I had planned to write about it, but thankfully I had a life that weekend so I passed on the opportunity. Henry C.K. Liu just took it on (China and the Global Crisis and Part 2), and so thanks to him I can vicariously follow through on what I had originally hoped to do.
(First of all, here's a transcript of Bush's speechwriter's speech.)
Liu: "President Bush [gave a] self-absolving explanation of the global financial crisis:
'The massive inflow of foreign capital, combined with low interest rates, produced a period of easy credit. And that easy credit especially affected the housing market. Flush with cash, many lenders issued mortgages and many borrowers could not afford them. Financial institutions then purchased these loans, packaged them together, and converted them into complex securities designed to yield large returns. These securities were then purchased by investors and financial institutions in the United States and Europe and elsewhere - often with little analysis of their true underlying value.First of all, note that even liberal Unitedstatesians would agree with this narrative. The disagreements between the left and right in the U.S. on the correct narrative to weave about the global financial crisis are minor enough to be entirely absent from Bush's account. Back to Liu:
The financial crisis was ignited when booming housing markets began to decline. As home values dropped, many borrowers defaulted on their mortgages, and institutions holding securities backed by those mortgages suffered serious losses. Because of outdated regulatory structures and poor risk management practices, many financial institutions in America and Europe were too highly leveraged. When capital ran short, many faced severe financial jeopardy. This led to high-profile failures of financial institutions in America and Europe, led to contractions and widespread anxiety - all of which contributed to sharp declines in the equity markets.
These developments have placed a heavy burden on hardworking people around the world. Stock market drops have eroded the value of retirement accounts and pension funds. The tightening of credit has made it harder for families to borrow money for cars or home improvements or education of the children. Businesses have found it harder to get loans to expand their operations and create jobs. Many nations have suffered job losses, and have serious concerns about the worsening economy. Developing nations have been hit hard as nervous investors have withdrawn their capital.'"
"Notwithstanding Bush's attempt to blame the victims for the crime, the easy credit was not caused by massive inflow of foreign capital. It was the other way around.
The massive inflow of foreign-owned capital denominated in dollars was caused by easy credit that grew out of monetary indulgence on the part of the US central bank, which alone can issue dollars. This monetary indulgence enabled the US to sustain a current account deficit with a capital account surplus of recycled dollars.
The US has been consuming more that it produces through recurring trade and fiscal deficits made possible by dollar hegemony, sucking up wealth form its trade partners who are not in any position to increase domestic consumption because real wealth has been exported to the US in return for fiat dollars that cannot be used in the domestic economy without causing inflation. "
In other words, U.S. debt has been the nation's number one export. But foreign investors have not been buying it because they think it's the smartest investment to make - although now investors the world over are buying U.S. debt simply because it is seemingly the safest investment in a toxic environment. But the lion's share of U.S. debt has been "bought" by foreign governments whose banks receive dollars for all of their exports that are denominated in dollars - which is an awful lot, as despite the success of the euro, the dollar still dominates international trade. So foreign governments typically use these dollars to buy U.S. debt, which has allowed the U.S. alone in the world to run enormous deficits without facing - thus far - an Argentina or South Korea style meltdown. Foreign governments could sell these dollars for their domestic currency, rather than buying U.S. debt, so as to use this form of wealth (U.S. dollars) they receive for their exports to serve domestic development. However, this would raise the value of their own currencies, thereby making their products less competitive in the world's largest market: the United States'.
Liu goes on, noting that Bush's commitment to free markets has been compromised by the financial crisis, and he has made socialist interventions into the economy, e.g., wholly and partially nationalizing banks.
"President Bush said with a straight face about his ideological surrender:
'We are faced with the prospect of a global meltdown. And so we've responded with bold measures. I'm a market-oriented guy, but not when I'm faced with the prospect of a global meltdown. At Saturday's [November 15] summit, we're going to review the effectiveness of our actions.The 'market-oriented guy' is forced to temporarily change his orientation toward massive government intervention in the market until the prospect of a global meltdown is averted. Since August 2007, the 'unprecedented steps' the US has taken have so far failed to stabilize market seizure, price volatility and loss of confidence. Equity market value has fallen over 50%. Major financial institutions had to be nationalized or allowed to go bankrupt. Financial sectors in all market economies are moving closer toward total collapse by the day. "
Here in the United States, we have taken unprecedented steps to boost liquidity, recapitalize financial institutions, guarantee most new debt issued by insured banks, and prevent the disorderly collapse of large, interconnected enterprises. These were historic actions taken necessary to make - necessary so that the economy would not melt down and affect millions of our fellow citizens.'
So Bush's socialist interventions into the economy have not been working so far. As Bush said, "[t]his crisis did not develop overnight, and it's not going to be solved overnight." Liu agrees, conceding that it "is true that the crisis took over two decades of flawed policy to develop." And the economic ideology forming the basis of "over two decades of flawed policy" will not be displaced overnight. Bush, along with most educated Unitedstatesians, believes that capitalism is still the best economic system available and that socialist interventions (that is, government regulation) inevitably muck things up. Liu writes:
"Showing his ideological conceit, Bush asserts that 'free market capitalism is far more than economic theory. It is the engine of social mobility - the highway to the American Dream.' He cites technological inventions as evidence of his ideological fixation. It is true that the US socio-economic system has produced much that benefited mankind, yet inventions are not unique to US capitalism. Historically, inventions also were made under feudalism, communism and even fascism. Bush concludes that 'today, the success of the world's largest economies comes from their embrace of free markets'.
By now, a case can be easily made with solid evidence that the failure of the world's market economies comes from their indiscriminate embrace of unregulated free markets."
A corollary point Liu could have made is that the success of the world's largest economies has only recently come from their embrace of free markets. As economist Ha-Joon Chang has convincingly demonstrated, the success of today's free market-embracing economies is due to their embrace of protectionism as they developed, and their subsequent embrace of and proselytizing for free markets once they had developed sufficient advantages in production. In other words, countries embraced free economic competition at the point at which they could compete successfully.
Bush gets to the heart of the matter later in his speech:
"Ultimately, the best evidence for free-market capitalism is its performance compared to other economic systems. Free markets allowed Japan, an island with few natural resources, to recover from war and grow into the world's second largest economy. Free markets allowed South Korea to make itself into one of the most technologically advanced societies in the world. Free markets turned small areas like Singapore and Hong Kong and Taiwan and into global economic players. Today, the success of the worlds largest economies comes from their embrace of free markets.This is an exposition of the conventional Unitedstatesian wisdom that only a small minority on the left-right spectrum of public debate in the U.S. would disagree with. Should you?
Meanwhile, nations who have pursued other models have experienced devastating results. Soviet Communism starved millions, bankrupt an empire, and collapsed as decisively as the Berlin Wall. Cuba, once known for its vast fields of cane, is now forced to ration sugar, and while Iran sits atop giant oil reserves, its people cannot put enough gasoline in their cars. The record is unmistakable. If you seek economic growth, if you seek opportunity, if you seek social justice and human dignity, the free-market system is the way to go.
(APPALUSE) [sic] "
- "Free markets allowed Japan, an island with few natural resources, to recover from war and grow into the world's second largest economy." Nope. Japan followed a protectionist, imperialist form of development ever since the Meiji restoration crushed feudalism in the country and set it on a path of modernization, which included following the most successful examples in the world in terms of the military and economics: Europe and the United States. The economic portion of the example was characterized by state intervention and protectionism; only Britain, with the most advanced economy and powerful empire, preached (if not practiced) free markets at the time.
- "Free markets allowed South Korea to make itself into one of the most technologically advanced societies in the world." There is a grain of truth in this: the freedom South Korean corporations had to export to the United States' market certainly helped the former's economic development. But it was the freedom South Korea had, as a U.S.-allied dictatorship bordering North Korea and "Red" China, to develop its economy using judicious measures of state planning and protectionism that was the key factor driving its advance to become "one of the most technologically advanced societies in the world." Needless to say that Chile, as one of many examples, did not enjoy the same freedom.
- Free markets turned small areas like Singapore and Hong Kong and Taiwan and into global economic players." No they did not. Singapore and Hong Kong were turned into global economic players when Britain established them as trading posts in its empire. Taiwan was turned into a global economic player through incorporation into another empire: the Unitedstatesian empire. (Empires, by the way, are not reconcilable with "free markets".)
- "Soviet Communism starved millions, bankrupt an empire, and collapsed as decisively as the Berlin Wall." Indeed millions starved during the Soviet period; and yes, the empire was critically weakened by its military expenditures so it did face bankruptcy in a sense; and it is a trivial truth that it collapsed "as decisively as the Berlin Wall." Poorly-designed, overconfident policies, droughts, and paranoid, disconnected leadership led millions to starve. Facing the brunt of the Nazi war machine did not help either. But what is overlooked in our era - after the Cold War era of communists vs. capitalists, where nothing each side had to say was worth a penny to the other - is that the Soviet system resulted in unprecedented economic growth that turned Russia from a barely post-feudal, war-ravaged backwater into a global economic powerhouse. The Soviet system built an empire. Bush only notes that the empire "Soviet Communism" built eventually collapsed. It was stifled first by its own violent birth and the resulting, but also ever-deepening, sense of paranoia pervading its leadership. Always the capitalists were plotting to overthrow the Russian people's revolution - and often, they were. And it spent too much of its social product on military expenditures, though given its enemy one can understand the pressures that resulted in this allocation. Furthermore the Soviet leadership's fear of foreign propaganda led it to choke off information flows to a detrimental extent. But it is an unjustifiably long hop from these ideas to the idea that government intervention into the economy is universally doomed to failure.
- "Cuba, once known for its vast fields of cane, is now forced to ration sugar" Vast fields of cane - get it? Sounds like "vast fields of grain." Kudos to Bush's speechwriter. How romantic, those vast fields of cane, worked by slaves. Cuba rations a lot of things for different reasons. The reason sugar is rationed is not that it is rare in this island, "once known for its vast fields of cane"; Cuba produced 1.5 million tons of sugar this year. Regardless, is economic success measured by a reliance on exporting agricultural products? No. The U.S. economy would not allow for our vast fields of grain if it weren't for billions of dollars in agricultural subsidies. When the market sends the signal that your competitive advantage does not lie in agricultural products, that is universally recognized to be a good thing. Besides, Cuba's sugar industry has historically been used for a colonial or neocolonial master's use: Spain and the United States, respectively. It is neither a mark of pride nor an indication of Cuba's overall economic vitality. Nor is its decline such an indication. What is important is that Cuba's economy does a lot better for its people, by objective measures, than the economies of nearby Haiti, Jamaica or the Dominican Republic do for their respective peoples.
- "[W]hile Iran sits atop giant oil reserves, its people cannot put enough gasoline in their cars." This is a puzzling statement, if you take Bush's words seriously. Because to the extent to which Iranians cannot put enough gasoline in their cars, it is due to market forces and U.S. economic pressure. Could Bush have been so brazenly hypocritical if he was conscious of it? Not likely. The price of oil being high, Iran chooses to milk it for all it is worth, especially because powerful foreigners are constricting other parts of its economy. Milking for all its worth means refusing to subsidize domestic consumption. And Bush certainly would be aghast at subsidies - subsidies that foreigners use, that is.