Perhaps the Japanese experience with Yamamoto reinforced this practice. Yamamoto may have contributed more to Japan;s defeat than any other military leader..

So do I. Chinese economic policy has been (like the economic policies of most countries), ad-hoc largely responding to current events and driven by political rivalries and compromises.

One reason that Chinese problem solving is romanticized is that the previous conventional wisdom was that the Chinese government was totally incompetent and on the verge of collapse, whereas there was a belief that the US could do no wrong.

Also, one reason that Chinese policy has been reasonably decent is that China has made a huge number of economic mistakes in the past and has learned from them. The banks are in reasonably good shape right now *precisely* because they were such disaster areas in the early 1990’s.

DJC: In Japan, for national security reasons, foreign educated Japanese are prohibited from high level positions in Japan’s government.

Which might explain why Japan traditionally has done such stupid and strategically self-destructive things, like attack Pearl Harbor. The one person that thought that attacking Pearl Harbor was a bad idea was Isoroku Yamamoto who had studied at Harvard.

In the case of China, because you have so many people in high positions with direct contact with the US, so that people in the Chinese government basically understand the United States.

DJC: The top elite in Japan are usually from Tokyo or Kyoto university. Beijing and Tsinghua Universities are the Chinese equilvalent.

A large fraction of people from Beijing and Qinghua University end up in American graduate schools. It’s an interesting relationship since American graduate schools are extremely dependent on Chinese graduate students for labor. A huge fraction of American universities would shut down cold if it weren’t for Chinese students.

DJC: I would hope the Chinese government would also follow a similar practice.

They don’t. Foreign university experience and foreign business experience is preferred for most positions in the Communist Party. After all, Sun Yat-Sen studied in Japan. Chou En-Lai and Deng Xiao-Ping studied in France.

This was a question that someone asked at the CSRC recruitment gathering. PRC citizenship is required for policy positions (although there are no restrictions on having a spouse or child with non-PRC citizenship). Also CSRC is doing what it can to make it easy for returnees to return. There are all sorts of logistical issues (jobs for spouses, education for kids, etc. etc.)

nice freudian slip there!

PMOK I very much agree that China’s reputation for looking forward and thinking strategically about the long-term seems a bit exaggerated. China’s currency policy for example seems to have been driven by a serious of short-term considerations (the time never seemed right to let the rmb move enough to really change the trade dynamics) that had the effect of leading china to accumulate a ton of dollars. its management of those dollars has been all over the place — in 06 it let the state banks take credit risk (That didn’t work), in 07-08 it bought equities (that didn’t work), from 05 on it shifted into agency MBS (rather than treasuries) and that left china a bit more exposed to a potential agency default that it wanted. so by default it is back in treasuries … and its search for an alternative to the dollar is hampered but an equal unwillingness to stop pegging to the dollar.

all in all, policy — best i can tell — has been driven by a set of short-term considerations, with the result that china created a problem for itself and ptoentially the world now that it concluded it is over-exposed to the dollar.

I get the impression many, many people continue to romanticize the Chinese as omniscient masters of planning and problem-solving. If they are, and their current guidance to economy recovery is indicative of that, then I’m fairly sure the U.S. itself must be making all the right moves as well.

“Where will the US taxpayers, or the 50% who are not taxpayers, find the money that they are supposed use to grow their savings, when most of them are less than two paychecks, or one medical emergency, away from going under?”

Most are not. As with the “average credit card debt” meme, it pays to look more closely at the numbers behind the averages.

“In Japan, for national security reasons, foreign educated Japanese are prohibited from high level positions in Japan’s government. The top elite in Japan are usually from Tokyo or Kyoto university. Beijing and Tsinghua Universities are the Chinese equilvalent. I would hope the Chinese government would also follow a similar practice.”

…… mind-boggling.

The point was simply that in a recession, it is hard to find capital, either to buy distressed assets (they are in oversupply) or for sick, but curable businesses. In that case private insolvency does not work as intended and there is a role for the government (or, that is what stakeholders hope). In the current recession, high debt levels (private equity) and incomplete transfer of manufacturing to the best (ricardian) locations (china etc) make things just a little harder in most OECD countries. Apologies for not being clearer the first time. I thought it was pretty straightforward.

In many industries, liquidation is probably the worst thing that you can do because the value of the firm has is embedded in social relations and if those relations disappear, a lot of the value is lost. This is the situation in financial and manufacturing firms.

There are a number of problems with using standard bankruptcy law with financial institutions. The big one is that things just happen too quickly. If you have an banking crisis, then within a matter of *hours* you have to let people know what liabilities are good and which ones aren’t, otherwise everything falls apart because all liabilities are bad.

The other problem is that there are no good legal procedures for dealing with a bank that is near insolvent but not insolvent or one in which reasonable people can disagree is insolvent or not. Also, just because you are not broke doesn’t mean that anyone is going to let you money.

There is also the difference between “bankruptcy” and “default.” You can deal with debt by just not paying your bills, and a lot of people that have borrowed subprime are dealing with their bills by just not paying them.

Huizer: Those externlities tend to lead to a phase of industry-wide contagion where overcapacity is reduced and more efficient operating approaches, often combined with product unbundling.

But often the problem isn’t overcapacity. GM wouldn’t have a problem with “overcapacity” if each car cost $100. What happens in a bankruptcy is that once the capital costs are forgiven, then the owners can sell assets at operating costs which are smaller and in some cases much smaller.

This ended up being the situation with the airlines and it’s really often the case with real estate, where the operating costs are negligible.

One thing that happens is that when people talk about “failed industries” they often look for a one size fits all solution, where in fact what you do with a bad corporate situation is very industry and often very company specific.

Imagine China’s electricity production is 1,000 units, and demand is 1,250 units. The extra 250 units is made up from individual generators burning everything from bunker fuel to kerosene, coal, wood and other crap.

When demand rises, there is no indication in the data: 1,000 units were already being consumed. Similarly, when demand falls, there is no indication in the data . . . until the surplus 250 units are no longer needed, in which case – very late – the data begin to decline. Here in Hong Kong, we noticed the downturn as better air quality, starting in mid-2008.