> My suspicion is that they will follow the US example and throw billions at the banks in an attempt to right them.
My suspicion is that China will actually let a few banks fail before the government steps in. And China culturally prefers to find scapegoats - it's easier to say the bad action taken by a company is not reflective of the company, but the result of a few criminals who betrayed the rest of the company for personal gain (this rationale is often used in government corruption cases).
In any case, if they let a bank or two fail, then anger about economic losses is redirected away from the government and towards the corrupt, greedy bankers, and the government is the knight in shining armor that comes and heroically saves the day. The US did the exact same thing with Lehmann - they found the bank that was more fucked than the rest, let them fail in a controlled manner, and it sent a signal to the market that "this is serious, equity will be wiped out, but it's not financial Armageddon". I expect China to send the same signals.
> The US did the exact same thing with Lehmann - they found the bank that was more fucked than the rest, let them fail in a controlled manner, and it sent a signal to the market that "this is serious, equity will be wiped out, but it's not financial Armageddon".
Umm, I guess this could be a matter of opinion but this seems completely wrong to me.
I'd argue the Lehman failure was anything but controlled, and so would pretty much anyone in the finance industry.
I'd also argue that the government didn't let them fail to be an example, that was done with Bear Sterns. The government try extremely hard to save Lehman and ultimately it was Lehman's ownership,who refused to have their equity wiped out, who sunk the company.
Agreed that the quoted account on Lehman is wrong. Bernanke was clear in his book last year:
“In congressional testimony immediately after Lehman’s collapse, Paulson and I were deliberately quite vague when discussing whether we could have saved Lehman,” Mr. Bernanke writes. “But we had agreed in advance to be vague because we were intensely concerned that acknowledging our inability to save Lehman would hurt market confidence and increase pressure on other vulnerable firms.”
Now, however, he appears to have some misgivings about some of those early statements. “I wonder whether we should have been more forthcoming, and not only because our vagueness has promoted the mistaken view that we could have saved Lehman.”
>The US did the exact same thing with Lehmann - they found the bank that was more fucked than the rest, let them fail in a controlled manner, and it sent a signal to the market that "this is serious, equity will be wiped out, but it's not financial Armageddon". I expect China to send the same signals.
Which is a very good reason the Chinese probably shouldn't follow our lead. Letting Lehman fail was a huge disaster. It essentially seized the capital markets and sped up the collapse of a bunch of other banks. In my opinion, the solution is making the bailout so impalpable to the shareholders than it's really the last solution before bankruptcy. Or maybe even some special bank only bankruptcy that allow it to fully operate with government backing.
Your narrative is directly contradicted by Bernanke himself. Read the NY Times article I linked to that references his book. He is clear on the matter.
Bernanke and treasury alone could not have done it. The government could have. What he left out was that they never considered nationalizing the banks. No narrative here; just pointing out what a Nobel prize winning economist laid out.
My suspicion is that China will actually let a few banks fail before the government steps in. And China culturally prefers to find scapegoats - it's easier to say the bad action taken by a company is not reflective of the company, but the result of a few criminals who betrayed the rest of the company for personal gain (this rationale is often used in government corruption cases).
In any case, if they let a bank or two fail, then anger about economic losses is redirected away from the government and towards the corrupt, greedy bankers, and the government is the knight in shining armor that comes and heroically saves the day. The US did the exact same thing with Lehmann - they found the bank that was more fucked than the rest, let them fail in a controlled manner, and it sent a signal to the market that "this is serious, equity will be wiped out, but it's not financial Armageddon". I expect China to send the same signals.