All the talk these days is of the government bail-out of the foolish (high-risk when already ahead) banks who sold mortgages to people who could not pay them back. Some of the banks then turned around and sold these bad mortgages to even more foolish banks, who are in even worse trouble. This has already destroyed the large investment banks of the United States, with every one of them now bankrupt, bought, or transformed. But the liquidity trap (see this excellent column by Paul Krugman explaining the problem, courtesy of Marginal Revolution). It’s a complex issue, and I do not understand it. Too many smart people are saying too many different things, many of them unexpected
So instead, I’ll trust China. China has nearly as much of a stake in America’s economic status as we do, and China (unlike America) has a ruling class made of engineers, instead of lawyers.
But what does China think about the bailout?
China Expat says that China is belittling the idea:
As China Finance, China News, and Chaobao Financial News stated, these actions by the Federal Reserve is only â€œcreating money that does not exist which leads to the inflation of liquidity,â€ and that by showering the bailout on just a handful of stupid financial companies (my take), the Federal Reserve is â€œonly protecting and encouraging large companiesâ€™ wrong doing.â€
Yet McClatchy newspapers says that China cheers the news:
China voiced reassurance that the U.S. plan would contain the crisis, while South Korea and Japan pondered whether it would provide protection for banks that are holding distressed American mortgage debt.
As stock markets rallied around East Asia, analysts worry that Washington will print more money to finance the bailout, an action that could weaken the U.S. dollar, lift commodity prices and fan inflationary pressures.
President Bush called Chinese leader Hu Jintao early Monday local time to explain the $700 billion rescue plan of the U.S. financial sector, which is shaping up as possibly the largest bailout of private industry in American history. The state news agency, Xinhua, said Bush told Hu that “his government was well aware of the scope of the problem, and had taken and would continue to take necessary measures to stabilize the domestic and world financial markets.”
So what does China think of the bailout?