China, Wall Street, and the Financial Crisis: Francis Fukuyama Talks with Henry Paulson

By Francis Fukuyama ; Henry Paulson | The Christian Science Monitor, March 3, 2010 | Go to article overview
Save to active project

China, Wall Street, and the Financial Crisis: Francis Fukuyama Talks with Henry Paulson

Francis Fukuyama ; Henry Paulson, The Christian Science Monitor

Scholar Francis Fukuyama and former Treasury Secretary Henry Paulson talk about China, Wall Street, and the global financial crisis.

Francis Fukuyama is the author of "The End of History and the Last Man." Henry Paulson is the former US secretary of the Treasury, whose recent memoir, "On the Brink: Inside the Race to Stop the Collapse of the Global Financial System" has just been published. This conversation between them will appear in the forthcoming issue of "The American Interest," and was made available to the Global Viewpoint Network.

Francis Fukuyama: You got to know the Chinese leadership when you were at Goldman Sachs, well before you came to be Treasury Secretary. Yet even during the period in which you made scores of trips to China, many observers expressed concern about the implications of large structural imbalances in the global economy: so much savings being accumulated in China, so much debt being racked up in the United States, and so much foreign money flowing back into the US banking and financial system in ways that may have encouraged excessive risk-taking and contributed to the real-estate bubble.

Looking back, what weight of responsibility do you assign to those imbalances for the way the financial crisis unfolded in the second half of 2008?

Henry Paulson: A big part of the imbalances, in my view, stems from our proclivity here in the United States not to save - as a nation and as individuals, and to borrow too much. There are a number of policies that contribute to this proclivity: our tax code, for example, which taxes savings and capital and encourages consumption; and the weight of a number of our housing policies, which stimulated the housing market via Fannie Mae, Freddie Mac, FHA programs, the tax code and in other ways that contributed to asset inflation.

By contrast, there are a number of nations - including China of course - where savings rates are high, and where domestic consumption plays a smaller role in their economy.

When I became Treasury secretary, we established the Strategic Economic Dialogue (SED) to address our economic relationship with China. And through the SED we looked for practical ways to address the economic imbalances. This included the currency issue because moving toward a market-driven currency would accelerate the progress of reform and help China transition toward higher levels of domestic consumption and producing higher-value-added goods and services and away from over-reliance on lower-cost, lower-value-added exports.

But I also argued for capital markets reform and opening up their capital markets to more competition, not because I was trying to do bankers any favor, but because I believed a vibrant domestic capital market would help China deal with the structural transformations they wanted to achieve.

One example I used frequently was that, in China, individuals with their savings in bank deposits received very low interest rates, well below inflation. Because of inefficient capital markets, they were, in essence, paying to save, or unable to earn any significant return on their savings. And of course inadequate government retirement programs and other safety nets led to high levels of precautionary savings.

We also focused on very high levels of corporate savings in China, particularly in the state-owned enterprises. So yes, I was mindful of the imbalances.

Fukuyama: We've been talking until we're blue in the face about the kind of liberalization you've just mentioned, and of course about revising the value of the renminbi. The results have been uneven, have they not?

Paulson: Yes, they have. While I was Treasury secretary, we saw substantial movement in the renminbi. That shows, I think, that the right way to deal with the Chinese is directly and in private, recognizing that they place a huge priority on economic development and reform.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

China, Wall Street, and the Financial Crisis: Francis Fukuyama Talks with Henry Paulson


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?