500 billion tickets to paradise

Well, some Asian markets are up, European markets are generally up, and the government is now signaling that they intend to inject new capital into banks directly (beyond or instead of buying troubled assets), which what I and many of my betters have been arguing is a more efficient way to help the system. However, we are far from out of the woods and, in finance terms, could use a white knight to save us.

How about China?

From the FT:

"The Chinese government could offer to lend up to $500bn (from its current stock of $1,800bn) to the US government for the rescue of its financial sector. Its previous assistance – buying US bonds – was indirect and unconditional. Not so in this case.

China’s loan offer would be direct to the US government to be spent in the current financial crisis. More important, it would come with strings attached. Tied aid, the preferred mode of operation of western donors since the postwar period, would now be embraced by China.

China would impose two conditions. First, it would declare that the offer of money was conditional on the US government’s adopting a particular approach to rescuing the banks, namely to favour in the next round the use of government money to recapitalise the banks.

(Second) China would stipulate that monies be devoted to cushioning the impact on vulnerable homeowners, so that they would not be forced into forgoing the American dream of home ownership. Chinese conditionality on this front would achieve an outcome that several economists on the left and right have argued for on grounds of fairness, and also to address the fundamental problem in the housing market.

For China, this offer of help would have three virtues. First, it would be riding to the rescue of a situation partly created by its own policies of undervalued exchange rates, which led to lax global liquidity conditions. Second, its economic interest would be served because successful US efforts at rescuing its financial sector could help avert an economic downturn, protecting China’s exports, its growth engine. Perhaps most important, it would seal China’s status as a responsible superpower willing to deploy its economic resources for the sake of protecting the world economy."

I have edited the FT post to remove the dripping sarcasm of the author, one Arvind Subramanian. Hey, we've already started on the first condition and I'm sure our political class would have no problem running with the second condition!