Senior monetary officials usually talk in code. So when Ben Bernanke, the Federal Reserve chairman, spoke recently about Asia, international imbalances and the financial crisis, he didn’t specifically criticize China’s outrageous currency policy.
But he didn’t have to: everyone got the subtext. China’s bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world — and, in particular, the United States — will do about it.
Some background: The value of China’s currency, unlike, say, the value of the British pound, isn’t determined by supply and demand. Instead, Chinese authorities enforced that target by buying or selling their currency in the foreign exchange market — a policy made possible by restrictions on the ability of private investors to move their money either into or out of the country.
...Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.
No doubt the central planners of Team Xinhua are doing their best to survive the current economic tsunami. No doubt their policies haven't always helped. But let's be clear.
The housing bubble was caused by speculators who figured that housing values could never go down because people would do anything to keep from losing their homes.
The housing bubble popped because some people figured out how to make money from its bursting. The damage that it caused, and the number of people hurt by its burst did not- and do not- in the slightest figure into their calculations. They are the same people who stand to make money if the Treasury's bail-outs are more focused on helping them blow another bubble.
It's always fun to blame the Chinese. After all economic wars are only slightly less profitable than shooting wars.
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