It begins with an attack on Geithner's handling a decade ago of the Asian Crisis. Geithner was then at the Treasury and stick handled the Indonesia bailout plan.
According to the Sydney Morning Herald's Peter Hartcher:
...in a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, [former Australian Prime Minister]Paul Keating gave a stark...account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis."According to this scenario, Geithner so mishandled the Indonesia problem that it spooked other Asian countries to never be caught short and thus dependent on the U.S. or the IMF.
In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.
Keating continued:
Soeharto's government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool [Geithenr] to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power.
This Keating argues is behind China's massive accumulation of Treasury securities. This accumulation, Keating says, lead to China to finance and fuel much of the the artificial boom in the U.S. that is now collapsing.
Hartcher writes:
China, in particular, drew hard conclusions from the IMF's mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.With Keating adding:
This has all been noted inside the State Council of China and by the Politburo. And it's one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it's why through a series of exchange-rate interventions each day that they've built these massive reserves.The bottom line fundamental cause of the current crisis (and Keating notes this) was the money printing of Alan Greenspan during his tenure at the Fed. That said, it has always been a curious fact as to why China would amass such a huge Treasury portfolio. Without China's huge Treasury accumulation which supported the dollar and prevented it from collapse, it is likely Greenspan's money printing gig would have ended much sooner, with much less structural damage.
Reserves are so large at $US2 trillion as to equal $US2000 for every Chinese person, and when your consider that the average income of Chinese people is $US4000 to $US5000, it's 50 per cent of their annual income. It's a huge thing for a developing country to not spend its wealth on its own development.
The general belief has been that China has propped up the dollar to support its exports, and this most certainly is a very important consideration of the Chinese government. Yet, the Keating thesis has a ring of plausibility to it, and may be a second key reason why the Chinese have been willing to accumulate such a huge Treasury securities position.
Thanks to Earth That Was who linked to the Hatcher story, in a comment to a post below.
Robert,
ReplyDeleteThanks for highlighting economic aspects of this piece that I didn't catch. I was more interested in the 'personality' angles. Keating at the time was keen to found a bunch of new super-national East Asian regional economic bodies that would bring Australia, Japan, China and ASEAN into a common bloc. This didn't really work out but he would have been close to the kingmakers in Beijing and Tokyo at the time.