The financial crisis has done some pretty surprising thing to the world, as survey shows that support for free-market capitalism dropped in the United States and, ironically, rose in communist China.If you can remember, there was quite a big swing in the popularity among ideologies over the past few years. When Alan Greenspan’s memoir was published in 2007, it was a wonderful world indeed: stock markets were hitting new highs everywhere, free-market capitalism was the ideology which worked, and deregulations seemed to have brought high growth. Economists cheered about the “great moderation”, which was an illusion, as it turned out.
Very few people sensed the trouble, but as problems emerged, mood changed very quickly of course, and Alan Greenspan became cause of the problem. Austrian economists recommended a do-nothing approach, which no policy makers had the courage to do so. And oddly enough, the actions of various governments in bailing out banks echoes what the Marxists said. I vaguely remember that at one point of the great financial crisis, one journalist quoted Karl Marx’s and Friedrich Engels’ Communist Manifesto on the process of becoming a communist’s economy to as it echoes what was happening. Step 5 of the process reads:
Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.
So when deregulations ended with an almost complete blow-up of the banking system, people started wondering that perhaps a planned economy isn’t that bad, and people started looking at the all-mighty central planning China. Oddly enough, right before the crisis, the Chinese state-owned banks were having their initial public offerings one-by-one, thus they were being partially privatised while the banks in developed countries were embarrassingly being partially nationalised. And all have forgotten that in the late 1990s, there was an even bigger banking crisis in China, and the main cause of that was that banks lending were not based on free-market, commercial principles, but were policy driven. According to Laeven and Valencia (2008) banking crisis database:
At the end of 1998 China’s four large state-owned commercial banks, accounting for 68% of banking system assets, were deemed insolvent. Banking system NPL’s in 2002 and 2003 were 20 % and 15% respectively of total loans. The restructuring cost to date is around RMB1.8 trillion based on estimates of capital injections and loans to AMCs to purchase assets, or 18% of 2002 GDP.
There is, of course, very little wonder why Chinese people embrace free-market capitalism even more than Americans. After all, they benefit from the open-up of the economy over the past 30 years or so. However, the Chinese government still attempt to control the economy. Perhaps there has been little Marxist flavour left in China’s economic planning, but the government became a Keynesian after the financial crisis (just like everyone else) as it desperately tried to keep growth rate at 8% or more (and succeeded). In the light of higher inflation and real estate bubble, the government resorts to administrative measures to curb prices as the monetary policy remained somewhat loose.
Things are, of course, getting more and more unplannable. Or, having one variable being controlled in a desirable level, other variables are getting uncontrollable. For instance, by keeping exchange rate low, they have no choice but to accumulate foreign currency reserve, buy US treasury securities that they don’t want, and increase money supply and fuel inflation and real estate bubble. In hope to curb home prices, the central government asked local governments to set prices targets, but all local governments wanted to see prices to increase rather than to fall.
Planning the unplannable is not possible. What’s the next line?
Prepare for the worst?
This article originally appeared here: When A Planned Economy Become Unplannable
Also sprach Analyst – World & China Economy, Global Finance, Real Estate
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