James Forsyth

How China’s currency manipulation caused the crisis

How China's currency manipulation caused the crisis
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One of the most important political and ideological battles of the next few years will be to determine who—and what—gets the blame for the current financial crisis. The public, and public policy, will react heavily against whoever and whatever is perceived to be at fault. All of which makes Sebastian Mallaby’s comments in the Washington Post so important:

“Geithner [Obama’s Treasury Secretary] is correct that China manipulates its currency. What's more, this manipulation is arguably the most important cause of the financial crisis. Starting around the middle of this decade, China's cheap currency led it to run a massive trade surplus. The earnings from that surplus poured into the United States. The result was the mortgage bubble

If Americans' insatiable appetite for loans explained the flood of Chinese capital into the United States, we would have seen the evidence in a rising price for those loans -- that is, higher interest rates in the bond market. But bond rates were strikingly low at mid-decade. This strongly suggests that it was the supply of lending that went up, not the demand for it. Chinese money flooded into the United States because of the push factor from China, not the pull factor from Americans.

Could the Fed have raised interest rates to avert the bubble? The Fed's monetary policy was indeed too loose. But as Martin Wolf argues in his recent book, "Fixing Global Finance," it's not clear that higher interest rates could have prevented the trouble. Once China decides to export vast quantities of capital, that capital has to go somewhere. Higher interest rates in the United States might have encouraged the world's savers to park even more of their capital in this country.

So there is no getting around China's culpability. The country relies on the sort of export-focused growth strategy that other Asian Tigers have pursued, with the difference that China is too big to go this route without destabilizing the world economy.”


Written byJames Forsyth

James Forsyth is Political Editor of the Spectator. He is also a columnist in The Sun.

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