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谢国忠

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麻省理工学院经济学博士

个性介绍: 1960年出生于上海,1983年毕业于上海同济大学路桥系,1987年获麻省理工学院土木工程学硕士,1990年获麻省理工学院经济学博士。同年加入世界银行,担任经济分析员。在世行的五年时间,谢国忠所参与的项目涉及拉美、南亚及东亚地区,并负责处理该银行于印尼的工商业发展项目,以及其他亚太地区国家的电讯及电力发展项目。1995年,加入新加坡的Macquarie Bank,担任企业财务部的联席董事。1997年加入摩根士丹利,任亚太区经济学家,2006年9月辞去该职务。

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plan b is no silver bullet / 謝國忠  

2008-10-01 19:03:35|  分类: 默认分类 |  标签: |举报 |字号 订阅

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Plan B is no silver bullet /谢国忠

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29 Sept 2008
谢国忠搜狐博客 http://xieguozhong.blog.sohu.com/


I wrote this ten days ago. Seems the planis still the same as before the McCain interruption. Its main impact inthe short term is to bring confidence to the financial market and maysupport a bounce. But, the bounce won't last very long. The economiccrisis is coming soon. The US economy may contract by 2-5% in 2009. Asthe economy contracts, highly leveraged businesses in the real economywill get into trouble. Their debts will be in trouble also. It may leadto a PE industry crisis. Cheers. Andy



Plan B is no silver bullet 点击查看译文



TheUS government has rushed out a barrage of measures, the so-called PlanB, to save its financial system. The measures include (1) establishinga government entity to take over $700 billion bad assets off thebalance sheets of financial institutions (the figure excludes nearly$300 billion for bailing out AIG, Fannie Mae and Freddie Mac), (2)guaranteeing $3.4 trillion deposits in money market funds, and (3)banning short selling of nearly 800 financial stocks temporarily. Themeasures have revived markets. But, the euphoria may be short-lived.Plan B won't stop a gut wrenching recession-2% or more contraction forthe US economy in 2009. In the longer term, the US still has to figureout how to pay for the losses, decrease leverage in the real andfinancial economy, and find a non debt-driven growth model. This is notjust a crisis of confidence. The fundamentals are deteriorating fast.Plan B can't halt that trend.



The bankruptcy of LehmanBrothers triggered the financial tsunami that has forced thegovernment's hand to rush out Plan B. It has struggled to hold thesystem together since the crisis began one year ago. It has dealt withthe crisis piecemeal. When Bear Stearns collapsed, it persuaded JPMorgan to 'buy' it with $30 billion from the Fed as incentive. WhenFannie Mae and Freddie Mac collapsed, it took them over. It tried forthe longest time to persuade Lehman Brothers and Merrill Lynch to savethemselves. The failing financial institutions took time to find thebest deals for themselves, usually about keeping their bosses inelevated positions. Out of frustration over the slow pace of theirself-rescue efforts, the government decided to 'kill a chicken and showit to the monkeys' and let Lehman fail. But, it didn't let AIG fail andtook it over, i.e., putting government credit behind its bad assets,because AIG was viewed as a monkey.



But, the Lehmanbankruptcy deeply scarred the financial market already in a fragilemental state. Institutional investors like pension funds or mutualfunds became deeply concerned who they should be doing businesses with.They were ready to move their funds out of any Wall Street firm thatwas rumored to be failing. The withdrawal of their funds would bleedthe highly levered Wall Street firms to death. This is why shortsellers attacked Goldman Sachs and Morgan Stanley soon after the Lehmanfailure. The sinking share prices of the two giants sent everyonescurrying for cover. It felt like the end of the Wall Street. Indeed,if the government had not taken actions, the US's financial systemwould have collapsed.



Ironically, the Wall Street gavebirth to the short sellers, or hedge funds, after the tech burst in2000 to juice up their businesses. These hedge funds have grownenormously and now manage about $2 trillion. They have become bigenough to take on the Wall Street. Like a modern day Oedipus play, theyhave come to slay their parents and take their kingdom. While thegovernment measures have held them off for now. This drama is far fromover. The Wall Street firms are staffed with corporate warriors whosucceed by sucking up to their bosses, while hedge funds have attractedthe brightest and the most ruthless. The battle is unevenly matched.Without government help, the Wall Street is doomed. Like TeutonicWarriors perched on hills overlooking Rome, they can't wait to sack theopulent and corrupt establishment.



Pundits andgovernment officials have heaped praises on Hank Paulson and BenBernanke for their handling of the crisis. I disagree. They have failedto understand the nature of the crisis. This is the collapsing ofGreenspan's debt empire. The financial system is a house of cards on anunprecedented scale. The establishment cannot be saved. The aristocratson Wall Street have been making billions every year by mixing debtswith debts. They call them derivatives. The government cannot prop themup. There was nothing but air inside. The financial system that comesout of the crisis has to be very different. They should have seized allthe failing financial institutions (i.e., most non banks and hundredsof banks), wiped out equity holders and debt holders, send debtpeddlers to jail, bring down the leverage quickly, and attract foreigncapital to recapitalize a much smaller but viable financial system.Instead, they hoped the people who made the bubble to solve theproblems for them.



Let me launch a broadside on theWall Street big wigs. Most of them have already been fired but walkedaway with millions as golden handshakes. Hopefully, justice willeventually catch up with them, and those who have destroyed so muchwould end up in maximum prison. The survivors still don't believe thattheir successes were a bubble phenomenon and psychologically biasedtowards preserving their empires. In a bubble, people who succeed aredaring but not necessarily smart. But, successes make them believeotherwise. That is what brings them to a tragic ending. They are notcapable of understanding the mess they have created. This is why thegovernment's attempt for these people to rescue themselves would neverwork.



The delaying tactic by the government was due tothe political considerations on the ongoing presidential election. Agovernment bailout would expose the economic mismanagement of the past,which would diminish the chances of the Republican Candidate, JohnMcCain, in November. Now the market has forced the government's hand.The rescue probably has killed McCain's chance to be the next president.



Howwould Plan B play out? I think it merely brings temporary relief. Asinvestors imagine that the government takes over bad assets, they thinkthey can forget about it and everyone can resume 'normal' life. Thisnaïve view won't last. Who would pay for the losses? Wouldn't thegovernment go after shareholders and creditors? Could taxpayers who arelosing their homes have the money to cover the losses? Could thegovernment whose debts stand at $10 trillion borrow more to pay thebill?



After covering the losses embedded in the badassets, the US economy is still over levered. It takes an enormousamount of money to recapitalize the US economy. The US's non-financialsector debt rose to 226% of GDP in 2007 from183% ten years before, andthe financial sector debt surged to 114% of GDP from 64% during thesame period. The real economy may need 40% of GDP in extra equity or$5.5 trillion, equivalent to one third of the US's stock marketcapitalization. Even if Americans tighten belts and raise savings toboost their equity capital, the process would be too long for financialmarkets to feel comfortable today. The US may need foreign capital atleast for half of the needed amount.



The US's financialsector may have to decrease leverage by $5-8 trillion. A significantportion of that are bad assets. The total reported losses have alreadyamounted over $400 billion. New losses would far exceed that amount. Asthe total losses could be similar to the total amount of capital in theUS's financial system before the crisis began, the US may have to letforeigners be majority owners of its big financial institutions. In thefund raising of the past year, the US's financial institutions soldminority stakes to sovereign wealth funds around the world. Without anycontrol over these institutions, they of course are resentful of theterrible losses that they have suffered. In future fund raisings, theUS's financial institutions may have to sell controlling stakes toforeigners.



The solution to America's crisis mustinvolve the countries that own $10 trillion in foreign exchangereserves. The US economy is undercapitalized. An internal solution isusually one form of debt replaced with another. The current proposalsfall into this category. When the shell game runs out of options,printing money is the only way out. That will eventually lead to dollarcollapsing and hyperinflation in the US economy. The world should cometogether to prevent such a tragic ending. Countries with big foreignexchange reserves like China, Japan, Kuwait, Saudi Arabia, UAE, etc.,should sit down with the US government to find a way to recapitalizeits economy. They should swap their dollar assets in debt instrumentslike treasuries for equity assets like stocks.



Theworld has a vested interest in ensuring an orderly resolution to theUS's crisis. If the US prints money to solve its problems, it will leadto the destruction of everyone's wealth in dollar assets and a globaldepression of unimaginable proportion. Rising leverage in the US hasdriven the demand growth in the global economy in the past decade. Ithas led to large US trade deficits and surging foreign exchangereserves among its trading partners. The foreign exchange reserves havebeen recycled back into the US's debt instruments, reinforcing itsleverage-driven demand growth. Hence, the high foreign exchangereserves of its trading partners and the excessive leverage of the USeconomy are two sides of the same coin. It is hard to imagine that thesolution wouldn't require both sides to participate.



TheUS needs to change its policy towards foreign investments. Itsxenophobia over investments from non-western countries is a majorbarrier to the solution. Remember CNOOC's attempted takeover of Unocaland the forced sale of the US ports by Dubai Ports World. If the US cansuccessfully make a debt-equity swap for its economy, the equityproviders have to be Asian countries or oil exporters who Americans arenot used to as owners. But, there are no other solutions. The US needsto become more like the UK in treating foreign ownership.



Whilethe above proposal is a win-win for the world, the odds for itsimplementation are quite low. The United States still has anunrealistic view of itself. Its domestic politics is insular andxenophobic. Even tough the US is the largest debtor in the world itbehaves like the largest creditor. Americans may need much morehardship to change their attitude.



The US'sunwillingness to accept capital from non-western countries may push itdown the path of printing money. The Fed can purchase whatever papersthe Federal government issues to cover the losses in the bad assetdisposal. It will lead to high inflation. When foreigners dump theirdollar assets, the dollar would crash, the US may experiencehyperinflation and economic chaos.



To protectthemselves against such a scenario, foreign governments should switchtheir treasury holdings into stocks that preserve value better duringinflation. Despite their sharp decline in recent months, the US'sstocks are fairly valued, not dirt cheap. They may well decline in thecoming months in a recessionary environment. But, they are better valuethan treasuries now. Central banks should put wealth preservation aheadof all other considerations.



Ironically, if foreignersswitch from treasuries into stocks, it will ease the equity capitalshortage in the US economy and discourage money printing by the Fed bypushing up treasury yields. Maybe, foreigners can save America even ifit doesn't want to.



While the financial crisis is stillfar from over, the economic crisis is already around the corner. Risingleverage has supported the US's consumption led growth for the pastdecade. A significant portion of the US's aggregate demand is keptafloat by the bubble. As the bubble bursts, that part of the demandwould vanish. The coming recession could be the most severe in fiftyyears. The US's economy could contract by 2% or more in 2009.



Manywould be skeptical of this view. When the crisis happened one year ago,everyone worried about the worst. But, the US economy has notcontracted. Many attribute it to the US's good export performance on30% dollar devaluation. But, that is not the most important factor. TheUS economy has not decreased its leverage. The US's non-financialsector debt rose to $32.4 trillion by mid-2008 from 30.4 one year ago,and the financial sector debt to $16.5 trillion from 15.0 during thesame period. The calm in the economy and financial system was sustainedby increasing debts to cover up the bad debt problem.



Themarket has forced the issue now. Like Asian economies in 1998, the UShas to deleverage . It means no loans for sustaining a big chunk of theexisting consumption. It means acceleration in property price decline.These two factors would cause significant economic contraction. Theknock-on effect will work through rising employment. The unemploymentcould rise above 8% in 2009, which would amplify the economiccontraction. Asian financial markets collapsed in 1997, and theireconomies followed in 1998. The US is repeating the experience.



Beyondthe economic collapse next year, the recovery beyond would be quiteanemic. Asian economies recovered quickly in 1999 from export boom asthey devalued their currencies and the global economy was good. Thesame would not happen to the US. Europe and Japan have weak domesticdemand due to their aging problem. Emerging markets are not big enoughto support the US recovery. The odds are that the US would stayflattish for years to come.



Governments around theworld are implementing measures to boost financial markets. Theireffects won't last for long. The world has experienced enormousprosperity since the fall of the Berlin Wall that discredited one formof economic management. The globalization since has boostedproductivity by increasing division of labor across the world. But, asignificant part of the prosperity was due to the debt bubble. Indeed,during the bubble, the Davos crowd-the globalization establishmentheaped praises on financial capitalism led by Wall Street. That modelis now discredited. We are moving towards a different world. It may notbe as glitzy as the past one but could be better for average workingmen and woman. The transition, however, would be painful.



谢国忠搜狐博客 http://xieguozhong.blog.sohu.com/

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