China must pay their part because they fueled the debt bubble.
Interest rates are just one aspect determining the supply and demand of credit. At any given rate the type of regulation of the finance industry and the level of debt accumulated have a huge importance.
Right now the debt is so high that even with negative real interest rates people will not borrow more. They ll just replace old debt by new one.

Interest rates are always politicised because the regulation of the finance industry is.

anyway …

The problem with interest rates is that they have become politicised. Interest rates are not some kind of moral instrument; they are simply the price of borrowing money. If the risk of lending goes up, are you willing to lend at the same rate? Probably not. It is not morality; it is supply and demand.

If you think that the problem has been financial innovation, why do you think that should China pay?

Germany - exactly! I am fan of what Germany has done. They went into emu at an uncompetitive exchange rate, but by being realistic about what they could afford and what they could do well, the Germans have recovered their position. Angela Merkel can meet the Dalai Lama and tackle the Chinese about climate change etc, and they still buy German products, because they would be stupid not to.

In any of the precedent occasions I would have saved the investors (probably not by lowering rates though) BUT I WOULD HAVE MADE ALL THOSE “INNOVATIONS” illegal and sent the financial leaders to jail.

What comes every 30 years or so is a phase in a global debt bubble. Look at any debt graph from any country and you can see debt rising after 1980 and exploding after 1990.

The idea that hiking rates is good because it ll punish us all for our sins … Gee. whatever the rate level if there s room left for herding, there will be herding. The subprime crisis is not mostly a pb of interest rates, it s a problem of stupid “innovations” (robbery) and promoting the hypocrit “ownership society”.

Now that the bubble is over, the worse would be to do as if it would be possible to pay back the ridiculous amount of debt that has been borrowed and lent. Those amounts need to be forgotten, erased, buried in inflation, whatever. No economy can repay the amount of debt that now exist.
Some countries have reduced federal (or national) government debt, I have yet to see an economy with stable or falling total debt levels (Germany recently ?).

as far as the US and china are concerned.
The US will repay its debt to all investors no matter what, yet in a weaker dollar. If the chinese are unhappy with that they should have asked for RMB denominated debt or spent the money. The US-China stuff is just a minor issue in the global debt bubble stuff anyway. Yet I must admit that since ultimately China are the ones who have fueled this bubble in the end, it is natural that they get hit too. They are no different from the mortgage lenders. They were repetedly told that they d be paid back in worthless dollars, they choose to invest. Well they must find it interesting anyway.

DC my bet is China s trade is going to rebalance pretty soon and in a nasty way. We ll see then if china’s dependance on the world economy has been overevaluated.

Moral hazard has arisen much more frequently than every thirty years or more. I would say that similar crises of financial excess arose in 1987, the early 1990s, 1998 and 2000, and each time, the response was to lower interest rates. The result has been cumulative, double-sided macroeconomic moral hazard. Cumulative because the easing is prompted by the pace of decline, regardless of the level. Double-sided because, despite the Fed’s talk about “taking out insurance”, the premium is actually appropriated by diluting the cautious investors who put their money in floating rate debt, so in addition to rescuing the borrower, the remedy penalises prudence. This sequence has to stop somewhere - better here than Argentina.

China lent money largely to the US government, not sub-prime borrowers. The government could have lent money to other countries by building their own reserves or SWF, or they could have invested it, in windfarms, railways, education etc. But they preferred to cut taxes, and leave it to the people to decide what to do. Collectively, Americans decided to consume. The US can have an internal argument about who was responsible for driving that consumption, and conclude that there should be some internal transfers to spread the burden of repayment (eg recovering bankers’ bonuses), but I think it would be wrong to short-change China. Not just because of the morality of a rich nation cheating a poor one, but because of the effect on international relations.

There have been a series of press stories in the US indicating that the appeal of outsourcing has fallen, and complaints on the indian side about the impact of the rising rupee. In terms of hard data, tho, i would need to do a bit of legwork. For goods exports, the evidence of a slowdown in indian export growth seems pretty good, tho the cause is as likely global and the rupee’s rise.

Brad- Would you pls provide some evidence for the same ? Is it S/W outsourcing that you are talking about ?

I did read the IMF data about China’s trade. We all agree that China is producing more intermediate components, say, for the lap top computers. In your words, this doesn’t have to be necessarily the case. — I don’t agree. — And this is very important, because it goes into the core of your re-balance scenario. Let me illustrate my point using lap tops as an example:

China started the lap top manufacturing in the assembly - and only assembly - jobs around 1998. Or, to be more precise, some Taiwanese lap top manufacturers moved their assembly operations into China. At that time, the top 5 lap top manufacturers are all Taiwanese, so you can see that this is not a Beijing’s design and the Taiwanese have no incentives to help Beijing. What happened next was that every one was straight-jacketed into the process that kept the industry evolving - the movement of the assembly jobs caused the supply chain to adapt and kept driving more and more high-end jobs into China. In other 3rd world countries, this may not necessarily be the case, but….. China is unique. One of the top 5 tried to keep the high-end jobs in Taiwan - and nearly bankrupted itself - lost 95% stock value and finally moved too. Today, the lap top manufacturing is ever more concentrated - Winner takes all - that within 1/2 hour drive from Shanghai, 2/3 of the world’s lap tops are manufactured. The force is so great that Samsung also moved its lap top manufacturing operation to Suzhou. Now you can’t accuse Korean companies to be unpatriotic money-first fat-cats …. and the industry is still keeping on evolving in the same direction ..

Looking back, or even now, how can any one - including Beijing - break the chain of events? Either everything - including the assembly jobs - are kicked out of China - which obviously is unacceptable to Beijing, or the evolution of the supply chain will keep on driving more and more high-end lap top jobs into China,.. and hence the ever larger trade imbalances, at least as far as the lap top industry is concerned..