Three years after the collapse of Lehman Brothers
- By John Ross
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China.org.cn, September 15, 2011
What is the result? It is politely referred to in economic terminology as "moral hazard." What "moral hazard" means is that if a profit is made, it is retained by a private bank, but if a loss is made on a scale threatening the institution, then the state, the taxpayer, is forced to pick up the bill. The consequences are regularly pointed out by analysts such as Martin Wolf, chief economics correspondent of the Financial Times. Such "moral hazard" is a system which incentivizes reckless and irresponsible financial activities. A situation whereby in the U.S. and Europe there exists private ownership of banks, but with de facto state guarantees of losses, is therefore a financial time bomb which it is merely a matter of time before it explodes again.
The theory that the capitalist financial sector is a system for rewarding and punishing risk is fiction. Its teaching in economics has no more scientific validity than the claim that the sun orbits the earth.
But if in the U.S. one theory was disproved, in China a different test was underway. China had a state dominated banking system – the state took the dominant risk and the dominant profit. "Moral hazard" in the U.S. or European sense therefore did not exist. China's banks, led by ICBC and China Construction Bank, emerged from the financial crisis with the greatest share market capitalization of any world banks – a position they retain. The structure of China's financial system remained intact.
In China the theoretical economic issues instead centered on the stimulus package launched in 2008. This package can be interpreted in either China's official terms of "socialism with Chinese characteristics," or in terms of Western economics as Keynes' support for a "somewhat comprehensive socialization of investment." The most important issue is not how it is described, but what policy was pursued.
In the U.S. and Europe the approach to dealing with the investment collapse resulting from the Great Recession was indirect. Stimulus packages were based on budget deficits which maintained or increased consumption – in the hope that this would also indirectly stimulate investment. In China the approach was "direct" – the core of the stimulus package was a huge investment program. These different approaches gave rise to a world-wide economic debate – the side that China's policy would work and the U.S. and Europe's would not was reflected in this column. Three years later facts have settled this debate – China's superior performance during the financial crisis to the U.S. and Europe is evident. While in China many individual issues remain to be dealt with the fundamental fact is China's economic growth of more than 40 percent in four years compared to zero or negative economic growth in the U.S. and Europe.
The three years since the collapse of Lehman Brothers have therefore been the greatest test of economic policy and economic theory since the 1930s. In both aspects China has come out ahead. Those who pretend otherwise are behaving like ostriches with their heads in the sand.
The author is a columnist with China.org.cn. For more information please visit: http://www.china.org.cn/opinion/johnross.htm
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.
An earlier version, edited for language, was removed at the author's request.
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