|CPDS Home Contact||See reference to this in GFC: The Second Failure of Globalization?|
This document includes CPDS' comments on an official US review of the global financial crisis (GFC) which suggested that the review seemed grossly inadequate, because it dealt only with domestic factors and ignored the international financial imbalances which had a significant role in generating the crisis.
This gave rise to an interchange with an observer in the US (Anon) to whom the above comments had been circulated. Issues emerging from that interchange include:
FCIC: Eroding Confidence in the United States? (Email sent 29/1/11)
The report by the Financial Crisis Inquiry Commission (FCIC) does more to erode investor confidence in the United States than any other event in recent decades.
I have had some interest in the financial crisis, and have written about the circumstances that gave rise to it for several years (eg see Structural Incompatibility Puts Global Growth at Risk (2003); Financial Market Instability: A Many Sided Story (2007); and Global Financial Crisis: The Second Test of Globalization?).
The financial crisis was partly the result of policies and actions taken within the United States. And the FCIC report has addressed those domestic issues.
However those policies and actions were also partly a result of pressures from the international economic / financial environment. For example, the easy money policies that contributed to the emergence of asset bubbles that subsequently burst had been needed to maintain growth in the face of international financial imbalances that resulted largely from the macroeconomically unbalanced economic models that have been the basis of economic ‘miracles’ in East Asia. A crisis emerged because US policy makers appeared unable to see what could go wrong because of a blinked approach to what was happening elsewhere in the world.
Unfortunately the FCIC Report reinforces this perception – as it makes little or no reference to the global context within which the financial crisis emerged. Without this perspective it is neither possible to properly understand the recent financial crisis nor to avoid stumbling into another (one with somewhat different symptoms).
I would be interested in your response to the above speculations.
|Interchange with Anonymous US Observer||
CPDS Reply sent 31/1/11 (thanks to quirks of differences in time zones)
Thanks for feedback. You are probably right about the official awareness of the consequences of imbalances, and about the conflicted policy response. However awareness and understanding has been partial and grossly inadequate
There were clear signs of some level of understanding from the Federal Reserve even under Greenspan who used to note the need for easy money policy to prevent deflation – though deflation was a risk that Japan faced – not the US. Greenspan used to hope, naively, that providing support for Asian development through US demand would give rise (eventually) to the emergence of democratic capitalist systems. And Bernanke invented the concept of ‘savings gluts’ whose implications he clearly understood – and launched what has been seen as a ‘currency war’ in an attempt to discourage them.
However what there is no sign of anyone understanding are the cultural dimensions of the issue (which reflects the most significant ‘clash of civilizations’ despite the diversionary efforts of Islamist extremists). I have not seen official (or even academic) reference to:
I would like to reproduce your comments on my web-site (either attributed or anonymously) if you are agreeable – at FCIC: Eroding Investor Confidence in the United States?
CPDS Reply sent 3/2/11
Unfortunately my statement applies to the policy makers just as much as to the masses. I have no doubt that the hidden agendas in the US that you refer to are part of the problem – but they are neither the only, nor the most important, issues that are not being discussed.
Cultures are a part of the ‘nature’ of people in different societies – and cultural differences can have profound effects. This can be illustrated by an example in The Cultural Potential for a Clash (in Competing Civilizations). Economists correctly regard knowledge / information as the key factor in economic growth. However different societies have completely different views of the nature of knowledge, so culture must affect economic performance. Moreover the view of knowledge that Western societies gained from their classical Greek heritage (ie that ideas model reality, and thus can be a basis for rational decision making) is unique. And rationality fails in dealing with complex problems (as is well recognised in management, public administration and economic literature) and only works reliably in Western societies because simplified social spaces are created (eg by a rule of law which makes it possible for individuals to know how the world will react to what they might choose to do) - see Cultural Foundations of Western Strengths. Native peoples do not create social spaces in which individual rationality would work, and do not solve problems by the use of abstract concepts. Australian aborigines are good at dealing with ‘real’ problems (eg fixing a motor), but completely lost in dealing with abstracts (eg designing a motor). Similarly Islamic societies do not create simplified social spaces in which rationality might work. Thus seeking to transfer the benefits that Western societies gain from democratic capitalism to the Middle East is a waste of time (see Stemming Refugee Flows from the Middle East ).
The economic notion of profitability is an abstract, and while it is very useful in organising economic activities in Western societies, it is by no means universal. Asian societies with a Chinese cultural heritage have an interest in, and a traditional means for achieving, political and economic power. But they have no classical Greek cultural heritage and their means for achieving political and economic power do not involve the use of rationality nor abstract concepts such as profitability (see East Asia in Competing Civilizations). Rather knowledge is used to directly transform individuals (through the education process) or society as a whole (through the influence of bureaucratic elites). Economically the goal is to maximize market share (ie ‘real’ rather than ‘abstract’ economic power) and become rich by saving, and it was noted at one stage that profitability was not a major goal of Japanese companies. Such societies have not created social spaces in which either rationality or abstract concepts such as profitability would be of any use in organising economic production (see The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems).
There may be a universal human aspiration to seek power – but the notion of ‘personal gain’ is mainly a Western phenomenon. The notion of seeking individual benefits (as compared with benefits for ones’ community) is traditionally viewed as abhorrent in ‘Asia’.
The way economic power has been sought in ‘Asia’ has macroeconomic consequences along the lines outlined in Understanding East Asia's Economic Models (ie a requirement for domestic demand deficits in a world dominated by Western concepts of profitability, and thus for trading partners who are willing and able to run current account deficits and continue increasing their debt levels indefinitely).
The point about protectionism (achieved by investing national savings without concern for profitability, because of the defence against financial crisis implicit in current account surpluses) is important because it has been invisible to Western observers who have no idea how such societies actually work.
There is no doubt that Japan invented the game long before China. There is also no doubt that Japan’s goal in WWII was to create an ‘Asia Co-prosperity Sphere’ and that its principle tactic in seeking to achieve this was to mobilize China (Japan’s ‘big brother’) to participate in this cause. According to Eammon Fingleton the methods that provided the basis for Japan’s post-war economic miracles were first used during Japan’s occupation of Manchuria in the 1930s – and were transmitted to China’s post-Mao leadership in 1979. In the 1980s I directly encountered untranationalist Japanese factions who were: (a) at the centre of the ‘system’ that lies at the core of Japan’s political and economic order; and (b) clearly still trying to win WWII. One needs also to look closely at the sort of precepts that are recommended in traditional ‘Art of War’ strategies, and at the methods for exerting power that are traditional in ‘Asia’ (methods based on influencing others’ thinking, rather than making decisions – see Pye ‘Asian Power and Politics). A classic Japanese precept is that ‘the Oyaban (boss / leader) does not dance on stage’.
In a recent discussion with a contact who has a very good understanding of Chinese traditions (and is well respected and connected in China in this regard) that individual (who does not want such views publicly ascribed to him) suggested that:
My response was:
While that contact will not permit me to publish his views, I would greatly appreciate your permission to publish our present exchange on my website (perhaps quoting you as an anonymous observer, if you did not wish to be named).
CPDS Reply sent 5/2/11
Thanks again for your thoughts, and for permission to reproduce them as the comments of an anonymous observer.
I have no doubt that you are correct in relation to the distorted policy processes in the US. President Obama seemed to have an aspiration to change the way Washington works – though he has apparently found it rather hard to change the ‘tiger’ while riding it. My suspicion is that educating the broader community about what is going on is only part of the solution. More fundamentally there seems to be a need to break down the ‘corporatist’ character of the US’s system of political economy (ie that, exemplified by the so-called military-industrial complex, which more generally involves private corporations in central roles in carrying out key government functions and thus gaining access to strategic understanding of the issues that exceeds that available to those who might act primarily in the community interest). One key requirement to break this down is likely to involve the creation of a permanent professional civil service to support executive government, rather than reliance on importing politically favoured executives from business and academia to run government agencies. Australia’s system of government faces challenges which are somewhat different and milder than those afflicting the US – but here also there is arguably a need for better external and internal support (through an informed community, and reversion to a professional civil service) to cope with those challenges (see A Nation Building Agenda).
Your experience doing business in China provides a useful basis for observing what is going on at the coalface. However it is also possible that appearance may be deceptive, or that there is a serious breakdown looming in China’s system of socio-political-economy (because individuals are exploiting for personal benefit the resources that the state makes available to them in the expectation that they will act primarily in the communal interest).
Certainly there are strong commercial traditions in southern China. However could the effective business activity that you observe be simply driven by a desire for commercial strength (ie doing real deals) rather than by a desire for profitability (ie earning a large return on invested capital)? One could only tell this by having access to the books of those you have business dealings with, and being confident that accounting practices are reliable. It is my understanding that: (a) business success in China depends more on connections (‘guanxi’) than on enterprising initiative; (b) capital for business investment is available primarily to those with connections – especially to China’s current social elite (ie the Communist Party); and (c) China’s system of socio-political-economy involves mobilizing national income for investment with limited regard for profitability (as suggested in earlier emails). If my understanding is realistic, it would not be obvious at the coalface – and it would require macroeconomic distortions (ie massive domestic demand deficits) that make global economic growth unsustainable.
However, if both my understanding and your perception (ie that individual self-interest is dominating over the communal interest at the coal face) are correct, then this could indicate a serious flaw in China’s system of socio-political-economy. Such a possibility was indicated by a prominent Chinese academic’s comment about erosion of the meritocratic government that China relies on. Moreover China’s history is one of periodic civil wars between north and south China (see Political Constraints) – and the core of those conflicts (which have seen southern Chinese groups repeated driven out to become the offshore Chinese) arguably lies in stresses between commercially-focused cultures that are strongest in southern China and the communally-focussed expectations that seem to dominate in north China.
|IMF's Blindness to Emerging Financial Crisis||
IMF's Blindness to Emerging Financial Crisis - email sent 10/2/11
Independent Evaluation Office, IMF
Re: IMF ignored warnings: watchdog, February 10 2011
It is understood that the IEO has concluded that the IMF failed to anticipate the financial crisis, because IMF analysts had a blinkered approach to excesses that were developing in US financial systems.
May I respectfully suggest that there was an equal (and complementary) contributing factor related to the financial crisis that the IMF ignored (and that the IEO still appears to be ignoring) – namely distortions in the financial systems that seem to be essential to the systems of socio-political-economy in major East Asian economies (eg see Structural Incompatibility Puts Global Growth at Risk, 2003; Financial Market Instability: A Many Sided Story, 2007; GFC Causes; Understanding East Asia's Economic Models, 2009; and Resist Protectionism: A Call That is Decades Too Late , 2010).