China in front of a test of wild capitalism lessons

China faces its own similar to “2008-2009” financial crisis and it is a very interesting moment whet will be its reaction. Will it follow the FED and EU practice of a massive money print in an effort to save its troubled banks, or will leave them meet the consequences of their investments.

Up to now it looks as the decision will be the same. China will pour the market with Yuans, saving the “too big to fail” banks, while leaving the smaller ones on market forces. The same has been done in USA. Much smaller banks defaulted, while the biggest were saved using TARP and the unofficial 15 trillion injection from FED.

China still has the alternative choice to rely more on pure market mechanism. It has also the great advantage of having the experience of Western countries that tested the extreme financial intervention mechanism. And that reached very suspicious results. So if Chinese are wiser they will take a lesson from other’s mistakes and will decide something different.

Anyway a very important part of any financial crunch is its unexpectedness. Surprised by rapid moves on the market, politicians are trying to react and very often this reaction is leading to controversial results. The society is expecting a reaction, and that is the main danger. Sometimes, when waiting you can get better opportunities. But once started the extreme money-print for saving banks, there is no stop. You must be decisive and say “No” at the beginning. With every further step in the wrong direction stepping back is becoming more and more difficult.

The up to now experience is clear enough. Saving banks has saved the problem that restarted to reproduce with passing the worst moment. I.e. the system was denied of the most effective capitalist cure, called “a bankrupt”. In Europe saving the troubled countries like Greece, Spain and Portugal simply crushed their economies, let to an extreme unemployment and no visible chance of revive. If left bankrupt these countries would always be back on the way to growth. Additionally after the Greek salvation plan, Greece anyway went bankrupt, creditors were hit hardly and a chain reaction in Cyprus happened. Up to now still there is no clear prospective in front of EU and the Euro.

So China has these good enough examples to plan its own policy. It is obvious it is better to take fast and hard pain, and be back on a growth path, instead of betting on the endless money-print agony.


Dobri
June 21st 2013

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