America's crisis, China's recovery?

Posted By David Rothkopf Wednesday, May 20, 2009 - 9:08 PM Share

It has already been pretty widely established in global public opinion that blame for the current economic crisis should fall squarely on the United States. Such conventional wisdom being what it is...and the facts being what they are...this is certainly an overstatement. Plenty of countries allowed financial institutions to cast aside sound notions of risk management, expose themselves to unregulated markets in complex instruments and become vulnerable to broad systemic risks. After all, if the risks were systemic then surely all those with responsibilities for parts of the system need to man up and accept they had a role in bringing down the financial house of cards.

Also in the wake of the crisis, there was much talk about the end of American capitalism, Wall Street, banks that were too big to fail, etc. As you know from my post yesterday on big myths, I'm not sure these views are right either.

Having said all that, a conversation with one of Asia's most experienced diplomats this morning drove home the point that regardless of your view on the aforementioned issues, it is far too early to predict the real lasting policy and political implications of the current upheaval.

That's because to know the true winners and losers from this crisis (be they policies, institutions or countries), you actually have to know how the crisis ends. If America recovers quickly, said this keen observer of international trends, then "your system will be seen to work and it will have even more momentum when it comes to setting international rules and best practices." If the U.S. recovery is slow and, for example, China's is faster and the climb out from the downturn is seen to be "China's recovery" then "they will gain influence and their views on the shape of the international system will have much more traction" especially if the United States is mired in a long period of economic sluggishness.

While the diplomat acknowledged that it is hard to imagine a strong Chinese recovery without a strong U.S. recovery, as China and all of Asia become more integrated with emerging economies worldwide as well, it is possible to envision a recovery in which the United States is up slightly, Europe a little more, the emerging world leads growth and America's economic influence "while still very strong, will be more easily challenged, real rival views will emerge and gain traction."

Not only is this analysis significant in the context of the next few years' discussions of revamping global institutions and regulatory regimes, it is also significant in the sense that the United States and China will, during this period, be shaping their new "G-2" partnership. Even though the Chinese resist the term, the reality as discussed here previously, is that the U.S. and China now form the world's "indispensable partnership" (to borrow and twist Sandy Berger's description of the United States as the "indispensable nation")...whether these issues are global climate, global markets, proliferation or security. But this partnership has no history and the different views within it on core issues-like the appropriate role of government vs. markets or strict views about democracy vs. Asian views on responsive government, etc. -- have yet to approach any kind of synthesis or balance. When and how they do will play a big role in shaping much of the world's agenda for the 21st Century...and who "owns" the recovery will be one of our first major clues as to how that may play out in the years immediately ahead.

Elizabeth Dalziel - Pool/Getty Images

EXPLORE:CHINA, ECONOMICS, FINANCIAL CRISIS, OBAMA ADMINISTRATION

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BLUE13326

6:18 AM ET

May 21, 2009

It would make logical sense

It would make logical sense that China would be more adept at handling this crisis, because its government can literally command its banks to extend credit. But we won't know the real outcome of this policy of easy credit for many years; China seems to be making the same mistakes we made by having the government step in and force banks to loan money without respect to the credit risk. This was, after all, the root of our own current crisis. It may be that the next time their economy falters their banks will face a huge amount of defaults on loans that never should have been given in the first place, just like we are experiencing now. If they can resume growing at 8%+ though this may not matter. So, this is their bet on easy credit. And it's much easier to simply have the government command the banks on this rather than the circuitous route we went about it starting largely in the 90s.

As for our current situation, I don't see anyway out of it, absent some major technological innovation. We've expanded our debt so much the coming rise in our cost of capital is likely to blunt any recovery, which would be a very dangerous cycle. Added to that we have an energy policy that seems designed to do little but raise the price of oil and things are looking grim. We are looking at least at a lost decade unless the current economic policies are radically altered.

ZJIN

5:00 PM ET

May 21, 2009

The most important sentence

The most important sentence of this post: "the Chinese resist the term,"...seriously, all other noises are just media hype to sell their stories. China perfectly understands its limits and challenges. Beijing probably has enough this nonsense (G2,China model...) already.