From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:
• insistence on free movement of capital across borders;
• the repeal of Depression-era regulations separating commercial and investment banking;
• a congressional ban on the regulation of credit-default swaps;
• major increases in the amount of leverage allowed to investment banks;
• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;
• an international agreement to allow banks to measure their own riskiness;
• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.
The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.
Particularly, that first point. One of the similarities between the last decade and the 1920s that has not been much remarked on in the popular press is the absolute flood of foreign capital that hit Wall Street. From John Kenneth Galbraith's Great Crash:
People were swarming to buy stocks on margin--in other words, to have the increase in the price without the costs of ownership. This cost was being assumed, in the first instance, by the New York banks, but they, in turn, were rapidly become the agents for lenders the country over and even the world around. There is no mystery as to why so many wanted to lend so much in New York. One of the paradoxes of speculation in securities is that the loans that underwrite it are among the safest of all investments. They are protected by stocks which, under all ordinary circumstances, are instantly saleable, and by a cash margin as well. This money, as noted, can be retrieved on demand. At the beginning of 1928 this admirably liquid and exceptionally secure outlet for non-risk capital was paying around 5 per cent. While 5 per cent is an excellent gilt-edged return, the rate rose steadily through 1928, and during the last week of the year it reached 12 per cent. This was still with complete safety.
In Montreal, London, Shanghai and Hong Kong, there was talk of these rates. Everywhere men of means told themselves that 12 per cent was 12 per cent. A great river of gold began to converge on Wall Street to help Americans hold common stocks on margin.
The causes were deeper than that, tracing back to the post-World-War-I exchange rate regime and the deep imbalances of Versailles. In a sense, Galbraith may be confusing cause and effect--the market may have taken off because of stupid money from abroad. But these things feed on themselves, and so it's probably folly to try to separate chicken from egg. The core point is the phenomenon he identifies: foreign money with little local knowledge flooding into the market, helping to run up asset prices to an unsustainable level, and then departing. This is the classic outline of an emerging market crisis, and arguably that's what happened to us, with Asian savings.
Ironically, it may be possible to trace back this flood of money to the IMF--and Timothy Geithner. Just as the gold flows in the 1920s had their roots in Versailles, the flows of Asian money into US dollars are often thought to be an artifact of the 1998 crisis, when hot money suddenly started deserting the region in droves. Asian businesses and central banks became determined that that would never happened again--and the way they opted to prevent it was to amass massive foreign reserves, particularly in dollars.
Paul Keating, the former Australian prime minister who worked with Geithner during the crisis, blames his mishandling of the crisis for this desperate reserve-hoarding:
In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis."
In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.
Geithner thought Asia's problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts.
The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment.
But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans - Thailand, South Korea and Indonesia - all had sound public finances.
The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind.
But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.
Keating continued: "Soeharto's government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power." . . .
Worse, Keating argued, Geithner's misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences: "The IMF is the gun that can't shoot straight. They've been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose."
China, in particular, drew hard conclusions from the IMF's mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.
Keating continued: "This has all been noted inside the State Council of China and by the Politburo. And it's one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it's why through a series of exchange-rate interventions each day that they've built these massive reserves.
"These reserves are so large at $US2 trillion as to equal $US2000 for every Chinese person, and when your consider that the average income of Chinese people is $US4000 to $US5000, it's 50 per cent of their annual income. It's a huge thing for a developing country to not spend its wealth on its own development."
Is this some flight of Keatingesque fancy? The former deputy governor of the Reserve Bank of Australia, Stephen Grenville, doesn't think so: "After the Asian crisis, the countries of east Asia decided that they would never go to the IMF again. The IMF is taboo in east Asia. Look at the evidence. The revealed preference of the region is that no one has gone to the IMF since, even when they needed the money."
To me, this doesn't suggest Geithner or the IMF were incompetence: hindsight is 20/20. What it does suggest is that global capital flows may be way more problematic than I have historically been willing to credit. I don't want to blame all bubbles on foreign money. But foreign money has two unpleasant characteristics: there is so much of it that it can relatively easily swamp a nation's productive capacity, and it is relatively uninformed about the local market.
I'm not sure where that leaves me. The capital controls of the mid-twentieth century were even worse, especially for emerging markets, where they became both focal points for, and sources of, massive corruption. And one of the reasons America today is such a massively successful economy is that foreign money funded our industrialization. Bubbles may simply be an inescapable side effect. But perhaps it's time to rethink a committment to global capital liberalization.
I don't know, markets are just as prone to local bubbles (tulips, anyone?) as foreign-financed ones.
I think the real problem here is something else: the assumption that there would be no large market failures. This led to the dismantling of Glass-Steagal as noted above, and the creation of "too large to fail" monstrosities.
A market can be free or it can be insulated from failure through government action. It cannot be both.
It can, however, easily be neither.
You're really on a roll at the Business channel, Megan, I've been deeply impressed by what you've put together there. Don't agree with a lot of it, obviously, but it's really well done.
"I don't know, markets are just as prone to local bubbles (tulips, anyone?) as foreign-financed ones."
The tulip bubble occurred during a flood of gold from the new world to Europe.
Megan,
I am surprised by how few people are approaching the right conclusion despite continual mounting evidence. Economic growth fueled by monetary expansion, be it gold from the Americas, Central bank influence on interest rates, or credit expansion is extremely unstable. Time and again we see that for this kind of growth to continue monetary growth has to continue and even slight slowdowns hint at disaster. As a brief exercise graph the federal funds rate since the recession in the early 80s.
The tulip bubble occurred during a flood of gold from the new world to Europe.
The Aztecs weren't exactly investing their money with Cortez.
No. He was taking it, and sending it back to Spain. Thus flooding Spain, and then Europe, with gold. "Don Quixote" shows the effects of this on Spain. The Tulip Madness on other parts of Europe.
Really, what that showed was that metallic currency, such as gold, was no safer than paper currency. Find a new supply of gold, and you get inflation.
"Really, what that showed was that metallic currency, such as gold, was no safer than paper currency. Find a new supply of gold, and you get inflation."
I agree but wouldn't go this far. What was shown was that gold isn't perfectly safe but I would still consider it far safer than paper money.
According to Rothbard's History of Economic Thought, chapter 4, section 1, the stock of gold and silver specie approximately tripled in Europe due to the Spanish imports from the new world, resulting in a tripling of prices over about a century. I am unaware of any fiat currency that can beat that rate of inflation, so even if the difference is not essentially qualitative we can pretty firmly suggest that metallic currency, absent overriding legal tender law allowing seigniorage-driven devaluation, is at least quantitatively safer from inflation than is fiat paper currency.
Any contravening evidence is eagerly awaited.
You can have bubbles with or without inflation. As I said below, Megan's argument was that foreign investors don't understand local market. As the Aztecs weren't investors, their prowess as investors or lack thereof couldn't have had anything to do with the tulip bubble.
True, but foreign money was still flowing in to Europe. The fact that it was stolen rather than being a voluntary investment is irrelevant within the narrow context of the point under consideration.
Right, but Megan's point was that foreign investors often supposedly doesn't understand local markets. The Aztecs weren't investing in Europe, so that makes little sense as a supporting argument for that point.
TallDave - It seems I can't reply to a reply to a reply, so I'm just replying to my comment that you replied to.
The point about not understanding local markets was not Megan's only point. You also have "there is so much of it that it can relatively easily swamp a nation's productive capacity", which can still apply. Also to the extent that you have people in some parts of Europe investing in others that they don't understand well, with money from the "new world" than you also have the "don't understand well" factor, but the main point in this case would probably be the "swamp a nation's productive capacity" factor.
OK, but again that wasn't foreign money, it was domestically-owned money being obtained abroad via European technological superiority. At that time, there was very little foreign investment because few places outside of Europe had well-established property rights, let alone a system of finance (at the Battle of Lepanto, Ali Pasha brought nearly his entire fortune with him to the fight). That's not quite the same as foreigners investing in a local market and overwhelming the available investments.
In any case, bubbles generally don't need help. Few people alive today remember the electric service bubble of the early 20th century, or the railroad bubble. In both cases, there was massive overbuilding on speculation of huge profits and the bubble collapsed.
Good, timely piece (and nice editorial comment).
"Hot money" capital liable to fly away at short notice can be of domestic origen as well as foreign. Just ask the Argentines. Capital controls which try to act at national borders are corrupting, costly and collader-shaped. Approaches more worth developing are likely to focus on creating means of making excess local liqidity costly; thereby cooling down a good chunk of the hot capital.
Jagdish Bhagwati has been making this distinction between free flow of goods (nobody is more in favor of it than he is) and free flow of capital (serious concerns) for quite a while now. It was a significant element of his Defense of Globalization book. He's looking might smart right now...
Oddly enough, he also recently wrote an article defending card check. (http://www.tnr.com/politics/story.html?id=a4edc34f-7670-4e85-a43d-16f3023f2b35)
I have to check out Bhagwati's book, thanks for the suggestion - one reason I love Megan's blog is the new additions to my reading list.
Foreign money can flow in quickly in large amounts, and be controlled by people who don't have a great understanding of local conditions.
OTOH attempts to control the flows of money are likely to do more harm than good. Such controls allow more opportunity for corruption, can seriously reduce international cross border investment (which despite the potential and possible actual problems, is still largely a good thing), and can distort such investment, possibly in such a way as to make a bubble more likely. For example if you allow foreign investment in particular areas, but not in other areas, then you push the investment to concentrate in the areas you allow, possibly causing one or more of them to form a bubble.
Meh.
I don't have much to say about the first point in Johnson's list, but the rest of it seems to be wildly overrated.
• the repeal of Depression-era regulations separating commercial and investment banking;
We all know that the repeal of Glass Steagal not only didn't contribute to the problem, but it in fact helped ameliorate the problem.
• a congressional ban on the regulation of credit-default swaps;
The ban on regulation of credit-default swaps is irrelevant. There was no potential regulation that would have helped forestall whatever problems there are with CDSs. In fact, the relevance of CDSs to the banking crisis is completely overstated (as we saw with the nonevent that the Lehman bankruptcy was with respect to its CDSs).
• major increases in the amount of leverage allowed to investment banks;
• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;
• an international agreement to allow banks to measure their own riskiness;
Is this all the same thing? Where's the evidence that "campaign finance, personal connections, and ideology" had anything to do with this? In fact, the point person at the SEC for this was a Democrat - Annette Nazereth - who was since considered by Obama to be the Deputy Treasury Secretary (she withdrew). The SEC made a mistake as to leverage. So did the Basel Committee. Mistaken happen.
• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.
Intentional? Really? Maybe they just didn't have a clue what to do. Which wouldn't be surprising, since it's pretty clear nobody still really has a clue what to do. As Geithner's plan yesterday showed pretty clearly.
Maybe I'll read the piece. I dunno. But's it's not very promising.
As others have pointed out, 'hot' money can just as easily come from domestic sources. Asian countries wanted to blame foreigners in 1998 because it was politically convenient to have a scapegoat, but their crisis began with companies (particularly in Thailand) issuing bonds in dollars without hedging their currency risk. And of course, someone formerly with the IMF naturally prefers an explanation that implies that the IMF is important and should be given more power.
The IMF guy is doing the same thing with this crisis by trying to blame it on deregulation, when the root of this problem was the excessive and corrupt regulation under Clinton and congress that forced banks to start making bad loans. 'More' regulation isn't always better.
What a trumped up list of 'deregulatory policies'! Was the 'insistence on free movement of capital' related to any specific previous regulation that was changed, or is he seriously arguing that we should define 'deregulation' as 'they didn't do something that I, in hindsight, think that they should have done'? The same question applies to 'an intentional failure to update regulations'.
As for 'an international agreement to allow banks to measure their own riskiness', it sounds like the IMF wanted more power to control global markets and were unsuccessful in their power grab, and now he's trying to pretend that giving him, personally, more power would have saved everyone.
If you go through his list carefully, this astonishing 'river of deregulatory policies' is a slight trickle, at best. Most ridiculous of all, he doesn't mention a key regulatory deficit - the choice not to reign in Fannie and Freddie, even after they were caught using fraudulent accounting.
One of the points I don't understand about all these people who are agitating for Glass-Steagal. The problems began with the stand-alone investment banks not IB's that existed within commercial banks. First Bear Stearns, and then Lehman brothers and Merrill Lynch. It was actually a positive factor that these standalone IB could be rolled into into JP Morgan and Bank of America. If not for these banks taking on the risk the cost to the taxpayer would have been much higher.
solonwasright -
You're coming at this the wrong way. The logical progression is:
1) This is all Bush's fault, because he's evil and he also (at least in theory) supported deregulation, which is also evil.
2) Thus, the cause of the crisis must have been some sort of deregulation done by Bush.
3) Since there actually wasn't much of any deregulation under Bush except relaxing Glass-Steagal, logically that must have been what did it (well, that plus an "intentional failure to update regulations").
If you make the right assumptions, the conclusion is inevitable.
Johnson's points about bank rescue by nationalisation followed by floating off (and breaking up) have become standard blog fare. But his insistence that the oligarchy - the Wall St elite - be tamed is very powerful. But how? Not only have they colonised the minds of those who are paid to be sceptical about them and their ways, they have the power, under your corrupt political funding system, to make election difficult for any politician who admits that he wants to take them on.
"About a century and a half" may be the answer to Mr Lincoln's enquiry about how long it could endure.
How do you all address Johnsons article while totally avoiding the central point of oligarchic influence? Megan, point 1 is not the free flow of capital accoss borders, it's the INSISTANCE on the free flow of capital. The capital per se isn't the problem, it's the incestuous integration of finance and government demanding more capital be made available for uses that are counter productive to the national wellbeing. What exists today isn't capitalism, it's cronyism and oligarchy.
Touche Roger. I wasn't sure any of the commentators, including Megan, had actually read the article based on the comments. The movement of foreign capital seemed like a tangential issue to Johnson's actual critique which is devastating. Johnson compares the US economy to an emerging market only worse because we won't "run out of money" like Argentina or Thailand since we have the luxury of printing money to pay our foreign debts. Johnson goes on to criticize the entire premise of the bailouts and our failure to hold anyone accountable for the mess. The failure to hold anyone accountable springs from the Wall Street/DC revolving door of oligarchic entanglement that everyone seems to want to involve themselves in because there is (or was) so much money to be made. But I think the bottom line was that we took on too much debt as a country. Wall Street / DC encouraged this through a lethal combination of marketing and perverse policy incentives to accumulate and acquire more debt and this debt was packed, sliced and diced into AAA rated garbage the rest of the world was only too eager to buy. Now the bills are due and we don't have the money. It's as simple as that - too much debt backed by too few assets.
Free movement of capital isn't the problem. The problem is it needs to move in more than one direction. Right now foreigners are heavily invested in dollars. They need to buy from us or we need to inflate our currency to get to an equilibrium state. In other words, if the only thing they want is dollars, we can make those. While that strategy may make us rich and lazy, it is not a sustainable strategy for long term world-wide growth.
For what it's worth, Keating's full speech provides a rich vein of material for Geithner-haters to mine:
http://lowyinstitute.richmedia-server.com/sound/Towards_the_London_Summit.mp3
Money is not the problem. Foreign money is not the problem. What one does with it can become a problem. We already have taxes in place that make short-buying and selling unattractive and empirically unprofitable. Investors all over the world still try to make a quick bug. Foreign capital is often used to prolong an inevitable correction or balance. Foreign investors often come late to a party - just like Wall Street arrives late compared to VCs. They also leave late and the morning after is rarely pretty.
Since "speculation" taxes are not producing results - a more effective solution to markets that would save more assets than restrictions on international capital flows would be, grin, the prohibition of managed funds. I am just not sure how this could be implemented legally and practically - it would be a nanny-state-regulation that would be rightly fought based on individual rights alone.
For individual investors - there is a simple rule that everyone could follow in order to avoid "the bubble" apart from avoiding managed-funds: If you have read about "the investment opportunity" - you are already late. My hope is that foreign investors will realize this too. Think globally - act locally - invest in what you know.
PS: Is the IMF a managed-fund on a grand scale (via Fama/French)?
This makes good sense, and was what Greenspan and others have been saying. It sounds like a very poor defense compared to, "It's Bush's fault" or "There wasn't enough regulation" (which kind?)...
But as everyone in the southwest NOT living in California knows the foreign money doesn't have to be foreign. When people in So-cal or the Bay Area sell their houses and then move to Nevada, Arizona, Utah and buy a house for cash as tens of thousands have done (or just buy a second home) it creates huge issues in the other markets.
So the solution? What will it be? More regulation? Will we just regulate foreigners, but not the flow of capital as I described with housing? Or will some bright regulator figure its a good idea to re-institute massive capital gains taxes that make it so when you sell your house and buy one for cheaper you can't actually end up ahead?
At what point do we realize that my money is my money, and even though you don't like the effects of me using it how I decide, it's not your right to control what I do with it?
I can see how people end up with this regulation philosophy, simply because the Gov. is sticking its fingers into EVERYTHING. We're bailing out companies and banks left and right, propping up other ones for decades that should be defunct, and we keep realizing we need to do more and more.
This silly line of reasoning just will not work and will lead to more catastrophe.
There are too many tyrants out there who want to control things. I'm not talking about evil murdering tyrants, but people who deem it is there right to reallocate things however they like.
Somehow there is this strange goal that if we can just make things stable, without ups and downs in the economy things will be ok.
Yes, so let's have a stable economy, a nice stable stagnant one, that stagnates along until it collapses. That's much better one that grows and contracts, and grows again.
I'm much better off than I was 5 or 10 years ago even though my investments lost the equivalent of 30% of my income this year...
Again, what is so wrong with the system is the people refusing to let bad companies die. Keep squeezing that bar of soap hoping you can control it.
Bubbles and crashes happen. It may be possible to ameliorate them by penalizing all risk taking but this would probably reduce GDP growth rates over the long term. Risk taking (and therefore losses) are fundamental to growth.
The problem we have is that government subsidizes and therefore causes excessive risk taking. First by encouraging excessive investment in real estate through FNMA and FHLB lending practices and through the mortgage deduction. Secondly, by providing an implicit guarantee to financial institutions.
Presumably we have learned the lesson on Fannie and Freddie. Politically, the mortgage deduction is not going to go away. The more interesting question is whether we will effectively address the problem of the financial institutions, i.e. taxpayers assume the risk while investors and employees get the rewards. I doubt the implicit government guarantee will go away which means you have to regulate to control the excessive risk taking you have encouraged through the government policy/practice of guaranteeing these institutions. Fortunately, this is a relatively easy thing to do through the imposition of capital reserve requirements (based on asset class, maturity, etc.) on all financial institutions for which there is an implicit government guarantee. Unfortunately, this effort may get derailed by the political process which seems primarily focused on shifting blame to disguise what was clearly a bipartisan political failure.
There may be reasons to fear deflation but it's perhaps not the economic equivalent of mortal sin. If Greenspan had not left interest rates so low in ~2002 perhaps home mortgages and prices would not have gone to such a bubble, sucking up that foreign capital which, in retrospect, should have gone to some more productive asset class, and we wouldn't have $2 trillion in debts that the assets don't back.
To me, the obvious moral to this story is that Smart Guys like Geithner are as prone to failure as free markets are and possibly more so.
There's much substance in Johnson's piece which can be summarized as the lords of money have become too powerful. He seems to be taking the essentially Krugmanite view that we need to recast the financial system which seems to me hopelessly unrealistic. This genie is out of the bottle and it can't be put back in. I don't really see it as a very different situation from that of the 1900's when the lords of industrialism had become too powerful and had to be reined in by a far weaker central govt. We can't recast the financial system which has certainly grown too large and powerful. We can only contain it. The system is severely chastened as I know for a fact. We've got a whole generation of bankers and lawyers who are going to be very careful never to repeat this experience and are to a large extent at the mercy of a reforming administration with all kinds of powerful tools at its disposal. I'd take the Keating critque of Geithner with a large pinch of salt....Keating has a large agenda. I'm sure we could find some misjudgements on his record but then we could find misjudgements in the record of any successful man. At the moment he along with Summers, Bernanke and Blair look uniquely equipped to dismantle the bomb the lords of finance assembled....and make sure they don't get the chance to build another one. Not for a long time at least.
"What it does suggest is that global capital flows may be way more problematic than I have historically been willing to credit."
"Historically." Really? Congrats on walking back your position to where a lot of leftists have had it for over a decade (see Malaysia in 1999.) Maybe next time you can do so without making a change in opinion sound like a passage from The Phenomenology of Spirit.
There is a difference in foreign money coming into and going out of a developed and developing market. The vast majority of US debt (private and public) is owed in dollars.
The genius of our financial screw-ups is that the system is set up such that when we go down, we take everyone else down with us. Human welfare may be absolute, but geopolitics is relative. As long as everyone else suffers more than we do, we're doing great.
It still amazes me that true asset values cannot be forced out of firms short of Simon Johnson's suggested nationalization.
Easy money is almost never put to it's best use. We need to put/keep capital in the hands of the producers of wealth. There is no other way that wealth is produced.
It still amazes me that true asset values cannot be forced out of firms short of Simon Johnson's suggested nationalization.
It amazes me that initiating force can be seen by any civilized person as a solution for anything. Market prices are discovered, not set. auction the assets off or write them off. Anything else is price fixing.
It does appear that when there is an excess of money, like water, it flows downhill into the most immediate money making schemes- like Dot.coms or real estate- thereby helping fuel bubbles.
China and America would both be better off if the Chinese spread their wealth around to their own citizens. This would drive up the value of their currency, make the citizenry wealthier, increase domestic consumption, all which would compete with American demand for Chinese goods, increasing their cost to us, and making American manufactured goods more competitive.
By piling dollars right back to us, it gives us too much cheap money, and all that does is inflate asset prices. The fewer economic decision makers (Wall St., are you listening?) there are who are now in control of more and more easily-had and cheap cash will ultimately make poorer, less market-driven, and potentially dangerous decisions about what to do with it.
"China and America would both be better off if the Chinese spread their wealth around to their own citizens."
What do you mean by "spread"? Wealth needs to be produced, and at least the Chinese government is doing less today to block its production. The reason that so many countries want to invest money in the US is because we have a strong rule of law and relatively good incentives that allow it to be invested more efficiently. Even with the distortions to our markets that have led too much money into bad loans that should never have been made, the sad truth is that we're still a much safer place to invest than China.
China's prosperity has been growing since it has stopped trying so hard to "spread wealth around" and instead focused on setting up a system where people have an incentive to create and build it for themselves, without the government hovering ready to grab and spread anything that's produced. China has moved in the right direction while Obama has been trying to move the US backwards, but China still has a long ways to go.
I think he is meaning that:
China should not sink its money into foreign currency funds, but rather invest in developing its economy.
Maybe it cuts taxes. Maybe it offers a business loan program. Maybe it builds roads to its 100000 different villages. A little bit of all 3 wouldn't hurt.
What China chose to do is fuel the US debt machine, in part to buy influence with our politicians, and in part to keep our economy running so we could keep China's factories running. Of course, like a perpetual motion machine, the former would never sustain itself and I'm amazed that anyone would think it could.