Re: China won’t suffer a Western type financial crisis

John Ross, Senior Fellow at Chongyang Institute for Financial Studies, Renmin University of China, wrote an interesting piece giving his reasons why “China won’t suffer a Western type financial crisis”. After having looked it over I don’t understand what argument he is making in the post.

If I understand the author correctly, he’s saying that China’s system is superior (will not suffer a major crisis) because:

1. It invests in infrastructure as opposed to consumption like the US. This holds a lasting asset that generates income. It also brings increasing property values which are taxed when sold. Essentially their strategy is investment vs. consumption.

2. When it comes to the bailing out of crisis the US has more difficulty in saving the banks because the resources are going from the government to the financial system as opposed to China where they are of one unified system. If this is the case, then the claim is that it’s easier to transfer the necessary assets to save a failing bank?

3. China can’t have a major 2008 style financial crisis because the government borrows less money and uses it more efficiently.

I acknowledge that the author is saying that crisis can happen but with China’s system major crisis cannot happen.

It seems to be saying that the moral of the story is that state intervention in the economy and financial system is what makes them superior? (Unless I’ve misunderstood something.)

If this is the case, I’d argue that this is false. I say this because those reasons listed were not the cause of the 2008 global collapse. Government debt didn’t have anything to do with it.

There several reasons why the collapse happened but I’ll address the primary two causes.

1. Lack of value generation via commodity production, i.e. unpaid mortgages

2. Financial maneuvering to cover the losses of those mortgages, i.e. fictitious payment

Low interest rates made it attractive to give out mortgages loans (sub-prime mortgages) to people who would normally not be able to get them. This got a great deal of people out looking for homes which raised their prices. These people who purchased the homes did earn enough income to be able to pay back the mortgages. Working and middle class had been declining for some time due to the effects of deindustrialization. Value which is generated through commodity production had dropped as manufacturing has been sent to the Third World. There was literally not enough people receiving sufficient wages.

To cover these losses the mortgages were made into investments and given a good rating. Because of this they gave a high rating to a large amount of pooled and repackaged mortgage debt (mortgage backed securities) that included subprime mortgages and the like. Basically they said these mortgage-based investments are good investments because historically housing prices have not collapsed since the Great Depression, the worst case being a small percentage decrease. Had the bond-rating agencies been correct in their assertion then those investments would have paid off greatly. Instead according to Case-Shiller Index figures US home prices fell 19.5. They became known as “toxic” assets.

The reason this is so important is because these mortgage-backed securities became investments that moved through the financial system. So when these investments went bad, they went bad in the financial sector as well. This is how the mortgage crisis spread into the financial system and became a general financial crisis.

Banks paid these failing mortgages with investments, meaning in Marxist economic language, they were paid for with “artificial payments”. Token-money was not used as payment, credit-money, fictitious capital was. Here we are reminded of something profound that Marx noticed of financial innovation. The means by which debts are settled become increasing “artificial”. To Marx the crisis doesn’t begin until the artificial payment system gets stretched to its limits.

This is where China’s real strength lies. They have the manufacturing that was drained from the First World. Marx spoke clear when he said that commodity production was the source of value. There is value in China because of its manufacturing. This value generation in wages is what allows people in China to afford those revenues the government relies on:

“Direct revenues are fares, rents, tolls, etc. Indirect revenues are generated as infrastructure investment aids economic growth, yielding taxes, and has well-known effects in raising land values – land sales being one of Chinese local government’s biggest sources of income.”

What I don’t see is how government debt in the US had anything to do with the 2008 crisis. Nor does government debt explain how China avoided it. I don’t understand what argument is being made here.

Original Article: China won’t suffer a Western type financial crisis