BLOCKED!!!!

Lafayette, IN -- As most you know by now, the always perspicacious Chinese government has, since last spring, blocked Facebook, Twitter, and a few other sites. Most important -- for this blog, anyway -- is that Blogspot is blocked and that means I can't possibly update this thing. I'm working on a solution and hope to solve the problem without starting a new blog location.

So: have patience. Check back every once in a while. Sooner or later we'll get things up and running again.

Fantasy Island

While the whole world has been watching the Global Economic Meltdown and the Rise of the Obama-ites with fascination, other stories have been buried in page 38 (or where ever). What you've all missed out here in Asia is the amazing saga of Chen Shuibian. In previous episodes, Chen was elected president of Taiwan (otherwise known as the Republic of China -- a clear case of the tail wagging the dog if there ever was one) with only 39% of the vote in 2000. Then there was a near-assassination "attempt" during his re-election bid in 2004 (altho many think the attempt was self-inflicted). These are old stories, as are the numerous flamboyant maneuvers of the Chen reign. By late 2006, corruption charges were were so thick in the atmosphere around Chen that Taiwanese TV was filled on a daily basis with film & live TV of a Peoples' Revolution -- masses of citizens in the streets of Taipei and other cities, demanding Chen's recall. In the end, the votes weren't there and Chen finished his term, albeit with much diminished power and reputation. He left office in the Spring of 2008, replaced by Ma Yingjeou of the Guomindang (Nationalist) Party. Since then, things have gotten really bizarre.

By Spring of 2006, Chen's approval ratings were somewhere between 8% and 20%, making even George W. Bush look wildly popular. His son-in-law, Chao Chienming (趙建銘) was arrested for insider trading & embezzlement. In November 2006, Chen's wife Wu Shuchen was indicted along with three others on corruption charges; Chen himself was immune from indictments while serving as president. Soon after leaving office last year, Chen was accused of money laundering. In a show of great chivalry, he quickly blamed his wheel-chair bound wife. Whatta Guy! His daughter-in-law was, allegedly (and likely), the recipient of US $31 million into a Swiss bank account, altho the money just round-tripped to another account in the Cayman Islands. Numerous other Chen-era officials have been arrested for various corruption issues. Frankly, I've lost count of them all. Throughout, Chen has alternated statements blaming others for all the illicit money movements (in effect, admitting that they took place, but at the same time blaming others for the wrong-doing) and then, simultaneously, claiming that he was being politically persecuted by his successor, Ma Yingjeou. He was finally arrested on November 2008 and again blamed Ma for his troubles. Chen then announced a hunger strike and was subsequently hospitalized but, like the Tiananmen hunger strikers of 1989, he was actually sneaking food when no one was looking. By early December 2008, he was released pending trial, but was re-incarcerated on December 30th after the prosecutors appealed his release. He remains in jail as the judicial proceedings continue.

While he has now embarked on another (alleged) hunger strike, the absurdities mount. Just this week, he renewed his accusations that all his troubles were the result of Ma Yingjeou's persecutions against him and furthermore that Ma (who is known for his rather modest lifestyle, strong marriage & high integrity) is not only gay but has had a homosexual relationship with an unnamed guy of African descent. Oh, horrors! You've just got to wonder whether if Chen is trying to push Ma & Obama into a closer relationship! I'm sure both Ma & Obama are completely uninterested in whatever Chen may be fantasizing.

If you haven't been watching this whole thing, you should! Its wildly entertaining. And better than any soap opera I've ever heard of. There's also lots of opportunities for spin-off shows, with Chen's son & ex-model daughter-in-law happily running a branch of the family money laundering business (allegedly, allegedly, of course). I've been unable to figure out how much the Chen Family has stolen from the people of Taiwan (or otherwise illicitly diverted for personal use) or took as bribes (or campaign contributions into their personal accounts) and so on and so on. It seems to have been well over a billion NT$ (US$28.8 million), and that's not counting the US$31 million that passed thru Switzerland. I know, I know! By Wall Street & Bernie Madoff standards, this is really Chump Change. But when it comes sociopathy & high drama, this has much more going for it.

And it ain't over yet!

Popcorn, anybody?

What Will China Do?

There's been a lot of speculation, in the press & elsewhere, about what the governments of every major country will do to respond to the current global economic crisis. Not only are specifics eagerly sought and eagerly speculated upon, but there is also (it seems to me) a lot of noise under the surface regarding two other aspects of the current situation. The first is about whether governments really understand what's going on. The answer to this one is two-fold, and they are both pretty straight-forward. No one knows what will happen over the next year and a half and governments are no different. Is this a severe recession with Global Characteristics? Certainly, it is. Is that all it is, or will things take a turn for the worse and will we irretrievably move away from "the world as we have come to know it"? And here is where things get tremendously speculative because, unless you can find Merlin the Wizard, or some soothsayer in a cave in Tibet, everyone is just guessing. For some its an educated guess. For others, its a wild stab in the dark. But no one I know can tell the future. And I've been to some of those caves in Tibet; they aren't talking about the global economy there. While there's a lot of guessing going on (although we might be better off calling it "scenario building"), the uncertainty remains high and the predictions are unreliable at best.

The second subject of background noise regards whether or not governments know what to do and (if they do) whether they have the will do what needs to be done. Here is where it gets a bit dicier. Certainly, there's a lot of policy debates in process. And a number of major decisions have been made. But: it ain't over yet! Like a very long and slow-paced movie, the story takes a long time to develop. Even if governments aren't quite sure what will happen next, they are certainly trying to figure out what to do to right the ship. They really have no choice. But it also seems to me that policy makers are feeling their way and searching for the right solutions for the major challenges before them. As we've seen in Washington, London, Berlin, Paris, Ottawa, and elsewhere, politics intrudes. That's the nature of a democracy.

The second & closely related question has to do with political will. Presuming the effective steps are known, do the governments of the world's major nations have the political will necessary to do what needs to be done? In my opinion, this is the major question. There is no doubt at all that, given the scope of this crisis, some -- and in all likelihood, a great many -- of the things that will be required will be difficult and sometimes unpopular.

Of one thing there is no doubt in my mind: when it comes to China, the Chinese government has the political will to take the steps it will need to take to build momentum towards economic recovery. Whatever it takes. No doubt in my mind.

None at all.

Nero Returns!

You know the image: Nero, the Roman Emperor, who is famously remembered as focusing on his lyre as Rome burned to a crisp. Whether History (at least as we popularly remember it) does him justice, the myth is being re-enacted today in Washington. It all makes it it very difficult for all of us American expats who have so self-righteously preached to the Chinese for years that they should look to the U.S. model for China's future.

While I still hold on with one hand to the mantra of free and open markets, the banner has gotten a bit tattered of late. Open markets have their limits, and if you don't understand that, you've been asleep for the last few years. The Chinese have not missed that point, altho I'm not too convinced we always see the same limitations. Nevertheless, the main points have not been missed. The Chinese government is, of course, no stranger to the skills of managing economic growth. If anything, they're too good at it. Too much growth, after all, can be a bit hazardous, too. Maybe not as hazardous as too little, but the risks are unmistakable.

Many of my Chinese friends are looking on in bafflement today as the debate rages on in Washington about the details of the pending stimulus package. They aren't alone. Many expats are also a little baffled, but for different reasons. What they don't see the value of is the political give & take of a democracy. Here in China, the debates are usually behind closed doors and mostly pretty short-lived. And, once over, the debates are . . . well . . . over. Already, the effects of the Chinese government response to the economic chasm we're all teetering on the edge of is being felt. Whether China will avert the worst is unknown; no doubt, this will be a tough economic year. But no one here thinks the government is not concerned or that, if early efforts are inadequate, further action won't be taken. They will do whatever it takes. And they will learn their lessons well. Probably, they already have.

Meanwhile, back in Washington, the Democrats have watered down the fiscal package in order to attract Republican support. In the U.S. House of Representatives, it didn't work -- not one Republican supported the original House stimulus plan. In the Senate, support was minimal. In each case, the final bills became more skewed towards tax breaks. I like tax breaks! Everybody does; nobody likes to pay taxes. But anybody who thinks people worried about losing their jobs (and already having lost much of their retirement savings) will buy a new car because the taxes are now lower is an idiot. Likewise with real estate purchases. If you're worried about your family's economic viability, your first thought is NOT about buying a new house. Unless you're independently wealthy or just scammed the taxpayer out of billions in undeserved bonuses, in which case tax savings is, maybe, a pressing concern. And, if you think about it, in order to pay income taxes, you've got to have an income. The unemployed don't pay income taxes.

I read a note posted by an old acquaintance last week. He is convinced that this whole thing will be over by the end of 2009, no matter what the U.S. government does. In one sense, he's right: the U.S. will get thru 2009. And then it'll be 2010. Time marches on, no matter what. Its what happens in the meantime that's the issue. If the U.S. is to avoid running the American economic locomotive into a brick wall, Congress will have to be both decisive and effective. There is no guarantee that the U.S. and World economies will be better in a year. More likely, if nothing is done, they'll be considerably worse. The Chinese can see that very clearly, as they can also see the inevitable linkages between the two economies. What is much harder to explain to them is why some Americans, who they think should know better, seem to be working so assiduously for broad American failure and for their own narrow self-serving interests. Even Chinese friends here who dislike the "powers that be" here readily point out that, in this crisis, the Chinese government is doing the right things. Why don't all American politicians want to do what clearly needs to be done?

I have no answer.

Meeting the Challenge of Slower Growth

The Chinese Central Government has floated the story, reported widely, that unemployment among China's roving migrant population has reached some twenty million workers. Reuters points out that, with additional workers just coming into the workforce, that will push the total up to about 25 million unemployed out of a total of approximately 130 million migrant workers. I believe that this actually understates the problem. Here's why: first of all, these totals are only for migrant workers, rural workers who leave their homes in search of jobs in other areas (usually urban areas, both large and small, and also usually coastal). In fact, the story was made public thru Chen Xiwen, director of the Office of the Central Rural Work Leading Group. But, again, these numbers are only for rural workers. Urban workers will also be losing their jobs as the growth rate slows, and many already have. And none of the unemployment projections around the country account for underemployment, a factor little discussed in China by labor economists. Also reported widely in the west have been the difficulties of recent university graduates in finding employment. This isn't a new problem, nor is it confined to China, of course. But everything in China, when it comes to population and labor issues is just plain bigger.

The central government (and, consequently, local and provincial governments around the country) are concerned about a probable increase in public protests. This concern is not new. China's government is nothing if not vigilant when it comes to public order and the threat of social chaos.

Western observers of China, particularly casual ones, frequently misunderstand these public outpourings. The Chinese "Laobaixing" ("Old Hundred Names", the common Chinese term for the masses of Chinese, both urban & rural) retain a strong trust in both the Central Government as well as with the Chinese Communist Party. On the other hand, distrust of local officials, particularly on the county, village & municipal level is not uncommon. When public demonstrations break out, unlike in the West, it is generally not to impress the press. It may be a spontaneous outpouring of angry emotion, a group reaction to events, a plea for attention from higher authorities, or an effort to pressure others. Despite the well known exceptions reported outside China, such as the unrest in many areas of ethnic Tibet (the Tibetan A. R. itself along with parts of Sichuan, Qinghai, and Gansu provinces) and Xinjiang in the last year, the anger and frustration are not directed at the central government.

Look for China's central government to be quite proactive in meeting the social repercussions of a slowing economic growth rate. Unlike Washington, Beijing is not hampered in taking quick and forceful action thru fiscal stimulus. The powers that be are quite sensitive to conditions in the countryside not likely to be taken by surprise. And the word has gone out from Beijing: pay attention to what the masses are saying and use a softer hand. That's good news.

What's Next?

As the global economic order collapses, most of the attention has been, for obvious reasons, on economics. After all, this is, first and foremost, an economic problem. We've all, those paying attention, become steeped in the vocabulary of economics and the financial world: credit-default swaps, hedge funds, yield curves, Treasury bond pricing, currency valuation, trade imbalances, savings rates (or lack thereof). For me, it has always been useful to try to look at problems from a completely different perspective. Sometimes its an empty and fruitless exercise -- interesting, perhaps -- but ultimately, providing no new insight. At other times, a whole new light can be shone on something and we see it in a new way.

The economic collapse we're witnessing is so complex and so multi-faceted & nuanced, that it gives us all kinds of different angles to watch from. One very popular Scenic Viewing Spot, a great Photo Op, you might say, is to look at the current situation and compare it to the Great Depression of 1929-1939 (or so). Certainly, there's a lot we can learn from the mistakes of the past that will help policy makers deal with the dilemmas of today. Its not the same, of course; it never is. But there are enough similarities, and the mistakes of the 1930's were so glaringly obvious, that the same mistakes won't be repeated. In China, in the U.S., in Europe, the media (and policy makers meeting rooms, you can bet) are filled with analysis and studies of lessons to be learned. There's been at least one thing that's been largely missing from the discussion, altho I'd bet that, at least in Zhongnanhai, the Powers That Be have been paying close attention. The media, to be sure (at least from my reading) hasn't woken up to the problem yet. What is it? Its the issue of what's next. What happens in the aftermath of an economic collapse of this magnitude? Again, a look back to the Great Depression is useful. It doesn't mean that the same things will happen; they never do. But similar things could happen, even if in different ways and in different places. Here's what I mean: the biggest & most consequential result of the 1929-1933 economic collapse was not economic, altho that was bad enough. It was political. Europe saw a turn from liberal democracy towards fascism, resulting in the rise to power of the National Socialists (who weren't really socialist at all) in Germany and the National Fascists in Italy. In Asia, Japan turned to the militarism that was latent in Japanese culture and politics. And, of course, the consequence of this broad political shift was World War Two. I'm not suggesting that the current problems will lead to another big war. Not at all. What I'm suggesting is that a broad shift downward in the economic prospects of hundreds of millions of people, if not billions, is likely to have political repercussions.

Already we have seen the Icelandic government collapse. Russians are restive, as are people in other pockets, both in Europe and in China. The U.S. has seen a peaceful, albeit dramatic, political change. With apologies to Elizabeth Kubler-Ross, I'd like to suggest that her Five Stages of Grief (Denial, Anger, Bargaining, Psychological Depression, and Acceptance) have a sociological and political application. First off, though, some caveats. These stages are not predictive, meaning they aren't inevitable. They may come in a rather random order. While, for individuals, there is a sequence, the edges are rather fuzzy (one can be alternate, for instance, between denial and anger). lastly, people don't necessarily go thru all the stages. Kubler-Ross maintained that people always experienced at least two stages, altho which two could vary. This is, in my opinion, even more true with large groups of people. Certainly, some of these stages of grief are already apparent. Who would today suggest that as recently as last summer, denial was not common? Americans were characterized as a "nation of whiners" by former Senator Phil Gramm. John McCain famously said the American economy was "fundamentally sound". If that isn't denial, the meaning is lost on me.

While some are still in denial, you can see evidence of bargaining, particularly in the halls of government. Then again, that's their job. In the U.S., at least, anger has been apparent, but it hasn't been a broad motivating factor. In other regions, it has been more visible. In China, it has sprouted up but has not been a broadly motivating factor for most of the population. For most of the world, the situation is in its early stages. There is economic pain, to be sure, but it is still characterized by early stage shock and denial. What is to be feared is the anger that may come as people realize their prospects & wealth may have been forever altered. If the world's government leaders, with their central bankers & finance ministers, are successful in limiting the disintegration that is potentially right around the corner, the dragon of political and social disruption will go back in its lair to hibernate for another eon. That's a big "if".

Creeping Socialism?

Its a real dilemma. Some of the biggest & best known names in American banking are, well . . . ready for foreclosure. They've failed. You can still call up your broker (assuming he or she is still employed) and buy stock in either Bank of America (where I started my career) or Citigroup, but the obvious question would be, "Why bother?" In the last year, B of A has lost 84.36% of its value and Citigroup has lost even more: its down by 87.30%. In the last 30 days alone, they're down by 53.29% and 48.44% respectively. Bank of America's market capitalization is a measly $39.9 billion dollars. Citigroup's an even more pitiful $16.9 billion. These were, once upon a time, the largest and most powerful banks in the world. To put that in further perspective, Citigroups' losses for 2008's fourth quarter totaled $8.29 billion. Another two quarters of equally stellar results and there's no equity left at all. Bank of America isn't much farther behind.

If there are any two banks in the U.S. that are really "too big to fail", its these two. But what are you gonna do? No investor, outside the Alzheimer's Investment Club would willingly put their money into these banks' common shares. Enter the U.S. Treasury and its "tag team" partner, the U.S. Federal Reserve System. Investors of Last Resort. When no one else will pony up, there are always these two. I can't see that there is any real choice on this one. The problem is, though, government bureaucrats make really bad bankers. Not that the bankers themselves have done so well. Those of us in China can attest to the fact (yes, a fact) that government owned and controlled banks are subject to political pressure and can all too easily make lending & investment decisions supported by political reasons alone. If you remember "Crony Capitalism" in Southeast Asia (remember the Asian Financial Crisis?) and the mess that Chinese banks have only slowly & recently emerged from, you know what to expect. Of course it won't be exactly the same, but its not a strategic plan that will warm the hearts of anyone who wants a healthy banking sector in the U.S.

The experience of the big four Chinese banks may, ironically, provide a model. Industrial & Commercial Bank of China (ICBC), Bank of China, China Construction Bank, and the Agricultural Bank of China were, for much of their history, part of the Peoples' Bank of China, China's central bank. As such, they were firmly under the control of the central government of China. And, as such, they made most of their loans based on government policy and had little (if any) independence. Predictably, operating results were nothing to brag about. Non-performing loans (NPL's) were difficult to isolate from the rest of the loan portfolio, but ranged anywhere from 20% to close to 50%, depending on who you asked and how you defined "non-performing". That's not sustainable. Today, after years of hard work cleaning up bad loans, selling them off to state-mandated "bad banks' (using one of Washington's latest buzz words) and revamping the management standards of each of the four, the portfolios are much more manageable. Indeed, all four have gone public and, in the process, have become much more disciplined.

My point is not that B of A & Citi should model themselves after the big four Chinese banks. But the Chinese banks do provide a lesson: there is an afterlife for state-owned banks. And while government ownership is not a formula for banking success, the Chinese banks recent history shows clearly that poorly managed banks can be cleaned up and learn to be disciplined financial firms. They can also go public and, in doing so, "go private" -- private in the sense of not being owned by the government. Current Citi & B of A shareholders & bondholders placed their bets long ago on bank management that was doing little more than rolling dice. They lost. If taxpayers are going to have to foot the bill, taxpayers deserve to reap the rewards. Calling it Socialism or Nationalization is not a useful excersize. Let's call it what it is: financial & economic necessity. The sooner the U.S. gets on with it, the sooner the problems can be solved and the sooner the banks can be returned to where they belong: in the private sector.