1、The US Originated Crisis and China Approach,Ping Chen http:/ Centre for Economic Research, Peking University, BeijingAndCentre for New Political Economy, Fudan University, ShanghaiConfucius Institute, Free University of BerlinOct. 12, 2009,Causes of the US Financial Crisis,Poor Economics Financial C
2、risisMarket fundamentalism Lucas counter Keynesian revolution Washington Consensus minimize government deregulation sub-prime crisisLinear financial economics unstable option pricing virtual financial market 10 times real economy Credit Swap AIG collapsedPoor Politics Social CrisisReagan revolution
3、Tax-cut + military expansion debt financing American disease financial sector crowding out industrial sector Aging + greed welfare system crisis high labor costs bankrupt of Big Three in auto industry + R&D sourcing out,American Financial Power: Exchange Rate Resonance DPI (Depreciation Pressure Ind
4、ex) of GBP, Euro, JPY and RMB Co-Movements driven by US Business Cycles,Implications of Exchange Rates Resonance Discipline American Policies,American business cycles is the SOURCE of world Imbalance and international financial instabilityFuture expectations in world financial market is driven by Am
5、erican POWER & IMAGE, not by fundamentals (TRADE & BUDGET DEFICITS) in real economy Inconsistent with equilibrium theory in international financeU.S. is the dominating power in international financial market No visible candidate which could displace U.S. DOLLAR as international RESERVE CURRENCYReali
6、stic REFORM Discipline rather than displace American POWER,Danger of Financial Concentration Implication from the Principle of Large Numbers for Positive Variables: More Micro Elements Effective Cluster Number (CN) N Less Macro Market Variability (MV),SN=X1+X2+ . . . . . . +XNMarket Variability (MV)
7、= Relative Deviation =,Observed MV Effective CN (Data Source: Fed. Reserve St. Louis),Real Personal consumption：0.15% (800,000)Real GDP: 0.2 % (500,000)Real Private Investment: 1.2% (10,000)Dow Jones Industrial (1928-09)：1.4% (9,000)S&P 500 Index (1947-2009)：1.6% (5,000)NASDAQ (1971-2009): 2.0 % (3,
8、000)Japan-US Exchange Rate (1971-09) 6.1% (300)US-Euro Exchange Rate (1999-09) 4.9% (400)Texas Crude Oil Price (1978-2008): 5.3 % (400),Meso Foundations of Business Cycles and Critical Role of Competition Policy,Household fluctuations contribute less than 5% of real GDP fluctuations Weak “Microfound
9、ations” in business cyclesSmall firm fluctuations contribute only about 25% of GDP fluctuationsOnly public listed companies and Giant Corporations may generate large fluctuations in INVESTMENT, which is 6-10 times LARGER than GDP fluctuations Stabilizing international financial market International
10、ANTI-TRUST LAW in asset market + TOBIN TAX in currency & commodity markets,Dan Gilligan, PMA President of PMA: Oil Price Manipulation,Did Speculation Fuel Oil Price Swings? (CBS 60 Minutes, 01/12/2009)http:/www.cwpma.org/Template.php?-p=HomeNewsPopup&-d=News&-r=52.0in 2000, Congress deregulated the
11、futures market, granting exemptions for complicated derivative investments called oil swaps, as well as electronic trading on private exchanges. Volatility in price of oil per barrel within one year： $67 $147 $45； even jump $25 in one day!Changes in demand & supply less than 5% Changes in price of o
12、il larger than 100%In mid-June - end of Nov. 2008，Congress investigation started $70 billion speculative capital left future market demand of oil dropped 5Price of oil dropped more than 75% to $10060-70of oil contracts in future market controlled by speculative capitalIn past 5 years，capital poured
13、into oil market by Hedge Funds and Big Investment Banks: $13 billion $300 billionsLarge players：Morgan Stanley, Goldman Sachs, Barclays, J.P. Morgan put hundred of billions of dollars in oil future market， California pension fund. Harvard Endowment, and large institutional investors,Nature of Persis
14、tent Business Cycles: White Noise (35%) vs. Chaotic Cycles (65%) Equilibrium illusion is created by high frequency noise-amplifying FD filter,Symptom Diagnosis (flu, immune disorder, cancer?) and Treatment Approaches: One recipe fits all?,Exogenous school blame NOISE or SHOCKS pour cooling water (Mo
15、netary & Fiscal stimulus) Endogenous school analyze Abnormal Rhythm adjust + surgery (Structural Reform),Higher moments of market risk ignored by asset pricing theory need New strategy in risk management,American Disease & China Development,AMERICAN DISEASE financial crisis !Reagan Revolution = Star
16、 War + Tax Cut + deregulation Deficit Financing + Financial Concentration FINANCIAL sector CROWDING OUT INDUSTRIAL sector global imbalance rise of East Asia & Pacific Economic UnionGerman experience and Japan lesson for China strategy: floating exchange rate and capital liberalization has tremendous
17、 uncertainty for China DIVERSIFY currency reserve + SELECTIVE CONTROL in capital accountEuro Dollar + ASIAN DOLLAR market check & balance to self-centered Fed policy enhance competition in dollar-centered financial market,US: Treat Symptom not Cure,Government capture by financial industry bailout fi
18、nancial sector (more than $1 trillion) at the cost of real economy no bank run + increasing unemploymentNo attempt of breaking financial monopoly dubious financial regulation (?) break tax heaven + Fed powerUS healthcare costs twice of Europe & Canada, triple of Japan public insurance option (?) Ide
19、ological barrier in weak healthcare reformWeak fiscal policy financial crisis in state governments (CA, NY, TX, etc),China: Prepare before Coming Rain,Preserve collective land ownership + family incentive low cost social insurance for peasants 20 millions rural workers back home rural developmentBre
20、aking state monopoly encourage innovations Chinas leading SOE rise to the top help private industryIncreasing regulation to State Banks + capital account control avoid financial crisis & housing bubble capital exportReform momentum shifting from coastal to inland area export led growth shifted to ba
21、lanced growthCrisis = danger + opportunity not change, only speed up Chinas reform course,Chinas Second Big-Bang Experimentand Policy U Turn in Early 2008,China at cross-road: converge to American typed market & institution or by Chinas self-innovation?Market fundamentalism vs. evolutionary experime
22、nt: policy target to inflation (7%) or hidden unemployment?Two big-bang attempts in China: price liberalization in 1988 and exchange rate appreciation + welfare state in early 2008:Currency appreciation 20% + raise interest rate & reserve requirementPush labor law & minimum wage law + Expanding soci
23、al security & health care coverageOutcome: labor costs rose 30% wave of bankruptcy in coastal area local governments protests policy U turn Chinas mode of effective check & balance,Chinas Crisis Reaction,Global crisis spread: export decline (from +30% to -20% in Oct.2008), 20 millions rural workers
24、lost jobs still maintain trade surplus + increasing foreign reserveStimulate consumption: increase retirement compensation, consumption coupons weak effectsMonetary policies: lower interest rate, stabilizing currency, expanding credit (car loan) revive housing, automobile, and financial marketFiscal
25、 policy: expanding 4 trillion RMB ($600 billions) in infrastructure investment revive steel and energy sector,Advanced National Transportation Network,High speed (200-350 km/hr) railway8,000km in 200950,000km in 2020 including:Four horizontal and four vertical lines: 12,000km22 cities develop subway
26、 system, invest $800 billions in 6 years (2009-2015).Pending project: magnetic suspended railway(?),Upgrade Ten Key Industries,Industrial upgrade plans for top ten industries (Feb. 2009): automobilesteel, nonferrous metalmachine, ship building (airplane)digital informationtextile, light industrylogi
27、sticspetroleum and chemistry,Develop New Green Technology,Market incentives + new technologiesProposal of carbon tax + energy resource tax + increase water price push structural reformRenewable energy: solar, wind, bio fuel,Green cars: hybrid, electricHydraulic power: number one in the worldWind pow
28、er: number one in the worldNuclear power: 24 nuclear power stations are developing.Accelerating technology upgrading,Increasing Role in World Affairs,Increasing cooperation with Northeast, Southeast, & mid Asia countriesCurrency swap with BRIC countries avoid a dollar crisis?Increasing investment in
29、 Africa, Latin America, and AustraliaIncrease competitiveness in OECD countriesPushing reform of international financial system Toward a more stable & diversified worldRise of East Asia & Pacific Economic Union a tri-polar world after the US originated crisis?,EU Puzzles (?),Why EU & Japan behave be
30、st (green environment + financial regulation + fiscal balance) but suffer most?GDP growth rate (%) in 2009 forecast by Economist: China +8.2, US -2.5, Germany -4.7, Japan -5.7Aging + conservative immigration policy increase welfare burdenHigh end of international division of labor higher profit but
31、larger risk vulnerable under international crisisHistorical constraints of German unification and East European transition: foreign bank retreat crisis in Baltic & EE, dependent (not competitive) economy in East GermanyEU question: expand or consolidate? Competitive or welfare? Moral lead or innovat
32、ion lead?,Arable Land and Population Pressure,Cross Country Comparison in 1993 (Madison1998),World Economy in Historical Perspective,(Annual average compound rate of GDP growth),Russias Economic Declines in 20th Century,(Each period started with 100%),Economic Performance during Transition,Whats Wro
33、ng with the Washington Consensus?,Market fundamentalism (pro market) minimize Government role ignore market instability counter Keynesian revolutionWorld is flat (pro Anglo-Saxon) development depends on capital & tech flow from advanced countries deregulation liberalization pro foreign investors (sp
34、eculator+multi-ponies)Private market is optimal (pro rich) protect property right cut tax weaken social infrastructure increasing inequality,China Innovations in Development Strategy,New government role local/central governments have more resource & choice than private sector in unequal competition
35、in the global market, especially compete with multi-national companiesMixed economies have better stability and lower cost in providing social insurance in learning uncertaintyMarket instruments (price, interest rates, exchange rates, rent) can be guided by development strategy in catch-up competiti
36、onNew check & balance created by competition by deeds between central & local governments, regional partnership, and official rotation,Chinas Growth Potential,8% in the next decadeEconomic scale:Catch Japan in 2010Catch US in 2030?Still a developing country with moderate per capita GDP new developme
37、nt mode?,Changing World after the Crisis,Decline of American power & dollar statusIncrease of European voiceRise of Asian economyWestern value based on freedom, democracy, & rule of law how to break monopoly & capture by interest group?Alternative approach based on innovation, coordination, & rule b
38、y experiment how to transfer leadership wisdom into social institution?,References downloadable at http:/ Chen, “From an Efficient to a Viable International Financial Market,” in R. Garnaut, L. Song and W.T.Woo eds. Chinas New Place in a World in Crisis: Economic, Geopolitical and the Environmental
39、Dimensions, Australian National University E-Press and The Brookings Institution Press, Canberra (2009)Ping Chen, “Equilibrium Illusion, Economic Complexity, and Evolutionary Foundation of Economic Analysis,” Evolutionary and Institutional Economics Review, 5(1), 81-127 (2008).Ping Chen, “Complexity
40、 of Transaction Costs and Evolution of Corporate Governance,” Kyoto Economic Review, 76(2), 139153 (2007).Ping Chen, “Evolutionary Economic Dynamics: Persistent Business Cycles, Disruptive Technology, and the Trade-Off between Stability and Complexity,” in Kurt Dopfer ed., Evolutionary Foundations of Economics, Chapter 15, pp.472-505, Cambridge University Press, Cambridge (2005).,
