Learning the Wrong Lessons

Clearly, once the dust has settled from the US financial sector meltdown, lessons will emerge. There's no shortage of suggestions now for what went wrong; eventually, people who know more about these things than me will be able to sift through them and figure out what should be done differently.

Unfortunately, a lot of people will probably learn the wrong lessons - or, more likely, use the recent events to justify whatever they were already doing.

Liu Mingkang, China's chief banking regulator, appears to be doing just that. In an interview in the Wall Street Journal, Liu takes comfort from the fact that China's banking sector is more tightly controlled than that in the US. China's stock markets shot up in the last couple years, and then came crashing down, but the banks were largely spared. Liu, unfortunately, credits intense government involvement:

"When China's capital markets went up . . . we called a meeting" of all the financial institutions, Mr. Liu says. The regulator told them: "'Keep away from capital markets. . . That's your task, and your mission.' Then we launched a huge campaign . . . to check their credit disbursement, and trace the money," to make sure banks weren't lending money to speculators, he explains.

Since 2003, Mr. Liu's ability to enforce this kind of directive has increased "thanks to the support given by Premier Wen Jiabao," he explains. "We dispatch people to each board meeting to be observers. We never said a single word, but we make notes and take notes. If we smell something wrong, through different channels, we can ask the board to recheck their thoughts. . . change their decisions and change their board members."

The comparison couldn't be worse. If the US has been on one end of the spectrum, with minimum supervision, then China is all the way on the other - the central government actually owns all of the major banks. And having such heavy-handed involvement may have prevented speculation and uncontrolled trading, but it has distorted the economy in a legion other, more damaging ways.

Just because the US financial model has some flaws, that doesn't mean that everything different is somehow better. China and other economies that are still developing their capital markets would do well to keep this in mind.