Flashback March 1987 - "I'll Take Manhattan -- and Waikiki"
Exxon, ABC and Tiffany have more in common than famous names and slick midtown-Manhattan addresses. All have Japanese landlords. Within the past six months, investors from Japan have bought the headquarters buildings of the three firms. In a new twist on the protectionist slogan "Buy American," Japanese firms are literally buying America, or at least choice pieces of it, from New York City high-rises to beachfront hotels in Hawaii. Eager as customers at a close-out sale, these investors from the Far East snapped up as much as $6 billion worth of U.S. real estate last year, more than four times the 1985 level, and they have only begun to shop.Then came the stock market crash of 1987 in October and the real estate crash. And just like that the Japanese caught the American contagion. Do you remember the scene in Back to the Future II where Marty Mcfly is fired by his Japanese boss. Back then it seemed like the Japanese would take over the world financially, but it never happened because they got stuck with bad investments.
Economic forces on both sides of the Pacific have helped set off this international game of Monopoly. For one thing, Japan's incredible export machine has created a huge pool of excess capital. Japan's trade surplus with the U.S. in 1986 alone was $58.6 billion, and exchange-rate changes over the past two years have sharply boosted Japanese purchasing power in the U.S. The dollar has depreciated in value against the Japanese currency by some 40%, from 260 yen in February 1985 to 153 yen last week. That makes even Manhattan prices seem reasonable. Example: a building that cost $100 million, or 26 billion yen, two years ago would now set back the buyer a relatively paltry 15 billion yen.
Now it's China's turn and the Chinese are not willing to repeat Japan's mistakes of 20 years ago. They want guarantees that they will not be the ones to suffer from the current financial disaster and they feel they have enough power to dictate the terms.
You can get an idea for the confidence that the Chinese are feeling from this article, "Chinese regulator calls US lending 'ridiculous' ". The comments from Liu Mingkang, China's top bank regulator, go as far as ridiculing his US counterparts.
"When U.S. regulators were reducing the down payment to zero, or they created so-called 'reverse mortgages,' we thought that was ridiculous," Liu said at the World Economic Forum in this eastern Chinese city. He said debt in the United States and elsewhere rose to "dangerous and indefensible" levels.The article goes on to suggest that changes are forthcoming. Jiang Jianqing, the chairman of China's 2nd largest bank was a bit more restrained in his comments. But China's goal remains clear - to break the financial hegemony of the United States and to become the dominant player on the world economic stage.
Liu's comments were unusually pointed criticism of U.S. financial regulation for a Chinese official.
As China made changes, Liu said, "a lot of the time, we learned that what we had learned from our teacher the day before was wrong."
Liu compared Washington's proposed $700 billion plan to revive credit markets to fast food and said the world needed to look at longer-term solutions.
"Fast food is convenient. This $700 billion package must ease the concerns and build up confidence. But if you only take this, it doesn't agree with your stomach. You should think about Chinese slow cooking and slow food," he said, prompting laughter from his audience.
The crisis is likely to increase the influence of China and other emerging economies in the world financial system, though Wall Street will retain its leading role, said Chinese and foreign businesspeople at the conference, the Chinese leg of the forum based in Davos, Switzerland.And finally in this same article we get the European response which is to defend the current system, but to acquiesce that barriers that had previously prevented non-Western governments from investing heavily in Western countries would be forced to come down.
"I believe this kind of regional financial strength will play a bigger and more important role," said Jiang Jianqing, chairman of state-owned Industrial & Commercial Bank of China Ltd., the world's biggest commercial lender by market capitalization.
"Right now the market is very unitary," with U.S. bonds dominating global holdings, Jiang said. "This kind of a unitary, over-centralized market is something we need to change." Still, he said, Wall Street's "dominance will continue."
The European Union trade commissioner, Peter Mandelson, defended the global capital markets structure, warning that drastic change might hurt prosperity.Which brings us to the topic of Sovereign Wealth Funds. These funds exist in countries with trade surpluses. Mostly oil rich Arab countries and China. As they have accumulated dollars, they have built up these funds and used them to make investments abroad. Naturally there are concerns about foreign countries buying up US assets.
"The capital market system, fundamentally, is not flawed," Mandelson said. "We are not looking for some alternative, and I hope that people in the emerging markets, in China for example, are not looking for an alternative to properly functioning capital markets."
The crisis is likely to reduce resistance in the West to investments by government funds as companies urgently seek capital, said Thomas Enders, CEO of the European aircraft producer Airbus Industrie.
"I would dare to predict that, yes, one of the big changes we will see is greater acceptance of sovereign wealth funds," Enders said.
But the biggest concern is the financing of the US Debt. Currently the total debt stands somewhere around $9.7 Trillion. Of that approximately $1.1 Trillion is held by the Central Banks of Japan and China. Japan holds about $600 billion or 22.7% and China holds about $500 billion or 19.3%.
And now China is threatening a panic sale of large amounts of US Treasuries in this article, "Asia Needs Deal to Prevent Panic Selling of U.S. Debt, Yu Says".
Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.The connection between China's threats and Paulson's $700 Billion bailout is made explicit in this same article.
"We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. "If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''
An agreement is needed so that no nation rushes to sell, "causing a collapse,'' Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion.
U.S. Treasury Secretary Henry Paulson is urging Congress to pass a $700 billion plan to remove devalued assets from the banking system. Federal Reserve Chairman Ben S. Bernanke said Sept. 24 that the U.S. is facing "grave threats'' to its financial stability.If this sounds like blackmail to you then you won't be surprised that it comes with a set of demands that goes beyond the economic bailout being imposed on the US taxpayer. Again from the same article.
China's huge holdings of U.S. debt means it must bear a large proportion of the "burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every "couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added.
"China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.''
Yu said China is helping the U.S. "in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.Could one of the "other issues" that China is referring to be Taiwan? If you know anything about China, then the answer is obviously yes.
"It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. "China knows what to do. We don't need your intervention.''
So what comes next? As I described in my previous post, the Chinese will swoop in to buy US assets once the toxic assets have been handed over to the taxpayer. Remember, they don't want to repeat the experience of the Japanese in the 1980's.
And to make the Chinese yuan go even farther in buying distressed US assets China is planning to finally follow a bit of US advice. It will let the yuan float and appreciate in value. This is something it has been reluctant to do because it would cause the price of their exports to rise, but the policy is about to change according to the final segment of this same article.
"Our export-growth strategy has run its natural course,'' he said. "We should change course.''So my question is why should the US fall into this trap when the outcome is so obvious? Right now China and Japan and others are stuck with bad US Treasuries. If we do nothing then they are obliged to prop up the US dollar in order to protect their investments. But by buying up the toxic assets on the market we release foreign investors from this bad debt and place all of the burden on the US taxpayer. Why would our government leaders propose such a treasonous plan?
China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs.
I have only one response - NO BAILOUT!
No matter how many provisions are added to the bailout to make it seem more tolerable, any purchase of bad debt by the US government must be rejected. The survival of our Democracy depends on it.
The companies that followed deceptive business practices must be allowed to fail without intervention. Let them go bankrupt and let the bankruptcy courts sell off the assets. Let the investors take the loss, whether they are foreign or domestic. And by all means prosecute those business leaders that deceived their investors and jail all those who are found guilty.