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This post was edited by abramicus at 2015-9-13 08:13|
WHY CHINA SHOULD NOT BLINDLY ADOPT THE "BEST ECONOMIC THEORIES" FROM THE WEST -- NO MATTER HOW MANY NOBEL LAUREATES SUPPORT THEM -- JUST LOOK AT THE SUBPRIME MORTGAGE DEBACLE THAT NEARLY BANKRUPTED THE ENTIRE BANKING SYSTEM, AND LOOK AT LTCM THAT BLEW UP DESPITE HAVING TWO NOBEL LAUREATES ON BOARD. WHITE CAT, YELLOW CAT, WHAT MATTERS IS THE CAT THAT CATCHES THE MICE, AND DOES NOT CRASH THE HEIRLOOM VASE. "CONSUMPTION" ECONOMICS, TIED TO "SERVICE ECONOMY" (CLEANING CARS) AND "INCREASING CAPITAL ACCOUNTS" (BORROWING TO LIVE BEYOND ONE'S PRODUCTION OUPUT) IS A DEAD-END, SO-CALLED "POST-INDUSTRIAL ECONOMICS" NONSENSE. CHINA IS NOT POST-INDUSTRIAL, AND SHOULD NEVER BE POST-INDUSTRIAL, BECAUSE IN CHINA, WHILE ENVIRONMENTAL PROTECTION WILL ALWAYS BE A PRIORITY, IT WILL HAVE TO BE FUNDED BY THE PROFITS OF ITS OWN DOMESTIC PRODUCTION, AND WILL NOT BE FUNDED BY ANY OTHER COUNTRY. SELF-RELIANCE IS THE FOUNDATION OF ECONOMICS WITH CHINESE CHARACTERISTICS, ALL THE REST IS SHIBBOLETH.
Lesson from the "Best" of Wall Street Big Wigs - Credit Event 2008.
Twelve banks have agreed to pay 1.87 billion dollars to settle an antitrust lawsuit stemming from their collusion to prevent market transparency in the lead-up to the 2008 financial breakdown, and beyond, to as recently as 2013. What it showed is not the existence of this race horse operation, but rather that only certain banks are allowed to deal in its bets, and whose customers are the public, or in many cases, each other.
To make the story simple and understandable, let us suppose Bank A issued a mortgage to a fellow for a house worth 10 times his salary, and Bank B issued a similar mortgage to another fellow with the same risk profile, for the same amount. Next, Bank B contracts to buy a Credit Default Swap from Bank A, to insure it against the risk of the borrower defaulting, and Bank A contracts to buy a Credit Default Swap from Bank B to insure against the default of its borrower.
But wait, Bank C wants to sell a CDS on the house bought by the customer of Bank A also, and Bank D, knowing that the borrower is unlikely to pay back his loan, agrees to buy that CDS.
Then, Bank D turns around and sells a CDS on the house bought by the customre of Bank B, which Bank C buys, both of them, to hedge against their earlier positions.
Then, imagine more banks piling on, much like in horseracing, anybody can bet on the horse any way he wants for a certain price. Anyone can buy a CDS as long as there is a seller, even if the buyer has no home to insure against. He can bet on any tranche of mortgages defaulting, and bank on collecting the face value of the mortgage if it does happen, all for the fee paid to the seller of the CDS. Thus, these new homeowners have become the race horses in a financial racetrack they never knew existed. And when they miss their mortgage payment, a "credit event" is registered that forces one bank to owe another bank the full value of their mortgage. After all the "credit events" have been triggered, you can have 20 to 30 banks owing each other the full value of their mortgage, which if isolated in occurrence, can be sorted out between the banks, but if the entire housing market were affected, causes the banks to lack the liquidity to pay off all their maturing obligations based on the CDS that they have sold to each other. But, you know what? The value of the mortgage is only 1/30th of the amounts they bet against each other. And why should the public give them 30 times the value of the mortgage, so that they can be solvent? Would it not have been simpler for the government to just pay off the 200 billion dollars of mortgages, which would have released every one of them from their obligations to each other, put these mortgages under the debt portfolio of the Fed, which can then be liquidated through the form of a REIT, costing the public 1/30th of the bailout money, and actually helping the home owners to be able to stay in their homes, paying rents that they can afford, which can be done restructuring their loans to fixed rate mortgages with longer duration, such as 30, 40 or 50 years?
If the CDS dealers made a mountain out of a mole hill, the government turned that mountain into an entire continent, forcing the public to shoulder a debt that is still hanging over their heads, now worth some 14 trillion dollars, and which they can never pay off, not in 30, 40 or 50 years, or ever.
Clearly, not only did the "white cats" fail to catch any mice, they nearly caused all the priceless heirlooms and costly appliances to crash down by their frantic attempts to save themselves, and the spreadsheet of the Fed is the best proof of what happens when China, now with a surplus of 3.2 trillion dollars, tries to imitate them. China had many good "yellow cats" who were retired who created the China Miracle - they don't need any "white cat theory". They only had common sense, like Deng Xiaoping, like Zhu Rongzhi. China should put those who have common sense at the very top, and those who have the burden of too much conflicted and contradictory learning, should serve as advisers, not decision makers, if there is to be peace and lasting, sustainable, prosperity for China. That is why Deng used the "white cat, black cat" paradigm -it is the best paradigm in economics, and now, it is time to apply it appropriately. White cat or yellow cat, what matters is that it can revive China's productivity that is the source of every project it has on its modernization agenda.
Growth by consumption is possible only if you consume what others produce or what you have previously produced - the former requires military conquest (establishing the Yuan as an international reserve currency by fiat) or debt servitude (opening capital accounts), the latter (cleaning cars instead of producing cars, and eating grain instead of producing grain) is the surest road to universal poverty and social upheaval.
Growth by consumption is simply put, IMPOSSIBLE - forget that crazy idea.