The Chinese Marshall Plan

It was always obvious late last Summer that Hank Paulson’s decision to fully backstop Fannie Mae and Freddie Mac was driven by bullying from China. Today’s Wall Street Journal just puts a bow on it by giving us the tick-tock on the hand wringing in Beijing:

The alarm for Chinese leaders started ringing loudly in July and August as problems deepened at Fannie and Freddie. Senior Chinese leaders, who hadn’t been apprised in detail of how China’s reserves were being invested, learned for the first time in published reports that the country’s exposure to debt from those two alone totaled nearly $400 billion, say people familiar with the matter.

Fearing that the U.S. government might not fully back the companies, China demanded and received regular briefings throughout the peak of the crisis from high-level Treasury Department officials, including Mr. Paulson, on the market for U.S. debt securities — especially those of the mortgage giants. [ . . . ]

While Mr. Paulson was in Beijing for the Olympics in August, he dined with Mr. Zhou, the central bank chief, at the Whampoa Club, an upscale restaurant that serves modern Chinese cuisine in a traditional courtyard building near the city’s Financial Street.

On Sept. 7, Mr. Paulson announced that the U.S. government would seize Fannie and Freddie, but Chinese officials remained concerned.

What’s interesting to see in this story, especially the top where the Chinese leaders give American institutions a well-deserved tongue lashing, is the way the Chinese fail to see that they’ve already had the benefit of their investment in American mortgage-backed securities. In fact, the recycling of Chinese profits into American mortgage debt is beginning to look like a 21st Century Marshall plan gone awry.

By investing in the US, the Chinese primed a consumption pump that created demand for their goods. That demand absorbed the huge number of workers coming to the cities over the last decade and accelerated China’s growth. In other words, the Chinese encouraged and enabled the irresponsibility of American households because it created demand for their goods.

After World War 2, the US faced a crisis of productive over-capacity. The solution was to send a lot of money to Europe that would then be used to buy American goods. In the case of the original Marshall plan, the sorry state of post-war Europe gave the plan a humanitarian glint. But that shouldn’t mask the real value of the Marshall plan or its intent.

Flash forward fifty years and you have China eager to raise the standard of living at home. Only this time, North Americans are tapped out, not because of a devastating war but because of devasting dotcom bubble bursting. There’s no way to dress this one up as the good guys coming to the aid of their fallen cousins.

That’s a shame. I don’t know what the final accounting was on the Marshall plan loans. I’d be curious to know. But in reading these stories, I’m beginning to think the Chinese are being a little disingenuous when they keep demanding that their investment in US securities be safeguarded.

Source:

Chinese Premier Blames Recession on US Actions
By JASON DEAN in Beijing, JAMES T. AREDDY in Shanghai and SERENA NG in New York
Wall Street Journal; January 29, 2009
http://online.wsj.com/article/SB123318934318826787.html