The WSJ apparently thinks that one-sided financial regulation (government bank bailouts through too big too fail) is still the best path. It notes plans by Senator Schumer to regulate hedge funds and private equity funds and then comments "even though heavily regulated banks that loaded up on risky securities have been at the heart of the financial crisis." While many banks played important roles in promoting the housing bubble, less heavily regulated mortgage companies were responsible for issuing most of the worse loans. Lightly regulated investment banks like Bear Stearns and Lehman Brothers managed to get themselves in the most danger through over leverage. In short, the WSJ was simply expressing an editorial position in support of one-sided regulation, not providing information to its readers. The article also misleadingly describes the Brookings Institution as "a liberal-leaning Washington, D.C., think tank." Brookings has academics with a a mix of perspectives, including many conservative and Republican scholars. Finally, the article has an extremely confused discussion of the relation between the yuan and the dollar. It suggests that the next administration would not want to force China to raise the value of the yuan, because China might retaliate by buying less U.S. treasury bonds, causing U.S. interest rates to rise. Actually, this is exactly the mechanism through which China would raise the value of the yuan. If the United States wants the value of the yuan of to rise, then it must want China to buy fewer treasury bonds, because that is precisely the action that keeps down the value of the yuan. The article also claims that the Chinese would never dump their dollar holdings because this would mean that they would take a large loss on these holdings. The Chinese central bank knows that it will take large losses on its dollar holdings. It was willing to accept these losses in order to sustain its export market in the United States. It surely is not scared by the prospect of such losses, since it knew that losses were inevitable when it first began propping up the dollar.
--Dean Baker
