Thursday, October 16, 2008

"We are all Chinese now"

We are all Chinese now. That is, we have a nominally capitalist economy, but we don't trust the freewheeling private market when it comes to the crunch. So we turn to the government for protection and stability.

The new interventionism isn't so much socialist as it is Confucian — a belief that a public-private partnership of the wise ones will get us out of the mess. And if it's any consolation, the Chinese are becoming more like us, even as we are becoming more like them.

A Chinese preview of this week's government-funded recapitalization of the banks came in the Hong Kong stock market crash of August 1998.

To counter a typhoon of speculation that had battered the local market, Chinese authorities intervened to buy up sagging stocks with public money. The government spent $15.1 billion to acquire about 7.3 percent of the companies in the blue-chip Hang Seng Index.

Back in 1998, free-market partisans in the West were shocked by the Chinese intervention, and decried it as a dangerous precedent. But it helped stabilize the Hong Kong market. Now, that earlier bailout seems modest indeed — compared to the quasi-nationalization of the world's leading banks we're seeing this week.

The Chinese have stayed edgy about markets, even as their version of capitalism has created unprecedented growth and prosperity. They preferred to run very large trade surpluses, a kind of forced public saving, rather than spend their new wealth. And they resisted pressure to revalue their currency upward, as market forces would have dictated, because they feared the consequences.

A Chinese central banker explained to me in Beijing a few years ago that he believed Japan's "lost decade" of economic stagnation was a result of letting the Japanese yen appreciate too rapidly during the boom years, and that the Chinese wouldn't make the same mistake. The Chinese were also squeamish as they watched the Russians during their wild "oligarch capitalism" phase in the 1990s.

The Russian model was too raucous, too rapacious.

It will take many months for the dust of this crisis to settle, and to make judgments about the shape of the new order. But already, my favorite futurist, Peter Schwartz of the Monitor Group, predicts that we are entering a new political and economic paradigm. "Clearly, we have just moved a big step away from democratic capitalism," he says.

One source of instability that must be fixed is the structural imbalance in global trade that came to be known as "Bretton Woods II." Essentially, it meant that the Chinese and other Asian economies would run large trade surpluses, and fund the corresponding U.S. trade deficits by buying Treasury bonds — in effect lending us the money to finance our overconsumption. That helped create the huge pools of capital that sloshed around international markets, and the low interest rates that encouraged investors to take too many risks.

The Bretton Woods II regime must evolve into something more stable.

In the simplest terms, the fix will require more consumption by China, and less by the United States. It's a tricky transition: After the shocks of the past few months, the Chinese will want to be less vulnerable to global markets; they will put more emphasis on domestic growth and consumption, and less on export markets. But China and the West still need each other, perhaps more than ever.

One hopeful sign last week was that the Chinese were moving toward private ownership, even as America and Europe were moving away from it. The Chinese government announced a new rural policy aimed at allowing millions of farmers to own the land they have been working.

This would create a huge new reserve of private wealth in China, which could power domestic spending and growth.

The reality that has come home to all of us during the great panic of 2008 is that nobody likes living on the knife-edge of the market.

We want the dynamism and flexibility that a capitalist economy uniquely provides. But we want protection, too — a safety net for ourselves and our families when markets fail.

Lucky, prosperous people disdain this human need for protection when times are good and relief is going to the destitute and unlucky.

But let's not hear any more thundering about self-reliance and the "school of hard knocks" from the bankers and trust-fund babies who are the beneficiaries of the bailout. We are all Chinese now, for better or worse, and we're all eating from the same bowl.

David Ignatius' e-mail address is

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