Off Balance: The Travails of Institutions That Govern the Global Financial System by Paul Blustein

Author:Paul Blustein [Blustein, Paul]
Language: eng
Format: epub
Publisher: The Centre for International Governance Innovation
Published: 2013-10-16T00:00:00+00:00

At that point, a showdown at the board on China was scheduled for September 22 — which, at the time, no one knew would come exactly one week after the most catastrophic financial episode in generations. The staff was putting the finishing touches on its 2008 Article IV report for China — which would never see the light of day. Here is the crucial wording from the report’s executive summary:

There are significant concerns that the exchange rate may be fundamentally misaligned and exchange rate policies could be a significant contributor to external instability....Accordingly, staff recommends that the executive board initiate an ad hoc consultation with China that would be expected to be concluded within about six months.

The September 22 board meeting was never held. The Article IV report was buried. Indeed, the US Treasury lost interest in prodding the IMF to label China. The bankruptcy of Lehman Brothers, and the financial chaos that ensued, shifted the balance of power again away from the United States and toward China — this time seismically, by several orders of magnitude greater than anything that had come earlier in the crisis.

Henry Paulson’s book, On the Brink, offers helpful insight on why, although it never mentions the 2007 decision. In his chapters about events immediately following the Lehman bankruptcy, the former Treasury secretary recounts numerous phone calls to Beijing in which he and other Treasury officials were essentially imploring Chinese leaders to see that it was in their own self-interest to help keep the rest of the US financial system afloat.15 On the Saturday after Lehman collapsed, for example, Paulson called Wang Qishan, the vice premier responsible for economic and financial affairs, in the hope that a Chinese state-owned company would invest in the investment banking giant Morgan Stanley, which was in desperate need of a cash infusion. According to his book, the Treasury chief told Wang that Washington would “welcome” such an investment, adding that the US government “viewed Morgan Stanley as systemically important” — a virtual promise that American taxpayer dollars would be tapped, if necessary, to protect the Chinese against major losses. Wang’s “unenthusiastic tone” convinced Paulson to back off. “China was already providing tremendous support to the US by buying and holding Treasuries and [other US] securities,” Paulson writes.

15 Henry M. Paulson, Jr. (2010), On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, New York: Business Plus.

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