Thus the only plausible case for a way out of the worldwide Great Depression in 1931 lay, as the great economic historian Charles Kindleberger emphasized, with some step from the US. At the time, there were all kinds of convincing reasons why US citizens should not want to take on the burden of a worldwide rescue. Sending more money to Europe might be seen as pouring money down a drain; had not the Europeans fought a world war that had been the fount and origin of the financial mess? Economically such action would have made a great deal of sense from a long term perspective; but politically it was a non-starter with no short term payoff at all.
China is the US of this century. The initial stages of the credit crunch last year were managed so apparently painlessly because sovereign wealth funds (SWF) from the Middle East, but above all from China, were willing to step in and recapitalize the debt of US and European institutions. The pivotal moment in today’s events came when the Chinese SWF China Investment Co (CIC) was unwilling to go further in its exploration of buying Lehman Brothers. CIC’s turning back will be held up in the future as a moment when history could have turned in a different direction.
Now there will be plenty of reasons why the Chinese pulled back. The logic sounds like the US case of 1931. Some of the arguments that are reverberating around Beijing are very reasonable: There is a great deal of uncertainty, and the SWFs might lose a lot of money. CIC would have initially lost some money with Lehman. Some lines of thought are more emotional: Might not this year be a payback for the US bungling of the 1997 to 1998 East Asian Crisis?
We are about to see what stake China really has in the survival of the globalized world economy. As in 1931, the political arguments are all against such an operation. Only the far-sighted will see that the case for a rescue is compelling.
Harold James is professor of history and international affairs at the Woodrow Wilson School, Princeton University and professor of history at the European University Institute, Florence, Italy.
COPYRIGHT: PROJECT SYNDICATE
RSS