The Party’s Over: China’s Endgame
On October 1 last year, China’s Communist Party celebrated the country’s National Day, marking the sixtieth anniversary of the founding of the People’s Republic. As they did ten years before, senior leaders put on a military parade of immense proportions in their majestic capital of Beijing. Like the Olympic Games in 2008, the parade was a perfectly executed and magnificently staged spectacle, but instead of international fellowship, the theme was the power of China’s ruling organization and the rise of the Chinese nation.
But did Beijing need two hundred thousand soldiers and school children to demonstrate its strength or ascendancy? The dominant narrative about China today is that it will, within a few short decades, become the preeminent power in the international system. Its economy, according to the conventional wisdom, was the first to recover from the global downturn and will eventually go on to become the world’s largest. Geopolitical dominance will inevitably follow.
How did this notion of Chinese supremacy gain hold? The answer is nothing more profound than statistical extrapolation. China was destitute when Deng Xiaoping grabbed power in December 1978. Since then, the country has averaged, according to official statistics, a spectacular annual growth of 9.9 percent. This rate, if carried forward, gives China the world’s largest economy in a few decades—2027, to be exact, according to a now-famous Goldman Sachs estimate.
So will ours be the Chinese century? Probably not. China has just about reached high tide, and will soon begin a long painful process of falling back. The most recent period of China’s fast growth began with Deng’s Southern Tour in early 1992, the event that signaled the restarting of reforms after the 1989 Tiananmen Square massacre. Fortunately for the Communist Party of China, this event coincided with the beginning of an era wherein political barriers to trade were falling and globalization was kicking into high gear, which set the table for a period of tremendous wealth generation.
Deng’s policy of gaige kaifang—a policy of “reform and opening to the outside world”—was perfectly suited to a period of spiking international income and liquidity. In the booming post–Cold War period, China attracted large sums of foreign capital that created hundreds of thousands of factories along China’s coastline and up and down the nation’s great rivers. Even more significant, Deng’s policies sparked the creation and development of private enterprises, in many ways the most important engine of China’s growth during the last three decades. In 1978, the state produced virtually all the nation’s gross domestic product. Today, that figure has dropped to a third.
In this period of sudden prosperity, it seemed that the country became the world’s biggest producer of just about everything. And as a result of its manufacturing strength, the Chinese central government accumulated foreign currency reserves that have been aptly called “the greatest fortune ever assembled”—$2.399 trillion, at last count. No country has a bigger stash. And no wonder analysts believe that China, having grown so large so quickly, has now acquired unstoppable momentum.
But the analysts and the conventional wisdom they peddle are wrong. China’s economic model, which allowed the Chinese to take maximum advantage of boom times, is particularly ill suited to current global conditions. About 38 percent of the country’s economy is attributable to exports—some say the figure is higher—but global demand at this moment is slumping. (Last March, the normally optimistic World Bank said the global economy would contract in 2009 for the first time since World War II and that global trade would decline the most it had in eighty years.) Globalization, which looked like an inevitable trend in early 2008, is now obviously going into reverse as economies are delinking from each other. So China is now held hostage to events far beyond the country’s borders.
As we saw in the Great Depression, the exporting countries had the hardest time adjusting to deteriorating economic conditions. That is proving to be the case now as well. China’s exports fell 16.0 percent last year, and forecasts show a weak export sector for at least the remainder of this year. As a result of declining exports and other factors, Beijing presided over the world’s fastest slowing economy. China’s economy, in fact, grew by about 15 percent in 2007, but fell to negative growth at the end of 2008.
Beijing stopped the precipitous decline with a $586 billion stimulus program, announced in November 2008. The plan created a “sugar high” as the central government flooded the country with money, but resulting growth will be short-lived. The state’s stimulus plan favors large state enterprises over small and midsize private firms, and state financial institutions are diverting credit to state-sponsored infrastructure. The renationalization of the Chinese economy with state cash will eventually lead to stagnation.
But the economy could fail before stagnation eventually sets in. Prime Minister Wen Jiabao, to fund his stimulus plan, has forced state banks to create the greatest surge of lending in history. One state manager, Lin Zuoming of Aviation Industry Corporation of China, publicly complained last April that central government officials forced him to borrow the equivalent of $49.2 billion from twelve Chinese banks, saying he did not know what to do with all the cash.
Government-mandated lending pushed unneeded funds into the Chinese stock markets, which caused an abnormal jump in prices; similar funds also flooded into the coffers of casinos in Macau, which had been languishing before the stimulus program. Predictions that Beijing’s plan might trigger the biggest wave of corruption in Chinese history now seem correct. And forced lending will undoubtedly create a mountain of bad loans because banks are shoveling funds to “beauty-show projects” that have little economic viability.
Chinese technocrats, goaded by a multitude of analysts and foreign leaders, have known for years that they would have to diversify the economy—steer it away from investment and exports and toward consumption. Yet Wen, in office since 2003, has not made much of an effort to do so. His stimulus plan targets the creation of infrastructure and aims almost entirely to boost industrial capacity even further, which would only aggravate the unbalance of the Chinese economy. Continuing with the old way of doing things will further reduce the role of consumption in creating prosperity, which has been sliding from its historical average of about 60 percent to about 30 percent today. That’s the lowest rate in the world, and it is continuing to decrease as the central government’s stimulus plan bolsters industrial production and exports.
So the Chinese economy, once in an upward super-cycle, is now headed on a downward trajectory. Beijing’s leaders had the opportunity to fix these problems in a benign period of growth, but they did not because they were unable or unwilling to challenge a rigid political system that inhibits adaptation to changing circumstances. Their failure to implement sensible policies highlights an inherent weakness in the system of Chinese governance, not just a single economic misstep at a particular moment in history.
Some scholars and China watchers nonetheless believe that Chinese authoritarianism, in the words of Andrew J. Nathan, may be “a viable regime form even under conditions of advanced modernization and integration with the global economy.” Recent Beijing leaders, Nathan tells us, have institutionalized themselves. “Regime theory holds that authoritarian systems are inherently fragile because of weak legitimacy, over-reliance on coercion, over-centralization of decision making, and the predominance of personal power over institutional norms. This particular authoritarian system, however, has proven resilient.”
But such praise of new bureaucratic mechanisms misses a critical point. The price of institutionalized Communist Party decisionmaking has been the diminution of the organization’s ability to govern. Why? China’s system is now weeding out the Mao Zedongs and even the Deng Xiaopings in order to prevent the rise of charismatic leaders, particularly someone like a Chinese Gorbachev. The individuals surviving this vetting, not surprisingly, lack the dynamism and ability of their bloodthirsty but imaginative predecessors. As the current leadership works to keep the lid on, small problems grow into big ones and big ones become gigantic. None of these problems has threatened the existence of the regime because increases in economic output in recent years have masked dislocations. But as the economy begins to contract, these problems may become too big to ignore—and perhaps too big to solve.
In addition to its outdated economic model, China faces a number of other problems, including banks with unacknowledged bad loans on their books, trade friction arising from mercantilist policies, a pandemic of defective products and poisonous foods, a grossly underfunded and inadequate social security system, a society that is rapidly aging as a result of the brutally enforced one-child policy, a rising tide of violent crime, a monumental environmental crisis, ever-worsening corruption, and failing schools and other social services. These are just the most important difficulties.
Worse yet, even if the Communist Party could solve each of these specific problems in short order, it would still face one insurmountable challenge. The economic growth and progress of the last three decades, which makes so many observers believe in the inevitability of China’s rise, is actually a dagger pointed at the heart of the country’s one-party state.
Change, in general, is tough for reforming regimes. As Tocqueville noted, it was rising prosperity that created dissatisfaction in eighteenth-century France and paved the way for revolution. These same trends played out more recently in Thailand, South Korea, and Chinese-dominated Taiwan. And they are at work right now in China itself.
Senior Beijing officials now face the dilemma of all reform-minded authoritarians: the economic progress that legitimates their leadership endangers their continued control. As Samuel Huntington taught us, sustained modernization is the enemy of one-party systems. Revolutions occur under many conditions, but especially when political institutions do not keep up with the social forces unleashed by economic change.
Beijing’s policies are widening the gap between the people, who are making a “kinetic dash into the future,” and their government, thereby ensuring greater instability. So it should come as no surprise that as China has grown more prosperous in recent years, it has also become less stable. As a people, the Chinese are not particularly obedient these days; they incite as many as 127,000 disturbances a year—perhaps more. Whatever the exact number, the political system is obviously having increasing difficulty channeling discontent as the Chinese people, believing in their rights and fearing their leaders less and less, wrestle for control of their future. As a prominent businessman told me last spring—smiling broadly as he sat in his spacious office in a Shanghai skyscraper—“No one fears the government anymore.”
And so, as the economy began to fail in 2008 and as factories closed by the tens of thousands, workers took to the streets, especially in the country’s export powerhouse, the Pearl River Delta of Guangdong Province. Protests have continued around the country. At the end of July last year, for instance, some thirty thousand steelworkers in the rust-belt province of Jilin fought with police and beat to death a top manager who had threatened large layoffs after a merger. The incident illustrates the trend that disturbances are becoming larger and more violent. In fact, demonstrators in the last few years have been using deadly force as an initial tactic against local authorities.
In good times, the Communist Party has been able to maintain its dominant role. But the real test of a political system is what happens when conditions worsen. After the abandonment of its economic ideology, the Communist Party made the continual delivery of prosperity its primary basis of legitimacy. But the future will not hold good times for the vast majority of the population. Thus, we are about to discover whether the regime can survive a downturn when decades of economic reform have weakened its mechanisms of control and made the Chinese people increasingly assertive and self-aware.
And even defiant. Expressions of discontent are expected in destitute places like Guizhou or Gansu or Ningxia, but now they are beginning to appear in prosperous cities like Beijing, Shenzhen, and Shanghai. One of the country’s most popular heroes—executed in November 2008—was a drifter who entered a police compound in Shanghai and killed six officers and wounded four others on the eighty-seventh anniversary of the founding of the party. In a development that did not make the evening news inside or outside the country, middle-class Chinese outside his trial chanted, “Down with the Communist Party!” and carried banners emblazoned with “Long Live the Killer.” Clearly, the country’s ruling organization has lost legitimacy, even among the relatively well-to-do in the important coastal cities.
Middle-class Chinese, the beneficiaries of decades of reform, now behave like activist peasants and workers whenever they think their rights are threatened. Yet Hu Jintao is repressing, not protecting, those rights. The humorless general secretary is now presiding over a seven-year crackdown on almost all elements of society, even the writers of karaoke songs, and the regime now attempts to control political speech more tightly than it did two decades ago. That is a sign of trouble to come. The party can censor and imprison, but it does so at the risk of creating even more enemies, both internal and external, and further delegitimizing itself.
So in the midst of all this turmoil, what will happen in China? The most important issue is whether the one-party system will survive, and despite everything, most observers feel it is secure. “China is facing enormous problems,” notes scholar Steven Jackson, but “this characterization has been true for the past 150 years.” David Shambaugh, another scholar, writes that China “is in a curiously ambivalent state of ‘stable unrest.’”
Political scientists generally support the idea that there can be smoke without fire. They argue that China lacks many of the factors that are thought to be requirements for revolutionary change. Because demonstrators in China today are directing their ire only against local grievances and have yet to form nationwide groups, for instance, most China watchers do not believe the People’s Republic is in any particular danger. Many correctly argue that all modernizing societies experience discontent. To understand China’s future, therefore, we have to distinguish change from instability, and instability from revolutionary unrest.
The economic and social transformation in China during the last sixty years has been accomplished with a velocity never seen before. And with Chinese people now talking to each other from one end of the nation to the other, “mass incidents,” the current government euphemism for large demonstrations, can have special significance. The protests in China today are occurring at a time of great stress in society. Worse, these disturbances are taking place as the party, updating its ideology, is trying to exchange the base of its support from peasants and workers to the middle class, a situation similar to the one that contributed to the failure of the Soviet Union. When China’s disaffected begin to realize their leaders no longer stand behind them, the unrest we see today could become revolutionary. The disruptions in China, therefore, can reflect more than just change or even instability—they have the potential to shake the mighty Chinese state and even bring it down.
Unfortunately for the Communist Party, this new restiveness comes as technology and instant communications are changing society. News travels fast in the modern Chinese state. During the first six months of last year, China’s citizens sent 382 billion text messages. No other country has more cell phone subscribers (there are 703 million of them) or Internet users (384 million, at last count). Cyber China, the most vibrant part of the most exciting nation on the planet, reflects the growing inquisitiveness of Chinese citizens about their society. Political dissent is sizzling on the Web—and readily available, at least most of the time. It is on the Internet that officials criticize their own government for corruption and businessmen post tracts on democracy.
Beijing has been more successful than any other government in creating a Big Brother–style Internet—with the help of American technology—but it is fighting a battle in which it will never be able to claim final victory. To consolidate his hold on the country, Mao divided up the Chinese people into small units and isolated each unit from the others. Now, in a modernizing nation, citizens are putting themselves back together with cell phones and laptops. On the Internet and in other forums, the Chinese people today are having national conversations for the first time since the Beijing Spring of 1989. Because so many share common grievances, demonstrations can erupt and engulf the one-party state.
The Uighur protests that erupted in Xinjiang last July, for instance, were sparked by news—which spread rapidly—of murders at a factory at the other end of the country, in Guangdong province. Worker demonstrations in early 2002 started in the northeast and spread to the center of China in a matter of days as laborers realized they shared common grievances. (“It’s the first time we have seen protests occur in the same industry, over the same issues, in different cities in China,” says Han Dongfang, a labor activist exiled from the mainland.) Telecommunications not only give new power to ideas but also supply new force to discontent. In a wired China, alliances can come together quickly, thereby making broad coalitions possible. As we are starting to see now, groups can be separated geographically yet still act in concert. Connected by phone or pager, people can meet at a moment’s notice for a common purpose.
We may, therefore, soon witness in China revolution by spontaneous combustion. Despite his belief that revolutions must be minutely organized, Lenin’s own state was eventually brought down not by a network of plotters but by an impromptu crowd. What we witnessed in Moscow—the disintegration of a state in a matter of days—later replayed itself in Manila, Lima, Belgrade, Kiev, and Tbilisi. Chinese people today may not have revolutionary intentions, yet their acts of protest at this unsettling time have revolutionary implications nonetheless.
As the acceptability of protest grows in China, the popularity of the Chinese government slides. “I don’t know anyone who believes in the party anymore,” one Shanghai resident said to me a few years ago. The strength of the Communist Party has been eroded by widespread disenchantment, occasional crises, continual restructuring, and the enervating effect of the passage of time. Although it is big, it is also corrupt, reviled, and often ineffective. In some parts of the countryside it no longer operates, having been replaced by clans and gangs with loose ties to officials. It’s doubtful the party even commands the loyalty of its own members. Many cadres are opportunistic careerists and many, for good or ill, disregard orders from the center. “Now, no Communist official is loyal to or will sacrifice for the party,” said democracy activist Peng Ming, just after he was released by the regime. “When I was in jail, the prison warden and guards were very respectful to me. Even when I criticized them, they would not criticize me back. Why? They said, ‘This regime will not last long. Who knows you won’t be our next leader? If we mistreat you now, you will come after us when you come to power.’”
People’s intense devotion to their rulers—evident during the eras of Mao and Deng—is noticeably absent from China today. The change in attitude has even affected the People’s Liberation Army, last line of defense for the party. Last July, in an extraordinary incident, junior Chinese officers openly complained about the corruption and failings of their country’s civilian leadership to their Russian counterparts during joint “antiterror” exercises.
If revolution is merely “a trivial shift in the emphasis of suffering,” as playwright Tom Stoppard once noted, the silent, slow-motion crisis of legitimacy in China could have real consequences. Anything can happen in a country filled with secret societies, revolutionary cells, private armies, illegal political parties, underground congregations, and clandestine triads. The risk for the regime is that one of these groups will launch an insurrection—some mass incidents already come close to rising to that level—or that some minor incident will trigger a fight that becomes a conflagration.
Under such a scenario, the party could be confronted with another million singing, shouting, chanting souls in Tiananmen Square. Deng Xiaoping preserved the regime last time by employing brute force, but it’s unlikely that a weakened party would have the ability to get away with another slaughter in the future. Ordinary soldiers probably would not kill fellow citizens on behalf of a regime that has lost the love and loyalty of most of its people.
Ultimately, rows of stern-faced Chinese soldiers goose-stepping through the center of Beijing on National Day tell us little about the government’s hold over the people. True, the one-party state is at high tide, but in the last thirty years, the country’s seemingly endless prosperity has fundamentally changed its people. The full extent of this change became clear to me in June 2008. I was in a dingy walk-up in my dad’s hometown, Rugao. It’s a backwater town in Jiangsu Province. I was trying to talk to a group of residents, some young and a few elderly, about the Olympics. Nobody wanted to discuss the Games, which were dismissed as just another government-staged event. All they wanted to hear was news from the American campaign trail. They wanted to hear about John McCain and Barack Obama. They wanted to hear about the workings of democracy.
BREAKING: Goldman Charged with Fraud
I saw it coming months ago. Finally GS is going to pay for the problems it caused
From the New York Times
Goldman Sachs, the Wall Street powerhouse, was accused of securities fraud in a civil lawsuit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly intended to fail.
The move was the first time that regulators had taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market.
The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.
In a statement, Goldman called the commission’s accusations “completely unfounded in law and fact” and said it would “vigorously contest them and defend the firm and its reputation.”
The focus of the S.E.C. case, an investment vehicle called Abacus 2007-AC1, was one of 25 such vehicles that Goldman created so the bank and some of its clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.
As the Abacus portfolios in the S.E.C. case plunged in value, a prominent hedge fund manager made money from his bets against certain mortgage bonds, while investors lost more than $1 billion.
According to the complaint, Goldman created Abacus 2007-AC1 in February 2007 at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst. Mr. Paulson is not named in the suit.
Goldman told investors that the bonds would be chosen by an independent manager. In the case of Abacus 2007-AC1, however, Goldman let Mr. Paulson select mortgage bonds that he believed were most likely to lose value, according to the complaint.
Goldman then sold the package to investors like foreign banks, pension funds and insurance companies, which would profit only if the bonds gained value. The European banks IKB and ABN Amro and other investors lost more than $1 billion in the deal, the commission said.
“Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio,” Robert Khuzami, the director of the commission’s enforcement division, said in a written statement.
The lawsuit could be a sign of a revitalized Securities and Exchange Commission, which has been criticized for early missteps in assessing the causes of the financial crisis. The agency appears to be tracing the mortgage pipeline all the way from the companies like Countrywide Financial that originated home loans to the raucous trading floors that dominate Wall Street’s profit machine.
At a conference in New Orleans on Friday, Mr. Khuzami indicated that he was scrutinizing other deals involving mortgage securities. “We’re looking at a wide range of products,” he said at a news conference. “If we see securities with similar profiles, we’ll look at them closely.”
Shares of Goldman Sachs plunged more than 10 percent in just the first half-hour of trading after the suit was announced Friday morning. They closed down 13 percent, at $160.70, wiping away more than $10 billion of the company’s market value.
Investors sold other bank stocks, as well, as rumors swirled about which other firms might become embroiled in the commission’s investigation. Next to Goldman Sachs, Deutsche Bank’s American shares had the steepest decline, falling 7 percent.
Goldman issued a second statement after the market closed saying that the firm had lost money on the deal in the S.E.C. case and that it provided investors with extensive disclosure on the deal. The firm said the losses in the deal came from the overall collapse of the mortgage market, not from the way the deal was structured.
The accusations amount to a black eye for the once-untouchable Goldman Sachs, a money machine that is the epicenter of Wall Street power. For decades, its platinum reputation has attracted top investors and stock underwriting deals.
Several of its former chief executives have gone on to high public office, among them Henry M. Paulson Jr., the former Treasury secretary, and Jon Corzine, the former New Jersey governor. (Henry Paulson and John Paulson are not related.)
In recent months, Goldman has been defiant in the face of criticism, repeatedly defending its actions in the mortgage market, including its own bets against it. In a letter published last week in Goldman’s annual report, the bank rebutted criticism that it had created, and sold to its clients, mortgage-linked securities that it had little confidence in.
“We certainly did not know the future of the residential housing market in the first half of 2007 any more than we can predict the future of markets today,” Goldman wrote. “We also did not know whether the value of the instruments we sold would increase or decrease.”
The letter continued: “Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a ‘bet against our clients.’ ” Instead, the trades were used to hedge other trading positions, the bank said.
Goldman was one of many Wall Street firms that created complex mortgage securities — known as synthetic collateralized debt obligations — as the housing wave was cresting. At the time, traders like Mr. Paulson, as well as those within Goldman, were looking for ways to bet against the overheated market.
For months, S.E.C. officials have been examining mortgage bundles like Abacus that were created across Wall Street. The commission has been interviewing people who structured Goldman mortgage deals about Abacus and similar instruments. The commission advised Goldman that it was likely to face a civil suit in the matter, sending the bank what is known as a Wells notice several months ago.
The S.E.C. action is a civil complaint, but it could be referred to criminal prosecutors who would have to prove that individuals intended to defraud investors.
The S.E.C. focused on only one Abacus deal in its complaint, but Mr. Khuzami said in a conference call on Friday that the commission continued to look at the rest. All told, $10.9 billion of Abacus investments were sold.
Mr. Tourre, the Goldman vice president named in the lawsuit, was one of the firm’s top workers running the Abacus deals, selling the investment to investors across Europe. Mr. Tourre was raised in France and moved to the United States in 2000 to earn his master’s degree in operations at Stanford. The next year, he began working at Goldman, according to his profile on the LinkedIn social network.
He rose to prominence working on the Abacus deals under a trader named Jonathan M. Egol. Mr. Egol, who is now a managing director at Goldman, is not named in the S.E.C. suit.
Goldman structured the Abacus portfolios with a sharp eye on the credit ratings assigned to the mortgage bonds contained in them, the S.E.C. said. In the Abacus deal cited in the S.E.C. complaint, Mr. Paulson pinpointed those mortgage bonds that he believed carried higher ratings than the underlying loans deserved.
Goldman placed insurance on those bonds — called credit-default swaps — inside Abacus, allowing Mr. Paulson to bet against the bonds while clients on the other side of the trade wagered that they would make money.
But when Goldman sold shares in Abacus to investors, the bank and Mr. Tourre disclosed only the ratings of those bonds and did not disclose that Mr. Paulson was on the other side, betting those ratings were wrong.
Mr. Tourre at one point complained to an investor who was buying into Abacus that he was having trouble persuading Moody’s to give the deal the rating he desired, according to the investor’s notes, which were provided to The Times by a colleague who asked for anonymity.
In seven of Goldman’s Abacus deals, the bank went to the American International Group for insurance on the bonds. Those deals have led to billions of dollars in losses at A.I.G., which received a $180 billion taxpayer rescue. The Abacus deal in the S.E.C. complaint was not one of them.
That deal was managed by ACA Management, a part of ACA Capital Holdings, which changed its name in 2008 to Manifold Capital.
Goldman told investors the mortgage bond portfolio would be “selected by ACA Management,” according to the deal’s marketing document, which was given to The Times by an Abacus investor. That document says Goldman may have long or short positions in the bonds. It does not mention Mr. Paulson.
ACA was not named in the suit. That firm was led to believe that Mr. Paulson was positive on mortgages, not negative, and so it did not see a problem with his involvement, the S.E.C. said. Mr. Tourre was aware of ACA’s misconception, the commission said.
In February 2007, Mr. Tourre met with both ACA and Mr. Paulson, and he sent an e-mail message to a Goldman colleague acknowledging the awkwardness of the situation. “This is surreal,” Mr. Tourre wrote.
Nine days later, a Goldman colleague wrote Mr. Tourre and said, “the C.D.O. biz is dead. We don’t have a lot of time left.”
The Abacus deals deteriorated rapidly when the housing market hit trouble. For instance, in the Abacus deal in the S.E.C. complaint, 83 percent of the mortgage bonds underlying it were downgraded by rating agencies just six months later, and 99 percent had been downgraded by early 2008, according to the S.E.C.
It takes time for such mortgage investments to pay out for investors who make bets against them. Each deal is structured differently, but generally, the bonds underlying the investment must deteriorate to a certain point before those who bet against the bonds get paid. By the end of 2007, Mr. Paulson’s credit hedge fund was up 590 percent.
Obamanomics vs. Reaganomics – Which Can Save the Economy?
By Marquis Codjia from marquisc.wordpress.com
In the 1980s, Ronald Reagan asserted emphatically that “government is not a solution to our problem,” but rather, “government is the problem.” Nowadays, many specialists revisit the soundness of such avowal in light of the mammoth government-engineered bailouts that questionably helped safeguard the global economic fabric.
Those experts are not alone. The current White House chief denizen, who uttered openly during the 2008 presidential campaign his admiration for Reagan’s political persona – much to the ire of some diehard Democrats – , has so far spearheaded policies overmuch adversative to Reaganomics.
Many Americans remember President Reagan for his debonair, articulate and Hollywoodian public posture; yet, the former leader had developed a sophistication in economic analysis that served him throughout the recession that hallmarked his presidency.
Faced with a dysfunctional economy at the onset of his mandate, President Reagan ingrained his policies in supply-side economics, advocating a quartet of measures that revolutionized America’s social dynamics and reignited its growth machine.
First, he proposed vast tax cuts on labor and capital to incentivize corporations and entrepreneurs to invest and innovate, whereas citizens, freshly cash awash due to increased savings, were heartened to spend. Next, deregulation in targeted economic sectors aimed at eschewing unnecessary costs to investors. Third, he steered a package of major budget cuts approximating – from 1981 onwards – a 5% reduction in government expenses (circa $150 billion today). Fourth, Reagan sought to tighten monetary policy to combat inflation.
The late president’s plan delivered mixed results.
Inflation experienced a spectacular fourfold decrease from 1980 to 1983 (13.2% vs. 3.2%), federal receipts grew higher than outlays (at an average rate of 8.2% vs. 7.1%), and the 16 million new jobs created helped shrink unemployment by 3 points (to 7.5% from a 1982 peak of 10.8%). Other accolades from the Cato Institute, a libertarian think thank, include a real median family income rise of $4,000 and a higher productivity.
This said, Reaganomics and its no holds-barred canons structurally devastated parts of America’s socio-economic fabric: fiscal cuts coupled with a surge in Cold War military spending created a yawning abyss in the nation’s finances (e.g.: large budget deficits, trade deficit expansion). In addition, some culpability can be attributed to the Republican leader vis-à-vis the 1987 stock market crash and the Savings and Loans crisis, merely because, at a minimum, both pandemonia occurred under his watch. In order to cover budget shortages, the administration then embarked on a borrowing spree that catapulted the national debt to $3 trillion from $700 billion, part of which (circa $125 billion) subsidized an S&L industry crippled by the failure of 747 thrifts.
The portmanteau Obamanomics – used to depict economic policies espoused by current U.S. President Barack Obama – is a new concept, which understandably needs more time to develop before a studious analysis can be conducted on its merits.
Clearly, the current administration – also faced with a chaotic economy – has so far adopted, or is envisaging, policies diametrically opposed to Reagan’s precepts: higher taxes, increased regulation, more spending, and a loose monetary policy.
President Obama’s plan to save banks was the correct initiative for two reasons: decrepitude in capital markets would have metastasized into a more costly, general chaos, and the fact that banks are now relatively stable attests to the program’s effectiveness, notwithstanding the remaining work to be accomplished in the bank bailout’s scheme.
Even if the current economic recovery plan will take a while to reach its desired goals, preliminary results so far are altogether mixed: banks are loath to lend, the mortgage sector is still lethargic, the lackluster private consumption is hampering corporate investments and the global economic productivity. The economy is gradually adding thousands of jobs but the unemployment rate still stands at 9.7%.
So, which of Reaganomics or Obamanomics can save the economy today?
The answer is none.
No economy policy ingrained in political partisanship can save the economy; to be efficient, authorities must use a combination of ideologies, extirpating the best areas of each and amalgamating them into a coherent plan deep-rooted in sound economics.
First, the government must balance its budget by reining in bureaucratic waste at the federal and state levels, seeking higher efficiency in its social programs and maintaining a tax base able to provide sufficient inflows. The recent nomination of Jeffrey Zients as U.S. Chief Performance Officer is a welcome decision.
Second, the government and the legislative branch must agree to suppress or significantly reduce pork-barrel spending; even if some of the projects subsidized are valid, the lack of transparency and the fact that too much power lies in the hands of one lawmaker are troubling. Citizens Against Government Waste, a private, nonpartisan watchdog, estimated in its latest report that 2009 pork-barrel spending amounted to $19.6 billion, up from $17.2 billion the previous year.
Third, the government must invest in education, sciences, health, and recreation services to assure a productive labor force and educated populace. Every citizen appreciates a good local school system, an efficient police, and functional social services. Fourth, a gradual and well-balanced regulatory framework for critical sectors is needed to level the playing field for all economic agents and eschew the negative effects of systemic risks.
Finally, the tax code should be more efficient and easier to understand so more revenues are collected. Currently, it is estimated that it costs the IRS between 25 and 30 cents for every tax dollar collected, without counting the billions spent by citizens in tax compliance and planning. We have a simplified property tax code in our cities; why can’t we engineer a similar scheme at the federal level?
The Death of Liberal Arts
By David A. Graham on Newsweek
After the endowment of Centenary College in Shreveport, La., fell by 20 percent from 2007 to 2009, the private school decided to eliminate half of its 44 majors. Over the next three to four years, classic humanities specialities like Latin, German studies, and performing arts will be phased out. It’s quite a change from 2007, when NEWSWEEK labeled Centenary the “hottest liberal-arts school you never heard of,” extolling its wide range of academics. In their place, the school is considering adding several graduate programs, such as master’s degrees in teaching and international business. Such professional programs have proven increasingly popular and profitable at other universities and colleges, especially during economic downturns, a point that the college president tries to downplay. “We’re not intentionally trying to chase markets,” says David Rowe. “We think the students need to have a grounding in the arts and sciences, but they also probably need some training in a specific area.”
But there’s no denying that the fight between the cerebral B.A. vs. the practical B.S. is heating up. For now, practicality is the frontrunner, especially as the recession continues to hack into the budgets of both students and the schools they attend. “Students want something they can sell,” says Anthony P. Carnevale, director of the Georgetown University Center on Education and the Workforce. According to a new study published by Roger Baldwin, an education professor at Michigan State University, the number of liberal-arts colleges dwindled from 212 in 1990 to 136 in 2009. The humanities are taking the hardest hit at schools with small endowments. Wisconsin Lutheran College, for example, said last March it would stop teaching political science after facing a $3 million budget shortfall. At elite research universities and colleges, there’s increasing pressure to beef up their pre-professional offerings. For instance, Claremont McKenna College in California is plugging a new undergraduate minor in financial economics, while Duke University’s Fuqua School of Business recently added a one-year master’s program geared to liberal arts graduates who may be looking to ride out the recession.
It’s easy to understand the concerns. Just 41 percent of people ages 18 to 29 are working full time compared with 50 percent in 2006, according to a recent study by the Pew Research Center. A 2009 survey of 220,000 incoming freshman showed that 56.5 percent of students said it was “very important” to pick a college whose graduates found good jobs. “It’s a huge investment, and people are more insecure about their financial opportunities after school,” says Anne Colby, a senior scholar at the Carnegie Foundation for the Advancement of Teaching.
Apart from the tough economics surrounding college choices, the move to offer more practical classes may have gone too far. Although many students now want to major in something that sounds like a job, the economy is shifting so rapidly that it’s hard to predict the landscape of the labor market in the next 10, 20, or 30 years. Not long ago, green tech, renewable energy, and health care were not the burgeoning fields they are today. While the number of students majoring in business has steeply risen this decade, there’s no guarantee that business training will offer students the best preparation for the future.
Among liberal-arts proponents, the concern is that students who specialize in specific careers will lack critical thinking skills and the ability to write, analyze, and synthesize information. While business education tends to prepare students to work well in teams or give presentations, it often falls short in teaching students to do in-depth research or to write critically outside of the traditional business communiqués of memos or PowerPoints. “I think you need to have both liberal-arts and pre-professional classes at the four-year level,” says José Luis Santos, assistant professor in the Higher Education and Organizational Change division at UCLA. “People need to graduate with critical thinking skills because most workplaces retrain individuals for the needs of the industry.”
Many well-paying fields still prefer to hire students from these liberal-arts schools or universities, says Caroline Ceniza-Levine, a former Time Inc. recruiter and a career coach at SixFigureStart. But regardless of where students chose to go to school, they still need to get good grades, network, and complete goal-specific internships. “If you don’t know that in advance and you major in philosophy, you’re in major trouble,” says Ceniza-Levine. “You can be Harvard philosophy major, but you’d better have worked at a bank during the summer.”
While the tradition of the liberal-arts education may be on the wane nationwide, the most elite schools, such as Harvard, Swarthmore, Middlebury, and Williams, remain committed to its ideal. These top schools are not tweaking their curriculums to add any pre-professional undergraduate programs. Thanks to their hefty endowments, they don’t have to. As the economy rebounds, their students, ironically, may be in the best spot. While studying the humanities has become unfashionable and seemingly impractical, the liberal arts also teaches students to think big thoughts—big enough to see beyond specific college majors and adapt to the broader job market.
Student Loans by the Numbers
It’s always said that a higher education is a great investment and that’s true. Bachelor holders always have lower unemployment rates and higher average salaries. However, the cost of a higher educations are very high ( and are increasing with acceleration). Mint.com, in a joint project with CollegeScholarship.org, introduces an infographic that shows the break-down cost and benefits of undergraduate and graduate education. It’s fun to watch, and yet very informative
At the peak of the Chinese bubble – Nearly 200 apartments sold out overnight
From Chinadaily
SHANGHAI – Nearly 200 apartments in Hangzhou in East China’s Zhejiang province sold out overnight on Monday – another signal that property in urban China continues to be in hot demand.
The 188 apartments, developed by Hong Kong-listed Greentown China Holdings Ltd, are between 230 and 330 sqare meters, and have an average price of 45,000 yuan ($6,600) per sq m, said an unnamed sales representative of the company. They sit in the heart of New Town Qianjiang, just a few blocks away from Qiantang River, where Hangzhou’s future central business district will be built.
Greentown China would not confirm the apartments sold out overnight.
Another 170 apartments by the same developer will go on the market in early May. Already many customers are showing interest in these apartments, said the saleswoman. Those apartments are all bigger than 400 sq m, carrying a price tag of more than 60,000 yuan per sq m.
“Only a few luxury properties are along the scenic Qiantang River and considering its rare location and future price growth, these apartments are not priced too unreasonably,” said Zhou Ganghua, the director of property research center in Zhejiang University.
“Home buyers, particularly those investing in high-end real estate, will focus more on quality and location,” he said.
Properties in Hangzhou are much cheaper than those along Huangpu River, said Jiang Hailang, a deputy general manager of Huabang real estate.
“With the strengthening integration and interaction of the Yangtze River, Hangzhou will show more potential in its economy as well as its property market,” he said.
Investors’ return in the property market last year was high, especially those who sold their high-end properties, Jiang said.
“More and more people chose to invest in property after the latest recession.”
Investors and homebuyers across the nation continued to build great enthusiasm for the property market.
Luxury apartments in Nanjing, such as No 9 Changjiang Road, were received well by the market. Known as one of the most expensive properties, No 9 Changjiang Road has raised its price from 35,000 yuan to 40,000 yuan per sq m within two months and only few apartments are still available, according to its sales department.
“Despite the central government’s resolution to tame soaring property prices, they are unlikely to decrease, and may even increase higher and faster,” Ma Ji, consulting manager with Centaline Property Agency Ltd in Shanghai told China Daily.
A property developer in the Sino-Ocean Group bought a piece of land in Beijing for 4 billion yuan on March 15, with the price per square meter setting a new record of 27, 000 yuan.
Five pieces of land were sold on same day in Beijing for total value of 14.35 billion yuan.
According to local reports, housing prices beyond the sixth ring road of Beijing, the rural strip connecting areas of the capital, have reached more than 10,000 yuan. In Shanghai, no houses are priced lower than 10,000 yuan per sq m and house prices beyond Shanghai’s outer ring have reached 20,000 yuan per sq m.
A Story About Motivation
This article is not concentrated heavily on finance in general, but if you end up taking over a company and try to find a way to motive your employees, it is a great one.
by Peter on February 3, 2010
in Harvard Business
I was walking back to our apartment in Manhattan, the hood of my jacket pulled tight to keep the rain out, when I saw an older man with a walker struggle to descend the slippery stairs of his building. When he almost fell, I and several others went over to help.
There was an Access-A-Ride van (a Metropolitan Transit Authority vehicle for people with disabilities) waiting for him. The driver was inside, warm and dry, as he watched us straining to help his passenger cross the sidewalk in the pouring rain.
Then he opened the window and yelled over the sound of the rain coming down, “He might not be able to make it today.”
“Hold on,” we yelled (there were five of us now) as we helped the man move around the back of the van, “he can make it.”
Traffic on 84th street had stopped. We caught the man from falling a few times, hoisted him back up, and finally got him to the van door, which the driver then opened from the inside to reveal a set of stairs. The man with the walker would never make it.
“What about your side door, the one with the electric lift?” I asked.
“Oh yeah,” the driver answered, “hold on.” He put his coat over his head, came out in the rain with the rest of us, and operated the lift.
Once the man with the walker was in safely, we all began to move away when the driver opened the window one more time and yelled, “Thanks for your help.”
So, here’s my question: Why will five strangers volunteer to help a man they don’t know in the pouring rain — and think about the electric lift themselves — while the paid driver sat inside and waited?
Perhaps the driver is simply a jerk? Perhaps. But I don’t think so. Once we suggested the lift, he didn’t resist or complain, he came outside and did it immediately. And he wasn’t obnoxious either. When he thanked us for our help, he seemed sincere.
Maybe it’s because the driver is not permitted to leave the vehicle? I checked the MTA website to see if there was policy against drivers assisting passengers. On the contrary, it states “As long as the driver doesn’t lose sight of the vehicle and is not more than 100 feet away from it, the driver can assist you to and from the vehicle, help you up or down the curb or one step and assist you in boarding the vehicle.”
So why didn’t the driver help? Part of the answer is probably that for him, an old man struggling with a walker isn’t a one-time thing, it’s every day every stop, and the sight doesn’t compel him to act.
But that answer isn’t good enough. After all, it’s his job to help. That’s when it suddenly hit me: The reason the driver didn’t help might be precisely because he was paid to.
Dan Ariely, a professor at Duke University, and James Heyman, a professor at the University of St. Thomas, explored this idea. They set up a computer with a circle on the left side of the screen and a square on the right side, and asked participants to use the mouse to drag the circle into the square. Once they did, a new circle appeared on the left. The task was to drag as many circles as they could within five minutes.
Some participants received five dollars, some fifty cents, and some were asked to do it as a favor. How hard did each group work? The five dollar group dragged, on average, 159 circles. The fifty cents group dragged 101 circles. And the group that was paid nothing but asked to do it as a favor? They dragged 168 circles.
Another example: The AARP asked some lawyers if they would reduce their fee to $30 an hour to help needy retirees. The lawyers’ answer was no. Then AARP had a counterintuitive brainstorm: they asked the lawyers if they would do it for free. The answer was overwhelmingly yes.
Because when we consider whether to do something, we subconsciously ask ourselves a simple question: “Am I the kind of person who . . ?” And money changes the question. When the lawyers were offered $30 an hour their question was “Am I the kind of person who works for $30 an hour?” The answer was clearly no. But when they were asked to do it as a favor? Their new question was “Am I the kind of person who helps people in need?” And then their answer was yes.
So what does this mean? Should we stop paying people? That wouldn’t work for most people. No, we need to pay people a fair amount, so they don’t say to themselves, “I’m not getting paid enough to . . .”
Then we need to tap into their deeper motivation. Ask them: Why are you doing this work? What moves you about it? What gives you the satisfaction of a job well done? What makes you feel good about yourself?
People tend to think of themselves as stories. When you interact with someone, you’re playing a role in her story. And whatever you do, or whatever she does, or whatever you want her to do, needs to fit into that story in some satisfying way.
When you want something from someone, ask yourself what story that person is trying to tell about himself, and then make sure that your role and actions are enhancing that story in the right way.
We can stoke another person’s internal motivation not with more money, but by understanding, and supporting, his story. “Hey,” the driver’s boss could say, “I know you don’t have to get out of the van to help people, but the fact that you do — and in the rain — that’s a great thing. And it tells me something about you. And I appreciate it and I know that man with the walker does too.” Which reinforces the driver’s self-concept — his story — that he’s the kind of guy who gets out, in the rain, to help a passenger in need.
Ultimately someone else’s internal motivation is, well, her internal issue. But there are things we can do that will either discourage or augment her internal drive. And sometimes it’s as simple as what we notice.
It’s not lost on me that I too have a story about myself — I’m the kind of guy who stops on a rainy day to help an old disabled man to his van — and that it makes me feel good to tell you about it too. That will make it more likely that I’ll do it again in the future.
As we left the scene, I looked at the drivers of the cars who waited so patiently and waved, mouthing the words “thank you” as they passed. Every single one of them smiled back. Wow. New York City drivers smiling after being stuck in traffic for ten minutes? That’s right.
“Yeah,” they were thinking behind their smiles, “I’m the kind of driver who waits patiently while people less fortunate than me struggle.”
Editor’s note: For recent studies on motivation, look at Teresa M. Amabile and Steven J. Kramer’s “What Really Motivates Workers” in the 2010 HBR List, as well as Daniel Pink’s recent book, Drive, reviewed in our Recommended blog.
