Wednesday, December 17, 2008

Chimerica Convergence: Ethical Bailout Needed

During our recent trip to Beijing (see video above), many people made the joke that just as China was becoming capitalist, the United States was going to nationalize its financial system. Which one was really socialist, some asked us? Some Chinese found America's movement back toward a socialized financial system to be frustrating: What is our benchmark? What is our goal? The target keeps moving, it seems.

More telling, perhaps, is that America and China are converging--Chimerica, as Niall Ferguson has called it (see video above at Carnegie Council's Public Affairs program).

Thomas Friedman made this point this week in his op-ed "The Great Unraveling:"

But while capitalism has saved China, the end of communism seems to have slightly unhinged America. We lost our two biggest ideological competitors — Beijing and Moscow. Everyone needs a competitor. It keeps you disciplined. But once American capitalism no longer had to worry about communism, it seems to have gone crazy. Investment banks and hedge funds were leveraging themselves at crazy levels, paying themselves crazy salaries and, most of all, inventing financial instruments that completely disconnected the ultimate lenders from the original borrowers, and left no one accountable. “The collapse of communism pushed China to the center and [America] to the extreme,” said Ben Simpfendorfer, chief China economist at Royal Bank of Scotland.

Coincidentally, Friedman comes to the same conclusion that we found on our trip to Beijing: The United States and the world need an "ethical bailout:"

The Madoff affair is the cherry on top of a national breakdown in financial propriety, regulations and common sense. Which is why we don’t just need a financial bailout; we need an ethical bailout. We need to re-establish the core balance between our markets, ethics and regulations. I don’t want to kill the animal spirits that necessarily drive capitalism — but I don’t want to be eaten by them either.

We need a balance between ethics and regulations. Policy Innovations makes a similar point in our latest financial commentary, "Raising the Bar for Hedge Funds," by Stanley Goldstein and Frank Plantan. Check it out here.