In this column from Sunday, Mallaby takes up the case of China and its currency manipulation. No doubt many of you read "China" and "currency policy" and immediately begin to fade. Hang in there, he makes it worth your while. Only two sentences into his second paragraph he drops this little nugget:
What's more, this manipulation is arguably the most important cause of the financial crisis. Starting around the middle of this decade, China's cheap currency led it to run a massive trade surplus. The earnings from that surplus poured into the United States. The result was the mortgage bubble.There you have it. The next time someone asks what caused the housing bubble and its aftermath the simple answer is cheap money from China. This in itself is really not that surprising since the cheap-Chinese-money-theory has been one of the handful of standard explanations that has been making the rounds ever since "pin the cause on the crisis" became America's number one parlor game (or at least it would be if anyone had parlors anymore). A few paragraphs on, Mr. Mallaby breezily dismisses two of the competing theories for the current mess as if they were almost beneath consideration.
This, then, brings us back to the Fed. Mr. Mallaby continues:
Could the Fed have raised interest rates to avert the bubble? The Fed's monetary policy was indeed too loose. But as Martin Wolf argues in his recent book, "Fixing Global Finance," it's not clear that higher interest rates could have prevented the trouble. Once China decides to export vast quantities of capital, that capital has to go somewhere. Higher interest rates in the United States might have encouraged the world's savers to park even more of their capital in this country.According to this analysis if China decides to return cash to the United States in the form of investment, there is little the Fed can do to prevent an inflationary bubble. The best it can do is to try and limit the magnitude of the bubble by mounting a fighting retreat against any other influxes of capital.
The staggering implication of this is that in large part the US has surrendered control of its monetary policy to the Chinese government. If you think the Ron Paul crowd are perturbed by the Fed's inflationary policies, I have to believe a realization that we mortgaged our future to the Chinese for some cheap televisions and tennis shoes would be enough to drive them to apoplexy.
The unsettling thing about Mr. Mallaby's analysis is not his shocking description of the Fed's impotence, but the fact that he is really not that concerned by it. His article does not call for Americans to stop surrendering their economic self-determination or make an attempt to shame China for its hand in the crisis. As a committed globalist who probably looks on things like nation-states and international borders as quaint relics of the past, Mr. Mallaby is more concerned that China learn from this crisis what the oil shocks taught OPEC. The lesson for China is not to stop trying to manipulate the U.S. market, but to do so in a way that is their own economic interest. Basically, don't kill the goose that lays the golden eggs.
No doubt those that have lost jobs due to overseas competition know all to well the costs of trade. It is time that all Americans realize that there are many sorts of costs associated with trade and currency policies, both ours and those of our trading partners.