Crossing river by feeling the stones?

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By You Nuo (China Daily)
Updated: 2009-02-16 07:34

The US produced two economic plans last week. On Friday, Congress handed President Barack Obama a victory by approving a $787 billion stimulus bill.

The Obama plan is designed to help victims of the crisis in the short run and, in the long run, to build a more competitive and hopefully more fuel-efficient economy.

On Tuesday, Treasury Secretary Timothy Geithner revealed his bank rescue plan, which outlined a future government-private sector partnership to re-finance the financial system.

Technically, it is the Geithner plan that carries more importance. If banks and other financial companies cannot return to their normal functions, all the new administration's good promises will sooner or later run into a bottleneck.

Despite some "buy-American" and "fire-foreigners" (foreign workers holding H1 visas) clauses, foreigners also have a genuine interest in seeing both plans work. The world needs the US economy to be healthy and strong, and to resume its driving power for global business. A lingering recession can only breed more protectionism, not just in public sentiment, but in legislation and policies.

The market, however, reacted to Geithner's plan quite harshly for its alleged lack of detail. But a lack of detail is only how it appears on the surface: Behind that lack is indecision.

Many economists have pointed out that the US banking industry is technically insolvent, with some of the major banks still sitting on God-knows how many bad assets. If they can't go through a major overhaul, economists say, they are going to be a heavy drag on any future recovery. Then the world will see a rerun of the so-called Japanese malaise.

That being the case, the US is faced with a tough choice: Should the financial establishment - so disastrous and costly in its unraveling last year - be allowed to remain pretty much as it was prior to September 2008?

Or, should there be some institution-wide overhaul? And if the answer is yes, then what replacement institutions and mechanisms are to be built, both in the short run and in the long term? And what pains and gains can society be sure of?

The lack of details in the treasury secretary's plan betrays the difficulty in solving these choices in simple terms.

Some tend to regard the choice as about two future scenarios: If the financial industry still prefers small steps in progress, then the recovery will be a fairly long process. If there is an overall solution, and if the new institutions (be they new "good banks" or "good funds" or a "good market") are equipped with useful instruments, the recovery may require less time.

In fact, the financial industry has changed quite a lot, willy-nilly, since half a year ago. Mixed ownership is already in place. In would-be regular-time market capitalization figures, it is the US, not China, that owns the world's largest state-owned financial services.

If more new institutions are set up, for the purpose of more effectively isolating the problem or of generating new credit, then the role and functions of the old institutions would naturally shrink.

Some commentators say that Geithner and his team prefer to learn as they go. So it is possible that new solutions would come about as necessities even without a grand overarching plan.

The Chinese also prefer to learn as they go ("to manage to cross the river by feeling the stones" - as the late Chinese leader Deng Xiaoping is frequently quoted). And as they can tell, when there are more new institutions, regulations, and instruments, what you have is no longer an ordinary recovery, but already an industry-wide reform.

But reform is absolutely necessary. It is also required by the global market, as nearly every economist points out. Yet the global-level reform has to bridge the internal systems and practices in the key markets and key countries. People are counting on the US to set an example.

E-mail: younuo@chinadaily.com.cn

(China Daily 02/16/2009 page4)