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This is MORNING EDITION from NPR News. I'm David Greene in Washington.
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And I'm Steve Inskeep in New York. Treasury Secretary Timothy Geithner is about to go have a meeting with his bankers. Geithner travels next week to China, which is loaning billions of dollars to keep the U.S. government afloat. The U.S. and Chinese economies increasingly depend on each other, which does not necessarily mean that their governments are always getting along.
Back in January, Geithner accused China of adding to the economic mess, manipulating its currency and undermining free trade. The Chinese quickly blamed Americans for the financial crisis. NPR's John Ydstie looks at the competing claims.
JOHN YDSTIE: Here's the short argument that China is partly to blame for the financial crisis: In its rush to industrialize, China ran up huge trade surpluses. It saved too much of the money it made selling its products. Then, it lent too much of that money to America, says Peter Morici, an economics professor at the University of Maryland.
Professor PETER MORICI (Economics, Maryland): They accumulated dollars and they invested those dollars in the New York bond market. That made it inexpensive for banks to loan us money through our homes on mortgages and second mortgages and to loan us money on credit cards and to buy cars.
YDSTIE: China flooded the U.S. financial markets with so much excess cash that it drove interest rates down, providing an irresistible temptation for Americans to take on more debt, says Morici.
Prof. MORICI: It meant that the Federal Reserve couldn't pull in the mortgage frenzy when it wanted to. There was not much the Fed could do. It raised short-term rates, but long-term rates didn't go up with them. Mortgage rates didn't go up. And the terms got easier and easier and people borrowed more and more.
YDSTIE: Economist and China expert Nicholas Lardy agrees that Chinese money provided the fuel for the financial crisis.
Mr. NICHOLAS LARDY (Peterson Institute for International Economics): The Chinese gave us the rope, but we didn't have to hang ourselves. If we had had tougher regulation, the inflow of capital from China would not have led to the crisis that emerged over the last year or so.
YDSTIE: Lardy says the lack of regulation allowed U.S. investment firms to develop riskier financial products. And they did so with abandon as they tried to boost profits in the low interest rate environment created by the flood of cash from China.
So why did China build up such large and destabilizing surpluses? Lardy and Morici disagree on China's motives. Morici thinks China made a deliberate decision to build its economy and its global power through exports.
Prof. MORICI: Quite simply, China wants to have a very large trade surplus with the United States as a development tool to employ folks that are in the rural areas in the cities making things to sell here. So what it does is it keeps its currency very cheap.
YDSTIE: But Lardy, a fellow at the Peterson Institute for International Economics, thinks China sort of stumbled into the situation. Back in the 1990s, it decided to peg its currency to the dollar, a move that was viewed as positive back then. And for a while it worked fine. The dollar appreciated and so did China's currency, the yuan. That meant Chinese exports were more expensive. So, despite its increasing productivity, China's trade surplus was manageable.
But early in this decade, the dollar began to fall, and with its currency still pegged to the dollar, China's exports became cheaper. China sold mountains of goods, says Lardy, and its trade surplus soared.
Mr. LARDY: Their goods became massively more competitive on international markets and they developed large trade surpluses without any precedent in recorded history.
YDSTIE: Lardy believes some Chinese leaders want a more balanced economy. But he says others, with economic interests in export production, have gotten addicted to the huge profits exports generate. They're resisting the calls from the U.S. government and others to allow the value of the yuan to rise.
Secretary Geithner will raise the issue during his talks next week, but Lardy says that with China holding $1.5 trillion in U.S. Treasury bonds, the U.S. doesn't have a lot of leverage. Just last month, the Treasury blinked when it declined to officially call out China for manipulating its currency.
Mr. LARDY: Certainly one of the reasons they probably didn't raise it to that threshold is, you know, the very commonsense idea that maybe you shouldn't pick a fight with your banker. If you need to borrow a lot of money from somebody, you have to treat them, perhaps, with greater deference than you would if you didn't have that dependency.
YDSTIE: Peter Morici argues it's the other way around. The fact that China has lent the U.S. so much money actually gives the U.S. leverage. That's because China needs a strong U.S. economy if it wants to be paid back in full. And, of course, it's still dependent on the U.S. consumer.
John Ydstie, NPR News, Washington.
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