hands
you a form requires a small bribe? America is litigious to a fault, but its
courts are fair and hard to corrupt.
Asians are reluctant to lend money to each other under the circumstances; they
would rather lend money in places where a hockey mom can get involved in local
politics and, on encountering graft and corruption, run a successful campaign
to turn the scoundrels out. You do not need PhDs and MBAs for that. You need
ordinary people who care sufficiently about the places in which they live to
take control of their own towns and states when required. And, yes, it doesn't
hurt if they own guns. Popular gun ownership places a limit on the abuse of
Proposals to expand Asian financial markets have been circulating for 20 years.
In 1996, the old print edition of Asia Times (which ceased operations during
the 1997 financial crisis) published an excellent little booklet on the subject
of Asian fixed income markets, sponsored by Lehman Brothers, which also has
ceased operations. The East Asia Pacific central banks launched flagship local
currency bond funds in 2003 and 2004 with considerable fanfare.
Several months ago, the Asian Development Bank (ADB) reported, "With the credit
squeeze in the United States imposing limits on many borrowers' access to the
market, some foreign companies are beginning to issue bonds within the Asia
region ... in February 2008, Lehman Brothers issued a S$250 million [US$171
million) five-year bond. It is the largest foreign issue in the Singapore
market to date." Lending money to the now-defunct Lehman Brothers was the one
capital markets coup the ADB had to brag about in early 2008.
Asian capital markets never lost their baby teeth. By way of comparison, US
fixed income markets at the end of 2007 had $30.146 trillion outstanding, or
220% of gross domestic product (GDP). East Asia's fixed income markets, reports
the Asian Development Bank, were only 46% of GDP. Asia's fixed income markets
are a quarter as America's relative to GDP. That is why Asia's retirement money
must look for a home overseas.
Perhaps America's fixed income markets expanded too fast. Mortgage-backed
securities, for example, jumped from $2.36 trillion to $7.27 trillion during
the decade through 2007, while Treasury debt only rose from $3.66 billion to
$4.86 trillion. More than $2 trillion of the mortgage expansion occurred in the
subprime or "alternative documentation" categories, which have lost roughly
half their market value in the past 15 months.
The trouble, as I argued in May, is that the sausages - the derivative
securities created out of the inedible scraps of the mortgage market - were
subject to monstrously large demand from a world of aging savers (see
The monster and the sausages, Asia Times Online, May 20, 2008).
This will only get worse. Twenty-eight percent of China's population falls in
the age cohort of 39-64 years, when individuals must put away most of their
retirement savings. By 2025, the proportion will rise to 35%. (By contrast,
America has 32% of its population in the 39-64 cohort today, but it will fall
to 30% by 2025).