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US financial woes offer lessons
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The US government threw down $200 billion to rescue leading mortgage lenders Freddie Mac and Fannie Mae because they are "too big to let die", but the effort was met with even more widespread and spirited media criticism.

Today, because of worries over ethical risks and depleted treasury reserve, the US government has been forced to withhold guarantees for banks interested in buying Lehman Brothers. This shows the US government, faced with a fast-sinking financial market where institutions go under at the pace of one every week, is already stretched thin.

As the stimulating effect of tax rebate wears off, the US economy is again showing signs of turning bearish. A recent Wall Street Journal survey of 51 economists found there is the possibility that American consumption will fall in the third quarter, the first time in 17 years.

Former Fed Chairman Alan Greenspan said the collapse of Lehman Brothers is the event of the century. Its development will prove more serious than he had foreseen and is far from over.

At a time when some of the largest US financial institutions are faced with persistent uncertainty, more could go bankrupt in the near future, he said, adding that the US stands a less than 50 percent chance of avoiding an economic recession.

Researchers at Brookings Institute believed the collapse of Lehman Brothers will not only set off a domino effect throughout financial markets worldwide but also impact the US presidential election.

Some election experts have pointed out that public opinion polls so far have shown American voters generally think neither Barrack Obama nor John McCain is very good at handling economic issues. But the Republican Party now holds the presidency, and its economic policies are widely perceived as more Wall Street friendly than otherwise, so the financial crisis will probably hurt Republican presidential nominee McCain more than Obama.

To deal with the impact of the US subprime crisis and check the downward momentum of the domestic economy, the People's Bank of China made a "sudden move" on Monday, cutting the interest rate of one-year loans by 0.27 percentage points to 7.2 percent while lowering the reserve rate for small and medium-sized banks by 1 percentage point.

This is the first time since February 2002 the country's central bank cut interest rates and the first time since November 1999 the reserve rate was reduced.

The financial industry saw this move by the central bank as a turning point in China's macro-control strategy.

The worsening US subprime crisis puts China's enormous US dollar assets and its opening financial market at tremendous risk. It also makes more Chinese people think about ways to prevent financial crises from spreading across the world amid globalization.

The author, Jiang Yong, is director of Center for Economic Security Studies of the China Institutes of Contemporary International Relations.

(China Daily September 19, 2008)

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