The one example of decisive executive leadership in the last three weeks was Hank Paulson, and he got instantly screamed at for leading decisively. Until near the end, both major party candidates were waffling, for very good reasons.

One the other hand, maybe a lot of vision is a good thing. The one major example of a decisive vision leading to action, was the decision to invade Iraq.

If we blame China for freeing up money for Americans to then go and buy mortgages and invest in Ponze Schemes (as they were told to by those in positions of influence and authority), then we have to blame gun makers for all the people killed by their products.

The interest rates were kept artificially low because those who could have adjusted the rates (Greenspan, et al.) chose not to raise them. Full stop.

Why did they decide to maintain these interest rates?

Because America seems to have a terminal lack of vision at its executive levels, and I am afraid it will continue to be a myopic nation for years to come.

Because they are invested in the United States playing the same kind of brinkmanship game learned during the Cold War’s Arms Race but now played openly in the economy over the past 15 years. If America goes down, everyone goes down.

We cannot find fault with China for investing in the U.S. during this time because the U.S. has been very keen to bring China closer to the United States – the U.S. wants China invested in America.

Having China invest in the United States has been a great first step in the reciprocity that is needed between the two if the world as we know it is to continue in the way we know it. What America should be focusing on with these investments made by China are not finance technologies like these toxic loans, but green technologies.

China simply cannot maintain its development at this rate, there just aren’t enough natural resources in the world for the U.S. to consume as it does and have China develop at this rate. What the U.S. should have been doing with those investment dollars that the Chinese “freed up” was (and is) to invest in technologies that would reduce the resource limitations placed on China. Then, the U.S. would be manufacturing real goods, meaning China could continue to be manufacturer to the world, and in so doing we create a more sustainable consumption pattern.

Instead, funding for the sciences (infrastructure innovation for the 21st century) by the Federal government over the past 8 years has been drastically cut, and the American economy has been running on the nutritional equivalent of protein bars.

Now the economy’s got diabetes: it’s not fatal if managed properly.

“What else might China do with their surplus ?”

That very good question shows that the real problem is the very existence of a long-running big trade surplus, and that the solution is to end it by sharply revaluating the RMB.

IIRC that view has been proposed by Brad (and Roubini?) for quite a long time now, and it has recently been advocated in China too.

“The U.S. financial crisis had taught China a lesson and that was: “Why are we piling up these IOUs if they may default?” China’s economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.

“Our export-growth strategy has run its natural course,” he said. “We should change course.”

China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.

Without yuan appreciation, China will continue to accumulate foreign reserves, which means further accumulating “IOUs from the U.S.,” said Yu. “This is paper and it may default and it will not increase China’s national welfare.”

If China doesn’t allow the yuan to appreciate and continues to promote export-led growth it will lead to confrontation with the U.S. and Europe, Yu said.”

(I add that accumulating IOUs from the EU or from Japan does not make much more sense than accumulating IOUs from the US. In any case, there was a currency (or two) used some time ago which is not an IOU from anyone, a point that Benn Steil mentioned in his recent papers.)

It is lamentable that the current bust might be leaving US with nothing but a notorious legacy and heap of worthless financial engineering of derivatives bearing arcane yet amusing names with nothing but letter.

For sake of those, let me cut n paste quoting Friedman,

“Many things make me weep about the current economic crisis, but none more than this brief economic history: In the 19th century, America had a railroad boom, bubble and bust. Some people made money; many lost money. But even when that bubble burst, it left America with an infrastructure of railroads that made transcontinental travel and shipping dramatically easier and cheaper.

The late 20th century saw an Internet boom, bubble and bust. Some people made money; many people lost money, but that dot-com bubble left us with an Internet highway system that helped Microsoft, I.B.M. and Google to spearhead the I.T. revolution.

The early 21st century saw a boom, bubble and now a bust around financial services. But I fear all it will leave behind are a bunch of empty Florida condos that never should have been built, used private jets that the wealthy can no longer afford and dead derivative contracts that no one can understand.

Worse, we borrowed the money for this bubble from China, and now we have to pay it back — with interest and without any lasting benefit.”

I truly worry for US should the game of finger pointing continues without the urgency to embark on the imperious and expedient task of self soul searching.

anyway, i have to disagreee with Brad on this.

If the Chinese or the rest of the world were to be blame for buying the US Tbonds, notes, bills and agencies and hence keeping long term rats low and sending the yield curve into inversion, the US banking and financial sector should be held liable for the mass creation and marketing of the toxic subprime financial deriavatives.

Apparently, the Central Banks and SWFs are more than happy with their buy and hold strategies of AAA US Treasuries, contented with the relatively low risk, low coupon, low yield and holding them to or near maturities.

HOwever, much cannot be said of the innovative and aggressive financial wizards who had invented relatively high yield, high coupon, high risk, low probability through some arcane financial engineering alchemy. Waste was turned into Gold and sold to the masses.

And, if there are any excellent statistics available on the US housing market, perhaps a breakdown of the nationalities of the subprime houseowners should suffice in proving that the subprime saga had arisen from the US within.

Im glad that Brad sees that the acute lack of timeliness and aptness of regulations from the relevant bodies were an integral part to this mess.

On the other hand, Im quite taken aback that the fact and notion that the financial markets (in this case the bonds and interest rates) are based on and operate on the noble philosophy of laissez faire are conveniently sidesteped when the time for finger pointing comes.

It is quite evident, that the market has no interest in correcting the inversion of the yield curve then. A multitude and plentitude of commercial and economic reasons can be found and argued. Simply put, it was much more and relatively easier to make money than to correct the inverted yield curve.

Lastly, they say Greed is good, but they forgot that Greed Kills.

Apparently, the fact that we need a USD 700 Billion bailout now says it all. Im not arguing against the need of it. However, through financial and budget prudency, the US, in all likelihood, might not have walked down this slippery road.

2Fish — putting the money in a bank vault (or holding dollars under the mattress) still provides financing for the US — though obviously it would have less effect on us financial markets if China held $ cash than if it held dollar-denominated financial assets.

Murph –a low savings rate usually combines with a big fiscal deficit to put upward pressure on long-term interest rates and thus to push home prices DOWN. the core issue here has always been why that didn’t happen in the US, and why the housing boom — in the context of ongoing low US savings — didn’t put pressure on rates that would have nipped the boom in the beginning. The fact that China bought so many treasuries and agencies is central to my understanding of why this didn’t happen.