China and its Discontents

With the release of the Treasury Department’s new white paper on housing policy, the administration has restarted a national discussion on reforming the GSEs (government-sponsored enterprises, Freddy Mac and Fannie Mae). The long and short of it is that they distort the market for mortgages, and contributed to the collapse of the economy by backing risky mortgage securities that later blew up. (they are not however the root cause and creators of those exotic securities; you can thank Wall Street for that) Our bailout of Freddy and Fannie has cost the government far more money than the stimulus or TARP ever cost. This entire set-up is rather strange, given that these are for-profit corporations with an arsenal of lobbyists.

What’s the government’s plan? I got curious when I read Ezra Klein write this bit: “But the government isn’t looking to dramatically change the role they play in the housing market. They’re just looking to get away from poorly designed institutions like Fannie and Freddie.” This seems like a contradiction – and I think he misread the report, although I agree with everything else he wrote in that post. The government’s stake in the mortgage market is going to be substantially altered. As Daniel Indiviglio writes, the government will still subsidize a small portion of mortgages for the poor and veterans through FHA and VA programs, but under any of the options provided by the Treasury Department, the U.S. government will gradually exit the 85% percent of the market it had previously inhabited.

The plan makes GSEs less and less competitive with private sources of funding, gradually winding down its influence on the mortgage market. Fees guaranteeing mortgages will rise, more private capital would need to be raised to cover credit losses, and larger mortgages will not qualify for government-backing. Next, the plan offers three options for a limited government presence on the market: completely private, no government role of any kind; a crisis funding mechanism that is so expensive that during good times it is never used, and in bad times much cheaper to ease a credit crunch; and a catastrophic guarantee reinsurance program. Indiviglio describes this better than I can: “Mortgages would pay a premium to obtain this insurance, but the first losses (up to some specified percentage) would hit whoever held the mortgage asset, whether it be a bank or investor. If losses exceed that first loss piece, then the government would cover the remainder. The government would use the guarantee fees it obtained to do so. That way, theoretically, taxpayers would not be harmed. Think of this as a little like depository insurance, where there’s a fund in place paid for by insurance premiums that the government uses to cover losses.”

This is all good. When it comes to housing policy, one major question will shape how you view all related policies: is universal housing ownership a worthy goal of U.S. government policy? I would say: not in of itself. Owning a house is not a smart decision for every single person. It might be the American dream, but we do more harm than good when we try to force it on people. I would suggest everyone also take a look at the GSE section of the Roosevelt Institute’s 2009 report on financial reform, “Let Markets Be Markets”. There’s a very good lecture from Raj Date included. The full report is here (pdf).

Celebrating the Spring Festival and Chinese New Year in Beijing has blown me away. The fireworks. The spectacle. The food. It’s nearly overwhelming. For the past five days, Beijing has been constantly rumbling with the sound of fireworks. New Year’s Eve, the city felt like a warzone. Every storefront was closed, so it was dark. China is just dirty and poor enough in some areas that you could almost imagine it to be a war-torn country. One of my friends remarked, “I’ve become so desensitized to the noise. If someone WERE to attack China, New Year’s would be the best time to do it. No one would pay any attention.”

It’s been a lot of fun, but I think I’m ready to get back into my normal routine and schedule now.

The New York Times’ recent article on the nature of Hezbollah’s current existential predicament was extremely instructive – mainly because many people don’t view Hezbollah’s problems as an issue over its very existence (but it is). The best quote, unfortunately, was wedged toward the bottom:

“Hezbollah doesn’t want to control the government or country, even though they could if they wanted,” said Anis Nakkash, director of the Aman Research Center here in Beirut.

The article identified the problem; that is, Hezbollah can’t consolidate power. But this quote says why: Hezbollah doesn’t want to claim total power. The real reason behind this being, Hezbollah is a militant group, and ruling governments by definition cannot fill the same role as a militancy. An institutionalized Hezbollah is no longer the same Hezbollah that once existed, and the leaders of the group don’t want to lose sight of their original goal: vengeance and destruction upon Israel. Now this is not to say that states that employ terror do not exist. They do. But they generally operate dysfunctionally and are rejected by the global community (Iran, North Korea, China at its worst, etc.).

Hezbollah is on a very shaky path right now. It simply does not have the requisite credibility among the international community to act as a real, normalized stakeholder in any Lebanese government. But it’s also true that we need Hezbollah to become legitimate more than anything – to shake off some of its radical roots, cut off ties with Iran (which might already have happened), and take over some responsibility in representing Lebanese’ interests on the world stage. This outcome is possible, but it will require a careful dance by US diplomats. As for Hamas – well, Hamas is another story. They’re really off the deep end.

It was a rather interesting flight from Beijing to SF yesterday. First, we were stuck on the tarmac for three hours because Beijing was too windy. Yes, too windy. I was seated in between a woman from Shanghai, and another from rural Hubei province. The conversation was quite interesting, given the regional pronunciation differences. Mandarin speakers from Shanghai change every zh and sh sound (the sound in jump and ship respectively) into simple z and s consonant sounds. This can be confusing, since Mandarin makes ample use of all four sounds, and the tonal nature of the language and relatively small number of consonant-vowel combinations (far fewer than in English) mean that more words are saddled onto half as many sounds.

The woman on my right had a very strong rural accent, even more difficult to piece together than the Shanghai accent. She didn’t know how to write pinyin or English to fill out her customs and entry form, so I helped to fill it out for her. She was seeing her two grandsons (4, and 8 years old) for the first time. Her son had left in 1994. She told me he played badminton. I assume professionally, but I’m not sure what money can be made from that in the US (in China, badminton sponsorships are commonplace). One of the questions on the entry form asked for an estimate of the value of all things on her person. I asked, “100 kuai, 200 kuai?” 200 kuai. All she had with her was $30 worth of clothing and a piece of paper with her son’s address and phone number. We were separated into two different lines during the customs process – I hope customs was able to get in touch with her son.

Traveling halfway around the world is a strange experience – your night becomes day and day becomes night. Added to that was my lack of sleep for the past two days; I couldn’t tell which way was up. Strange then, that I went to bed in San Francisco only to naturally wake up at 7 AM. I heard a rather strange sound for Saturday at 7: chants and songs. Outside was a line of marchers stretching down for half a mile. I decided it was a good day for a morning run; I was also curious about the marchers. It turned out to be for the Coronation of the Virgin Mary – they were walking from here to the Mission, on a 9-hour march.

Running on the path next to Colma Creek, I realized why running suddenly seemed so much easier: my lungs were no longer wheezing from the pollution. I took a loop around town, running from El Camino to Orange Park, walking to Ponderosa, and then running the rest of the way to Orange Library, through Alta Loma back to El Camino. The run got me thinking about some of the differences between here and what I would have seen on the same run in Beijing. Here is what surprised me, in no particular order:

• Dogs higher than a foot.
• Asian-looking people who don’t respond to me in Mandarin.
• Parks that are empty at 7:30. Also, no old people practicing Taiqi, playing classical instruments, crooning into a microphone, or line-dancing to pop songs.
• Public art installations at Orange Park. A couple new ones including two giant insect wings painted blue and a strange sheet of steel.
• Birds on electric wires.
• Canadian geese resting on a grassy field.
• Empty streets.
• Quiet.
• Suburbia that is not reserved for the wealthy and wasn’t built within the last year.
• People with tans.

I was really touched when my homestay parents asked me over dinner, “Who do you think is America’s best friend? China?” I responded, thinking in terms of real-politik allies, “No, probably not.” But they said, “America is China’s best friend. Japanese students don’t come to China and live with Chinese families. They live together in dorms. The Koreans don’t come to China and live with Chinese families. They live out on their own. Only Americans do. They’re unique. More Americans understand China than in any other country, and more Chinese understand America than in any other country; more students study in each other’s country than in any others. That is why we are best friends.”

Also something that I had forgotten: they mentioned that George Bush Sr. had served as ambassador to China in the early 1970’s under Ford (he wasn’t actually ambassador at the time, because the US still recognized Taiwan, but was the official envoy, and acted like an ambassador). Furthermore, they said Bush Jr. was in China during this time, biking around Beijing taking pictures. For some reason, this really surprised me, simply because the perspective you would have as a foreigner in Beijing prior to the Reform and Opening Up would be somewhat unique, as there were really no foreigners in China prior to that time.

At some function (it’s unclear in what capacity), my homestay father got to know John Tsu, who he described as Bush Sr.’s “Chinese teacher” (he was chairman of the Asian-Pacific Affairs Committee in the White House). I thought that was an interesting connection as well.

While WikiLeaks made the trove available with the intention of exposing United States duplicity, what struck many readers was that American diplomacy looked rather impressive.

Is this really true? I don’t believe it!

No seriously, what did people expect? That we have amateurs representing our interests on the world stage?

President Dmitri A. Medvedev, expressing continued wariness over the prospect of military cooperation with his country’s former cold war adversaries, warned on Tuesday that a failure by Russia and the West to reach an agreement on missile defense could provoke a new arms race.

This is why the New Start Treaty needs to be ratified before the end of the year. We need the Russians to be on our side. Medvedev has staked Russia’s good relations with the United States, and any future nuclear negotiations, on the success of the treaty. New Start and missile defense are not just related – they are inseparable. Without a resolution on one, the other will languish. If we let New Start go, our priorities with Russia across the board falter. If we don’t deal with missile defense, then the Russians will back out of New Start.

I’m very happy to see John McCain coming out of a long, dark election season and finally articulating a position that makes sense: supporting the passage of New Start and encouraging Jon Kyl to follow suit. It’s too bad that some politicians can’t stand up to pressure from within their own party (but at least he’s here right now).

I think ratifying the New Start treaty and the successful inclusion of the Russians in a joint-NATO missile defense plan would be an unqualified success.

Over an official lunch in late February, a top South Korean diplomat confidently told the American ambassador, Kathleen Stephens, that the fall would come “two to three years” after the death of Kim Jong-il, the country’s ailing leader, Ms. Stephens later cabled Washington. A new, younger generation of Chinese leaders “would be comfortable with a reunited Korea controlled by Seoul and anchored to the United States in a benign alliance,” the diplomat, Chun Yung-woo, predicted.

That is a bold prediction – and the Guardian (here and here) is much more direct than the New York Times in claiming this. I agree with Stephen Walt that in regards to China and North Korea, the embassy cables are much more of a wash than they are portrayed as (what an ambassador says to another ambassador is not necessarily the discussion the Politburo Standing Committee is having). Even assuming Kim Jong-eun or the military cabal is somehow incapable of successfully negotiating the power transfer, there would need to be some pretty astounding diplomacy for China to be comfortable with a unified Korea. The entire idea behind supporting a divided peninsula from China’s perspective is that, regardless of how odious the North Korean regime is (and it is a serious headache to China), any unbalancing of the status quo will ultimately hurt China’s interests. Any US or NATO military presence above the DMZ and the floods of North Korean refugees, as the article notes, would be untenable. But that’s not all.

An ascendant, unified Korea could not be a benign ally of the US, according to certain Chinese viewpoints. Already, China is boxed in on all sides by countries closely-partnered with the US: South Korea (of course), Japan, the Philippines, Indonesia, Australia, and India. Unification means a great deal psychologically. A unified Korea would have subtle, but greatly-expanded persuasive powers on the international stage. I hope that, as the Guardian suggests, younger leaders are no longer concerned about this, and want to work with both Korea and the US in a mutually beneficial manner. But that’s not a given.

The goal, then, is to make unification in China’s interest. China might not be able to prevent it – the regime might slide so quickly as to be unsalvageable (and China certainly is never going to war over North Korea again). But the US and Korea should want China to recognize the unified state on its own terms. Not consulting the Chinese would harm our relations with them on all fronts. Incentives for Chinese investment in Korea would help – so would significantly paring back American military presence on the peninsula. (Why, in a post-North Korean world, would we even need military bases there? Is war with China a realistic threat in this day and age? And besides, we always have Japan) We could even couple some of the things China wants with some of our own priorities (on trade, fiscal policy, climate change, energy policy, you name it). I have a feeling that this is not a zero-sum negotiation in which China and the US negotiate, tit-for-tat. Instead, an outcome in which both sides are satisfied can only be positive.

I’m having a hard time imagining how painful the reunification process would be. The North Korean state, if it did merge with the South, would probably go down in flames. The state is already a wreck with food shortages and the like, but without even minimal state assistance many more would probably starve. The military would suddenly be a loose cannon – and the nuclear material currently lying around Yongbyon would be up for grabs. Of course, South Korea and the United States have certainly drawn up coordinated response plans to rush into the vacuum when needed, and have practiced plenty of military scenarios (the current exercise with the two countries’ navies being conducted right now included). But it still boggles the mind.

From Steve Clemons:

Information has reached me that some USAF personnel have been put on 24 hour deployment alert with regard to North Korea. I don’t know how regular or irregular that is — but know that despite a lot of tension in the country since 9/11, my sources have not been put on such alert before. The USAF has denied that it has changed its alert status in comments to other journalist friends of mine — but the actual personnel beg to differ.

When I first heard the news that North Korea had shelled an island across the DMZ, I thought this disturbing provocation seemed more serious than previous attacks. Let’s hope this does not escalate.

Meaning to get to this for a while.

How big is the rift between China and the US?

Administration officials speak of an alarming loss of trust and confidence between China and the United States over the past two years, forcing them to scale back hopes of working with the Chinese on major challenges like climate change, nuclear nonproliferation and a new global economic order.

And David Shambaugh calls China “an increasingly narrow-minded, self-interested, truculent, hyper-nationalist and powerful country.” Ouch.

You can see this especially in Obama’s latest trip to Asia and his support for elevating India to the Security Council. This article was published before the trip and the midterm elections, and I definitely feel like some of the fear-mongering associated with the election has tempered slightly in the past few weeks. For a while, Blue Dogs and Tea Partiers alike were really shredding our precious guanxi (if there is one Chinese word you should know, it should be guanxi, or relationship). But the political system has now let out some steam.

There’s not much more analysis I can add that isn’t already covered excellently in the article (see below), only to say that we should neither disparage China’s (and our) growing calcification nor try to take an even harder-line to our relationship. This is simply a natural, and predictable reaction by the American public (and in reaction to them, Congress) to rather distressing bilateral economic policy conducted by both countries over the past decade.

To round out, here’s an especially pertinent section of analysis:

Political factors at home have contributed to the administration’s tougher posture.With the economy sputtering and unemployment high, Beijing has become an all-purpose target. In this Congressional election season, candidates in at least 30 races are demonizing China as a threat to American jobs.

At a time of partisan paralysis in Congress, anger over China’s currency has been one of the few areas of bipartisan agreement, culminating in the House’s overwhelming vote in September to threaten China with tariffs on its exports if Beijing did not let its currency, the renminbi, appreciate.

The trouble is that China’s own domestic forces may cause it to dig in its heels. With the Communist Party embarking on a transfer of leadership from President Hu Jintao to his anointed successor, Xi Jinping, the leadership is wary of changes that could hobble China’s growth.