Jim Fallows has an absolute must-read interview with Gao Xiqing, a US-educated top Chinese banker who is utterly frank about how badly Americans have screwed the financial pooch. Check out these excerpts, then go read the whole thing. Can Obama hire this straight-talking commie instead of Tim Geithner to run Treasury? I'm joking, but not totally.
The overall financial situation in the U.S. is changing, and that's what we don't know about. It's going to be changed fundamentally in many ways.Think about the way we've been living the past 30 years. Thirty years ago, the leverage of the investment banks was like 4-to-1, 5-to-1. Today, it's 30-to-1. This is not just a change of numbers. This is a change of fundamental thinking.
People, especially Americans, started believing that they can live on other people's money. And more and more so. First other people's money in your own country. And then the savings rate comes down, and you start living on other people's money from outside. At first it was the Japanese. Now the Chinese and the Middle Easterners.
We--the Chinese, the Middle Easterners, the Japanese--we can see this too. Okay, we'd love to support you guys--if it's sustainable. But if it's not, why should we be doing this? After we are gone, you cannot just go to the moon to get more money. So, forget it. Let's change the way of living. [By which he meant: less debt, lower rewards for financial wizardry, more attention to the "real economy," etc.]
About stock market derivatives and their role as source of evil, this brilliant explanation:
If you look at every one of these [derivative] products, they make sense. But in aggregate, they are bullshit. They are crap. They serve to cheat people.I was predicting this many years ago. In 1999 or 2000, I gave a talk to the State Council [China's main ruling body], with Premier Zhu Rongji. They wanted me to explain about capital markets and how they worked. These were all ministers and mostly not from a financial background. So I wondered, How do I explain derivatives?, and I used the model of mirrors.
First of all, you have this book to sell. [He picks up a leather-bound book.] This is worth something, because of all the labor and so on you put in it. But then someone says, "I don't have to sell the book itself! I have a mirror, and I can sell the mirror image of the book!" Okay. That's a stock certificate. And then someone else says, "I have another mirror--I can sell a mirror image of that mirror." Derivatives. That's fine too, for a while. Then you have 10,000 mirrors, and the image is almost perfect. People start to believe that these mirrors are almost the real thing. But at some point, the image is interrupted. And all the rest will go.
When I told the State Council about the mirrors, they all started laughing. "How can you sell a mirror image! Won't there be distortion?" But this is what happened with the American economy, and it will be a long and painful process to come down.
And his politely devastating advice to how a humbled America should behave in the new world order:
Americans are not sensitive in that regard. I mean, as a whole. The simple truth today is that your economy is built on the global economy. And it's built on the support, the gratuitous support, of a lot of countries. So why don't you come over and ... I won't say kowtow [with a laugh], but at least, be nice to the countries that lend you money.Talk to the Chinese! Talk to the Middle Easterners! And pull your troops back! Take the troops back, demobilize many of the troops, so that you can save some money rather than spending $2 billion every day on them. And then tell your people that you need to save, and come out with a long-term, sustainable financial policy.
I hate to say it, but this Chicom makes more sense than anybody in Washington. Do go read the whole interview.
And I, for one, welcome our new Chinese banker overlords.
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Are you leveraged 30:1? Do you know any person leveraged at 30:1? Is anyone reading this leveraged at 30:1?
Can't say I know anyone who's come out and said that, but this pretty much describes a subprime borrower who put down 3.3%, and my understanding is that many put down even less.
but the idea that all derivatives contracts are in some way illusory or fraudulent is not right. Suppose I make a deal with a farmer to buy 100 bushels of corn from him at a fixed price at the end of the growing season.
That actually depends on the macroscopic circumstances, just as Mr. Qi points out. Your proposed deal works nicely if the farmer always grows enough corn to fulfill the contract. It goes awry when enough of some commodity gets tied up in derivatives and the suppliers can't deliver the goods. If derivatives cover delivery of 1 million bushels but the farmers only succeed in growing 800,000, your derivative proves worth either 100 bushels or 80 bushels or potentially 0 bushels. Or some other value. That's what Mr. Qi means with the excessive creation and economic overexpansion of derivatives seeming to make sense microscopically but macroscopically absurd. And where average Americans are microscopic investors, corporations and countries have to deal with the macroscopic level.
There's another thing that can be done with futures contracts and higher order derivatives of them covering whole crops or all of production, which is that de facto cartels holding enough of them can corner markets. And probably did this year in foodstuffs and petroleum. Hedge funds and the like seem unable to have kept up the cornerings in the past several weeks.
Thankfully, our antitrust regulators were on the ball and...oh, wait, we are talking about the Bush Administration which greenlighted the plundering of Californians by their energy company partners in the restoration of honor and integrity to the White House within weeks of getting into office.
That's the problem with Chinese aid. Once you've had it, you're hungry for more later.
How anyone can defend the entire bullshit derivative scam is beyond me.
So you think it was a good thing that investors and pension funds got raped by Wall St?
Man, that poster is clueless.
The Chinese economist is absolutely right.
We seem to be a nation of ignorant spendthrift dummies, dummies who are sooooooooooooo dumb that we don't even realize that we've stepped off a cliff.
except that the china/us relationship has self-interest expressed in both parties in a manner similar to the old soviet/us cold war military relation (see eric janzsen of itulip). we need their money; they need our spending.
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