Chinese bailout of US!

Arvind Subramanian is cheeky in suggesting that the Chinese Central Bank could step in and provide liquidity to the financial markets, by lending say, $500 bn, to the Fed, which could then use it to bailout the distressed firms. He writes,

"China’s loan offer would be direct to the US government to be spent in the current financial crisis. More important, it would come with strings attached. Tied aid, the preferred mode of operation of western donors since the postwar period, would now be embraced by China.

China would impose two conditions. First, it would declare that the offer of money was conditional on the US government’s adopting a particular approach to rescuing the banks, namely to favour in the next round the use of government money to recapitalise the banks. Europe has been using this approach and evidence suggests it is the most effective way of dealing with large-scale financial crises.

The US government – like third world governments in the past – has been unable to adopt the most efficient course of action. This stems from an ideological obsession against 'socialising' banks or because inducement is necessary to overcome any domestic opposition to it.

The second condition would relate to 'social safety nets', which had become standard embellishments to World Bank/IMF adjustment programmes. China would stipulate that monies be devoted to cushioning the impact on vulnerable homeowners, so that they would not be forced into forgoing the American dream of home ownership. Chinese conditionality on this front would achieve an outcome that several economists on the left and right have argued for on grounds of fairness, and also to address the fundamental problem in the housing market."

Interestingly, the ongoing crisis appears to be a mirror inversion of the 1997 crisis in many emerging economies. The only difference now is that there have been not even a single case of bank failure in any of the emerging economies. Even as the Central Banks of developed world, cut rates in a co-ordinated manner, many major Asian Banks have deemed it not necessary to respond. Incidentally, the only two economies to have emerged unscathed (beyond the inevitable contagion effects) from the two biggest financial crisis of the past two decades are India and China. Do we have Central Banking lessons there? Talk about empire striking back!

(HT: Gadde Swarup)