The Global Financial Crisis: Lessons for the United States and China

Some analysts in emerging economies make the mistake of assuming that the current global financial crisis reveals weaknesses in the political and economic systems of scientifically and economically advanced nations, notes Albert Keidel, senior associate with the Carnegie Endowment for International Peace. Such systems are works in progress, and crises that emerge from mistakes, bubbles, the lack of checks and balances, spur reform and progress. Even the most advanced systems have potential for corruption and require updated regulation. “Twenty or thirty years form now, when China has a more sophisticated financial system than it has now, it will want to know how to regulate its emerging derivatives markets,” writes Keidel, and it will study solutions being crafted today. Keidel also details the impact of recent US market interventions on China. Transactions and trade, international and domestic alike, depend on trust. Fast-changing rules designed to help select players, industries or nation, tend to diminish the trust and invite risk to travel in new directions and spread.Theories suggesting that China’s high saving rates and cash reserves fueled the US mortgage bubble are preposterous. Deficit spending by the US on infrastructure or lasting projects would resolve the crisis more quickly than reducing interest rates. China could be insulated from some of the harshest effects of crisis because of its relatively closed capital accounts, its potential for domestic growth, and decreasing world prices. Keidel concludes with specific advice for both countries to weather the current financial storm and minimize its effects. – YaleGlobal