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