264 Parallels between Japan of the late 1980s and US today - R. Taggart Murphy

(1) Student Loans: US Government is now officially in the Banking Business - Ellen Brown
(2) Parallels between Japan of the late 1980s and US today - R. Taggart Murphy

(1) Student Loans: US Government is now officially in the Banking Business - Ellen Brown

From: Ellen Brown <ellenhbrown@gmail.com> Date: 31.03.2010 02:05 AM

http://www.truthout.org/student-loans-the-government-is-now-officially-banking-business58148

Student Loans: The Government Is Now Officially in the Banking Business

Tuesday 30 March 2010

by: Ellen Brown, t r u t h o u t | News Analysis

"We say in our platform that we believe that the right to coin money and issue money is a function of government.... Those who are opposed to this proposition tell us that the issue of paper money is a function of the bank and that the government ought to go out of the banking business. I stand with Jefferson ... and tell them, as he did, that the issue of money is a function of the government and that the banks should go out of the governing business."

- William Jennings Bryan, Democratic Convention, 1896

William Jennings Bryan would have been pleased. The government is now officially in the banking business. On March 30, 2010, President Obama signed the reconciliation "fix" to the health care reform bill passed by Congress last week, which includes student loan legislation called by the President "one of the most significant investments in higher education since the G.I. Bill." Under the Student Aid and Fiscal Responsibility Act (SAFRA), the federal government will lend directly to students, ending billions of dollars in wasteful subsidies to firms providing student loans. The bill will save an estimated $68 billion over 11 years.

Money for the program will come from the US Treasury, which will lend it to the Education Department at 2.8 percent interest. The money will then be lent to students at 6.8 percent interest. Eliminating the middlemen allows the Education Department to keep its 4 percent spread as profit, money that will be used to help impoverished students. If the Department were to actually set up its own bank, on the model of the Green Bank being proposed in the Energy Bill, it could generate even more money for higher education.

A Failed Experiment in Corporate Socialism

The student loan bill may look like a sudden, radical plunge into nationalization, but the government was actually funding over 80 percent of student loans already. Complete government takeover of the program was just the logical and predictable end of a failed 45-year experiment in government subsidies for private banking, involving unnecessary giveaways to Sallie Mae (SLM Corp., the nation's largest student loan provider), Citibank, and other commercial banks exposed in blatantly exploiting the system.

Under the Federal Family Education Loan Program (FFELP), the US government has been providing subsidies to private companies making student loans ever since 1965. Every independent agency that has calculated the cost of the FFELP, from the Congressional Budget Office to Clinton's Office of Management and Budget to George W. Bush's Office of Management and Budget, has found that direct lending could save the government billions of dollars annually. But the mills of Congress grind slowly, and it has taken until now for this reform to work its way through the system.

In the sixties, when competing with the Soviets was considered a matter of national survival, providing the opportunity for higher education was accepted as a necessary public good. But unlike Russia and many other countries, the US was not prepared to provide that education for free. Loans to students were necessary, but students were notoriously bad credit risks. They were too young to have reliable credit histories, and they did not own houses that could be posted as collateral. They had nothing but a very uncertain hope of future gainful employment, and banks were not willing to take them on as credit risks without government guarantees.

The result was the FFELP, which privatized the banks' profits while socializing losses by imposing them on the taxpayers. The loans continued to be "originated" by the banks, which meant the banks advanced credit created as accounting entries on their books the way all banks do. Contrary to popular belief, banks do not lend their own money or their depositors' money. Commercial bank loans are new money, created in the act of lending it. The alleged justification for allowing banks to charge interest although they are not really lending their own money is that the interest is compensation for taking risk. The banks have to balance their books, and if the loans don't get paid back, the asset side of their balance sheets can shrink, exposing them to bankruptcy. When the risk is underwritten by the taxpayers, however, allowing the banks to keep the interest is simply a giveaway to the banks, an unwarranted form of welfare to a privileged financier class at the expense of struggling students.

Worse, underwriting these private middlemen with government guarantees has allowed them to game the system. Under the FFELP, banks actually profit more when students default than when they pay back their loans. Delinquent loans are turned over to a guaranty agency in charge of keeping students in repayment. Pre-default, guaranty agencies earn just 1 percent of the loan's outstanding balance. But if the loan defaults and the agency rehabilitates it, the guarantor earns as much as 38.5 percent of the loan's balance. Collection efforts are also much more profitable than efforts to avert default, giving guaranty agencies a major incentive to encourage delinquencies. In 2008, 60.5 percent of federal payments to the FFELP came from defaults. An Education Department report issued last year found that only 4.8 percent of students who borrowed directly from the government had defaulted on their loans in 2007, compared to 7.2 percent for the FFELP; and the gap widened when longer periods were taken into account.

In 1993, students and schools were given the option of choosing between the FFELP and the Direct Loan program, which allowed the government to offer better terms to students. The Direct Loan program was the clear winner, growing from just 7 percent of overall loan volume in 1994-1995 to over 80 percent today.

The demise of the FFELP was hastened in early 2007, when New York Attorney General Andrew Cuomo began exposing the corrupt relations between firms lending to students and the colleges they attended. Lenders that had been buying off college loan officials were forced to refund millions of dollars to borrowers.

Congress responded by cutting the private lenders' subsidies. But after the 2008 economic crash, the lenders claimed they could no longer afford to lend to low-income (high-risk) borrowers without these subsidies. Congress therefore acquiesced with a May 2008 law requiring the federal government to give banks two-thirds of the funds lent to students. The bill also required the Education and Treasury Departments to buy loans from lenders made between May 2008 and July 2009 for the full value of the loans plus interest. To comply with this bill, the Department of Education projects that it will eventually have to buy $112 billion in FFELP loans.

Despite all this government help, lenders have continued to turn their backs on riskier borrowers, driving students to the government's direct lending program. With the banks enjoying heavy subsidies while failing in their mission, Obama campaigned in 2008 on a promise of eliminating the middleman lenders; and with the new SAFRA, he appears to have fulfilled that goal.

Thus, ends a 45-year experiment in subsidized student lending. In the laboratory of the market, direct lending from the government has proven to be a superior alternative for both taxpayers and borrowers.

The US is not the only country exploring government-sponsored student loan programs. New Zealand now offers zero percent interest loans to New Zealand students, with repayment to be made from their income after they graduate. And for the past 20 years, the Australian government has successfully funded students by giving out what are in effect interest-free loans. They are "contingent loans," which are repaid if and when the borrower's income reaches a certain level.

Where Will the Money Come From? The Green Bank Model

Eliminating the middlemen can reduce the costs of federal lending, but there is still the problem of finding the money for the loans. Won't funding the entire federal student loan business take a serious bite out of the federal budget?

The answer is no - not if the program is set up properly. In fact, it could be a significant source of income for the government.

The SAFRA doesn't mention setting up a government-owned bank, but the Energy Bill that is now pending before the Senate does. Funding for the energy program is to be through a Green Bank, which can multiply its funds by leveraging its capital base into loans, as all banks are permitted to do. According to an article in American Progress:

Funding for the Green Bank should be on the order of an initial $10 billion, with additional capital provided of up to $50 billion over five years. This capital could be leveraged at a conservative 10-to-1 ratio to provide loans, guarantees, and credit enhancement to support up to $500 billion in private-sector investment in clean-energy and energy-efficiency projects. [Emphasis added.]

Banks can create all the credit they can find creditworthy borrowers for, limited only by the capital requirement. But when the loan money leaves the bank as cash or checks, banking rules require the bank's reserves to be replenished either with deposits coming in or with interbank loans. The proposed Green Bank, however, is apparently not going to be a deposit-taking institution. Presumably then, it will be relying on interbank loans to provide the reserves to clear its checks.

The federal funds rate - the rate at which banks borrow from each other - has been maintained by the Federal Reserve at between zero and .25 percent ever since December 2008, when the credit crisis threatened to collapse the economy. An Education Bank qualified to borrow at the interbank lending rate should thus be able to borrow at zero to .25 percent as well, generating more than 6.5 percent gross profit annually on student loans.

The Treasury, by contrast, paid an average interest rate for marketable securities in February 2010 of 2.55 percent, which explains the 2.8 percent interest at which the Education Department must now borrow from the Treasury. The interbank rate is obviously a better deal, but it could go up. The cheapest and most reliable alternative would be for the Treasury itself to become the "lender of last resort," as William Jennings Bryan urged in 1896.

The Treasury Department and the Education Department are arms of the same federal government. If the government were to set up a government-owned bank that simply lent "national credit" directly, without borrowing the money first, it could afford to lend to students at much lower rates than 6.8 percent. In fact, it could afford to fund a program of free higher education for all. That such a program could be not only self-sustaining, but a significant source of profit for the government, was demonstrated by the G.I. Bill, which was considered one of the government's most successful programs. Under the Servicemen's Readjustment Act of 1944, the government sent seven million Americans to school for free after World War II. A 1988 Congressional committee found that for every dollar invested in the program, $6.90 came back to the US economy. Better-educated young people got better-paying jobs, resulting in substantially higher tax payments year after year for the next 40-plus years.

Taking Back the Credit Power

Winston Churchill once wryly remarked, "America will always do the right thing, but only after exhausting all other options." More than a century has passed since William Jennings Bryan insisted that issuing and lending the credit of the nation should be the business of the government rather than of private bankers, but it has taken that long to exhaust all the other options. With student loans, at least, government officials have finally come around to agreeing that underwriting private lenders with public funds doesn't work.

We are increasingly seeing that underwriting banks considered "too big to fail" doesn't work either. Banks are borrowing at near-zero interest rates and speculating with the money, knowing they can't lose because the government will pick up the losses on any bad bets. This is called "moral hazard," and it is destroying the economy.

Issuing the national credit directly, through a federally-owned central bank, may be the only real solution to this dilemma. Today, the government borrows the national currency from the privately-owned Federal Reserve, which issues Federal Reserve Notes and lends them to the government and to other banks. These notes, however, are backed by nothing but "the full faith and credit of the United States." Lending the credit of the United States should be the business of the United States, as William Jennings Bryan maintained. The dollar is credit (or debt), in the same way that a bond is. Both a dollar bond and a dollar bill represent a claim on a dollar's worth of goods and services. As Thomas Edison said in the 1920s:

If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20 percent. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.

(2) Parallels between Japan of the late 1980s and US today - R. Taggart Murphy

Robert Brenner's Update

R. Taggart Murphy

Introduction

http://japanfocus.org/-R_Taggart-Murphy/3265

Out in the academic cemetery to which avatars of market fundamentalism thought they had consigned their intellectual and political opponents, one can hear today the unmistakable scrape of coffin lids opening. And climbing out of their graves are the bodies of those who contend that the reductionist assumptions of neo-classical/ rational choice orthodoxy are not simply inadequate but flawed in the most fundamental sense.

The reason may seem obvious: the financial catastrophe of last year and the failure of so many established thinkers to see it coming. But there is more dogging the luminaries of mainstream finance and economics than the simple inability to have read the tea leaves properly – to their blindness, for example, in the face of the rise in U.S. housing prices to the point they no longer bore any relation to the earnings streams of much of the American population or to the fantastic assumptions about default rates built into the business models of too many Wall Street houses. To be sure, a few non-mainstream analysts did get these things right before the fact -- Nouriel Roubini, for example, or Michael Lewis. But it was in the way the crisis took the entire policy establishment by surprise that we see signs of broader, systemic conceptual failure. Policy makers in Washington, London, Frankfurt and Basel were, after all, advised by intellectuals and analysts privy to the most supposedly up-to-date thinking about markets, about finance, about economic reality. That they could get things so very, very wrong points to deliberate, self-induced myopia over the complexity of and interrelationships among economic and political realities – a myopia that surely contributed to the worst economic crisis since the Great Depression.

So the world suddenly seems more receptive to those who contend that economic life is not all about interchangeably autonomous "actors" maximizing their utility, but that institutions matter, that culture matters, that history and place matter – and above all that power matters. Signs of this are everywhere. Frightened politicians have been reaching for the old Keynesian tool chest in their efforts to stave off economic meltdown. John Kenneth Galbraith with his notions of the "notoriously short memories of financial markets" and the overweening pricing power of large corporations is acquiring a new patina of respectability. Thorstein Veblen's Theory of the Leisure Class and Anthony Trollope's novels are being dusted off for offering better insight into the rapacious behavior of Wall Street than back issues of the Journal of Finance. And here and there in "respectable" publications, one even encounters the visage of Karl Marx: intellectual grandfather of the suspect discipline of sociology, proponent of dialectical materialism and the class struggle, and prophet of the demise of a capitalism hoisted on the petard of its own contradictions.

Thus for writers and analysts on the left, the recent economic events hold out the tantalizing promise of an end to the marginalization they have endured since the fall of the Berlin Wall. But for all their understandable schadenfreude at the sudden advent of an era in which it is scarcely possible to keep a straight face while uttering the words "efficient markets hypothesis" – not to mention "Washington Consensus" – does Marxist scholarship actually have anything to say that illuminates our present predicament? It is one thing to invoke Keynesian fears of liquidity traps at a time when it is obvious that waves of credit creation by the Federal Reserve and the Bank of Japan are barely moving the real economy of production and trade. Or to concede that regulators had become captives of those they were charged with regulating and that all the complex, formula-driven instruments that were supposed to diversify risk had done exactly the opposite. Or even to acknowledge that financial markets are more akin to herds of cattle driven alternately by greed and fear than the smoothly humming, risk-distribution machines of modern finance theory; that they can and regularly will overshoot with catastrophic consequences for the real economy – and that governments need proactive and deliberately intrusive oversight to head that off.

It is quite something else, however, to seek understanding from a 19th century thinker carrying all the intellectual baggage of his era: the grandiose pronouncements, the attraction to explain-it-all system building, the ponderous prose, the scientism and reflexive assumption that history was something that only unfolded in Europe. Particularly when that thinker had seen some of the world's most murderous, despicable regimes established in his name. ...

Robert Brenner ... is typically identified as a Marxist scholar and indeed he brings to his analysis of contemporary political and economic reality insights explicitly derived from Marx. But what gives Brenner's work its breathtaking scope and insight is precisely that ability he shares with Marx – to see the capitalist world economy holistically as a system. And this derives not from some automatic recourse to a Marxian prism in which to view contemporary issues, but from his work as an historian – particularly his work as an historian of systems in transition. ...

Because unlike any other Western economic historian of whom I am aware, Brenner fully grasps the significance to global capitalism of what has happened in East Asia since the appearance of the export-led, state-directed Japanese growth model in the 1960s and its spread throughout Asia since the 1970s. "Manufacturing over-capacity emerged, was reproduced, and has been further deepened by way of an extended process of uneven development in which a succession of newly-emerging manufacturing powers has been able, thanks to systematic state intervention and highly organized forms of capitalism, to realize the potential advantages of coming late, especially by combining ever increasing technological sophistication with relatively cheap labor and orienting for the world market."

Brenner contends that "the premature entry of high-competitive lower cost producers, especially in the newly developing regions of East Asia" would have led to serious crisis were it not for the ability of advanced capitalist governments to make available "titanic volumes of credit." For a while, "traditional Keynesian measures" did the trick in compensating for the decline in manufacturing profitability in the Western capitalist countries, but like a diabetic facing insulin-resistance, governments found that these measures became less and less effective over time. Instead, "artificially cheap domestic credit" opened the way for "domestic asset bubbles" made possible by the growing financialization of the economy and the migration of human and financial capital from industry to Wall Street and the City of London. Specifically, "the weakness of business investment made for a sharp reduction in the demand by business for credit. East Asian governments' unending purchases of dollar-denominated assets with the goal of keeping the value of their currencies down, the competitiveness of their manufacturing up, and the borrowing and the purchasing power of US consumers increasing made for a rising supply of subsidized loans...One has therefore witnessed for the last dozen years or so the extraordinary spectacle of a world economy in which the continuation of capital accumulation has come literally to depend upon historic waves of speculation, carefully nurtured and publicly rationalized by state policy makers and regulators – first in equities between 1995 and 2000, then in housing and leveraged lending between 2000 and 2007. What is good for Goldman Sachs – no longer GM – is what is good for America." (emphasis in the original).

If this is correct, there is no easy fix for our problems. The blowing of asset bubbles is not an unfortunate side effect of regulatory capture or Wall Street's greed. It was the only way governments could keep economic growth from falling below politically dangerous levels once traditional Keynesian methods of fiscal stimulus through deficit spending were no longer adequate to compensate for the sclerosis at the heart of the advanced capitalist economies: "worsening difficulties with profitability and capital accumulation." Brenner labels this bubble-blowing "stock market Keynesianism" referring to deliberate measures by governments to steer credit into equity markets.

Brenner identifies the first experiment in "stock market Keynesianism" as Japan's bubble economy of the 1980s. "In 1985-6...a fast rising yen had put a sudden end to Japan's manufacturing-centered, export-led expansion of the previous half decade, was placing harsh downward pressure on prices and profits, and was driving the economy into recession. To counter the incipient cyclical downturn, the Bank of Japan radically reduced interest rates, and saw to it that banks and brokerages channeled the resulting flood of easy credit to stock and land markets. The historic run-ups of equity and land prices that ensued during the second half of the decade provided the increase in paper wealth that was required to enable both corporations and households to step up their borrowing, raise investment and consumption, and keep the economy expanding." My only quibble here is with Brenner's identification of the Bank of Japan ("BOJ") as the prime mover – the BOJ was more of an agent of the Ministry of Finance ("MOF") in its attempts to compensate for the sudden surge in the yen's value after the Plaza Accord of 1985 – the historic agreement among the world's leading economic powers of the time to suppress the exchange value of the dollar, particularly against the yen. But Brenner has the essence of what happened in Japan in the mid 1980s right, and he goes on to argue that the Japanese experience formed a model that would be consciously emulated. "(US Federal Reserve Chairman Alan) Greenspan followed the Japanese example. By nursing instead of limiting the ascent of equity prices, he created the conditions under which firms and households could borrow easily, invest in the stock market, and push up share values. As companies' stock market valuations rose, their net worth increased and they were enabled to raise money with consummate ease – either by borrowing against the increased collateral represented by their enhanced capital market valuations or by selling their overvalued equities – and on that basis, to step up investment. As wealthy households' net worth inflated, they could reduce saving, borrow more, and increase consumption. Instead of supporting growth by increasing its own borrowing and deficit spending – as with traditional Keynesianism – the government would thus stimulate expansion by enabling corporations and rich households to increase their borrowing and deficit spending by making them wealthier (at least on paper) by encouraging speculation in equities – what might be called 'asset price Keynesiansm.'"

A further parallel that Brenner may have overlooked between the Japan of the late 1980s and the US in the early 2000s lies in the deliberate manipulation of land prices. The financial authorities in Japan did not simply steer credit into the real estate market in order to pump up prices. They had both direct and indirect means of determining those prices. Briefly, the Official Public Land Price Quotation System – Chika Koji Kakaku Seido – essentially gave tax authorities the power to set a floor under prices while banks, operating under MOF "guidance," could arbitrarily assign collateral value to real estate independent of any cash flow it might generate. Fifteen years later, as Brenner describes in relentless and riveting detail, their American counterparts would also proactively be boosting land prices not simply through interest-rate cutting but by the abdication of regulation of sub-prime lending and the emergence of the mortgage-backed securities market and the derivatives based thereon with what amounts to the active encouragement of the Federal Reserve and the Bush administration.

The key point here, however, is that Japan led the way. What makes it so fascinating is that the very same country that would initiate the blowing of asset bubbles had been the harbinger of the global crisis of manufacturing overcapacity. Japan had, from the mid 1950s on, deliberately staked its prosperity on the construction of excess global capacity in a series of key industries beginning with textiles and marching up the value-added chain from ship building and steel through machine tools, a wide range of consumer durables, and capital equipment, as well as a host of important upstream components. Japan did not launch industries. Rather, it targeted markets that were already served by existing capacity in other countries. Japanese companies built their own capacity to capture these markets and then, backed by patient financing and enjoying the advantage of an undervalued currency with predictable labor costs and meticulous attention to quality control, flooded global markets with "torrential rain-type exports" to quote a Japanese government term. The result was to destroy profitability in these industries, forcing foreign competitors either to abandon the industry in question or to cut costs drastically – most commonly, by shifting production to low wage, developing countries.

Subsequently, in its momentous shift away from the Stalinist economic model of autarkic industrialization, China would follow the road blazed by Japan: the deliberate creation of overcapacity in targeted industries aimed at the global market and with the necessary cheap financing overseen and/or organized by the state. Deng Xiaoping's visit to Japan in 1978 – the first ever by a de facto head of the Chinese government – may well be the most important foreign trip ever made by a Chinese leader.

{photo} Deng and Prime Minister Fukuda Takeo {end} <http://japanfocus.org/data/deng.fukuda.jpg>

These two countries – and the smaller economies of East and Southeast Asia that followed in their wake – could not, however, escape the consequences of their systematic creation of overcapacity and the resultant decline in manufacturing profitability. To save the global system on which they themselves had come to depend, they were forced to turn around and provide the waves of credit that permitted the financial lynchpin of the global capitalist system – the United States – to continue to act as the world's primary engine of demand.

As Brenner notes in discussing how the explosion in deficits by the George W. Bush administration was financed, "... Japanese economic authorities saved the day by unleashing an unprecedented wave of purchases of dollar-denominated assets. Between the start of 2003 and the first quarter of 2004 ... Japan's monetary authorities created 35 trillion yen, equivalent to roughly one percent of world GDP, and used it to buy approximately $320 billion of US government bonds and (the debt of government-sponsored institutions such as Freddie Mac), enough to cover 77 per cent of the US budget deficit during fiscal year 2004. Nor were the Japanese alone. Above all China, but also Korea, Taiwan, and other East Asian governments taken together increased their dollar reserves by $465 billion and $507 billion...."

{graph} Chinese and official purchases of U.S. Treasuries, 2000-2008 {end}

These countries thus found themselves tightly wedded to the global system that revolves around the financial hegemony of the United States and its currency. Brenner completed his study in March, 2009 and since that time, we have seen at least one momentous event: an explicit rejection by the Japanese electorate of the political guardians of the postwar model of economic growth. After the deflating of the land and stock market bubble in the 1990s, Tokyo's financial authorities had found themselves unable to blow new ones. They had reverted to the crassest kind of old-style Keynesian stimulus, blanketing the country with environmentally destructive public works. These measures probably kept the economy from tipping directly over into recession until last year, but Japan was then overwhelmed by the global collapse in demand that followed the events of 2008, plunging into the worst economic conditions it had endured since the immediate postwar years. A new government has now come to power led by men who have made it clear they intend to break with the old order – among other things, they are letting the yen rise in foreign exchange markets and are at least talking about such matters as a transition to a "green" economy and the construction of an explicit safety welfare net that should theoretically encourage more risk-taking by young people and entrepreneurs. But as much as one wishes them well, neither they nor anyone else has any clear blueprint for springing the jaws of structurally anemic demand in which their country has been trapped for twenty years.

Meanwhile, in the United States, it is now obvious that the stimulus package enacted by the Obama administration was too small to do anything more than prevent the onset of a full-scale depression. The failure to enact a more robust package can be attributed partly to the seeming ease with which the White House allows itself to be intimidated by the Republican rabble in Congress. But it also seems rooted in fear that the Treasury may be approaching the limit to the amount of U.S. government debt it can cram down the throats of the bond markets. Wall Street is back blowing bubbles, but this time they are not translating into any wider upsurge in consumer purchasing power. Unemployment remains stuck at politically dangerous double digit levels, mortgage defaults are still frighteningly high, while lending to businesses – as opposed to the financing of these new bubbles – continues to stagnate. Brenner described the situation at the end of 2008: "with nothing to induce expenditures by either businesses or households, the economy was experiencing a self-reinforcing downward spiral in which falling consumer demand made for declining profits, which brought about cutbacks in both investment and employment, which reduced aggregate demand, and had entered into free fall." The fall may have slowed since then, but there has been no real revival of the broader economy. The partial recovery in equity prices we have seen in the last few months seems a function mostly of Wall Street's euphoria in dodging the bullet that a year ago appeared inevitable. It is certainly not due to any recovery in corporate profits unrelated to finance or any loosening of household purse strings.

The one bright spot is China. China's economy is again growing smartly. Waves of government-mandated stimulus and credit creation combined with an undervalued currency have revived Chinese exports and with them, the broader economy. But China's rising industrial production is not translating into any revival in global demand. As Hung Ho-Fung writes in an important article in the New Left Review,

"(China’s) export competitiveness has been built upon long-term wage stagnation, which arose in turn from an agrarian crisis under an urban-biased policy regime. Rather than sharing a greater part of profits with employees and raising their living standards, the thriving export sector has turned most of its surplus into enterprise savings ... from the late 1990s onwards total wages declined as a share of GDP, in tandem with a fall in private consumption."

See the debate over Hung’s analysis here.

The profits from China's exports are being plowed back into investment in more global excess capacity. Or into financing of the twin U.S. trade and government deficits.

{graph} China’s growing share of the U.S. trade deficit {end}

China's exports are coming at the expense of exports from other countries. The World Trade Organization expects global trade to fall by 9% this year – the very year that China will surpass Germany to become the world's number one exporter. (Link) However, this way of doing things – exporting into the teeth of a global downturn and turning the proceeds not into domestic demand but into savings deployed as investments or dollar reserves – can only continue as long as China together with the likes of Japan and South Korea are able and willing to prop up the buying power of its principal customer and lynchpin of the global capitalist order: the United States. As I wrote elsewhere about China's financing of the US deficits and its support of the dollar in light of Japan's modern economic history: "Once your economy is so large that whatever you do affects global economic architecture, the 'free rider' option begins to close. If you manage your economy in such a way as to maximize exports and trade surpluses at a time when global growth is sluggish or non-existent, you are willy-nilly forcing other countries to run trade deficits. What happens if they refuse to go along? The 1930s suggests the answer, when the United States itself attempted to preserve its surpluses and helped foster a global depression instead. And if they do go along, running the trade deficits by others that the laws of accounting require if you are going to run surpluses? Then you end up accumulating large reserves in the currencies of the deficit countries; if you don't want to walk away from those reserves and you want the mechanism to keep running, you find yourself forced to bail out the system again and again and at ever higher cost." ("China's Outward Swinging Trade Doors – More Lessons from the 1970s?" The Asia-Pacific Journal)

Hung maintains that China's leadership understands this, but they are trapped by the power of the newly arisen coastal elite. "The (Chinese) government is ... very aware of the need to reduce the country’s export dependence and stimulate the growth of domestic demand by increasing the working classes’ disposable income. Such a redirection of priorities has to involve moving resources and policy preferences away from the coastal cities to the rural hinterland, where protracted social marginalization and underconsumption have left ample room for improvement. But the vested interests that have taken root over several decades of export-led development make this a daunting task. Officials and entrepreneurs from the coastal provinces, who have become a powerful group capable of shaping the formation and implementation of central government policies, are so far adamant in their resistance to any such reorientation. This dominant faction of China’s elite, as exporters and creditors to the world economy, has established a symbiotic relation with the American ruling class, which has striven to maintain its domestic hegemony by securing the living standards of U.S. citizens, as consumers and debtors to the world. Despite occasional squabbles, the two elite groups on either side of the Pacific share an interest in perpetuating their respective domestic status quos, as well as the current imbalance in the global economy...Unless there is a fundamental political realignment that shifts the balance of power from the coastal urban elite to forces that represent rural grassroots interests, China is likely to continue leading other Asian exporters in diligently serving—and being held hostage by—the U.S." ...

Notes

[1] See for example two best-sellers: Justin Fox, The Myth of the Rational Market (Harper Collins, 2009) and Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable ( Random House, 2007).

[2] Perry Anderson, /Spectrum: from right to left in the world of ideas /(London:Verso, 2005) p. 258.

[3] An exception is Leo Panitch, Martijn Konings, Sam Gindin, and Scott Aquanno, "The Political Economy of the Subprime Crisis" in Leo Panitch and Martijn Konings (eds.), American Empire and the Political Economy of Global Finance, 2nd ed., New York: Palgrave, 2009, pp. 253-292.  This piece does indeed rival the depth of Brenner's analysis, albeit without the focus on  Asia, and underscores the wider point that Marxian scholarship may ultimately have both a more penetrating and a more comprehensive take on the current crisis than mainstream neo-classical and neo-Keynesian writing.

Brenner’s article, "What is Good for Goldman Sachs is Good for America: The Origins of the Current Crisis," is available here.

Robert Brenner is Professor of History and Director of the Center for Social Theory and Comparative History at UCLA. His book, The Boom and the Bubble: The US in the World Economy is available in Korean, Chinese, Portuguese, German and Spanish translations with Japanese and Turkish forthcoming.

R. Taggart Murphy is Professor and Vice Chair, MBA Program in International Business, Tsukuba University (Tokyo Campus) and a coordinator of The Asia-Pacific Journal. He is the author of The Weight of the Yen and, with Akio Mikuni, of Japan's Policy Trap. He wrote this article for The Asia-Pacific Journal.

Recommended citation: R. Taggart Murphy 'In the Eye of the Storm: Updating the Economics of Global Turbulence, an Introduction' The Asia-Pacific Journal 49-1-09, December 7, 2009." The Asia-Pacific Journal, 49-1-09, December 7, 2009.