End of Year Reading

• Zerohedge summarizes a Bank of America study on the past and upcoming decades of Asian economics and how they impact the US.

  The financial crisis delivered a clear verdict, in our view, on the limits to the Asian growth model. It no longer makes sense to pursue double-digit growth by lending cheaply to the US consumer.
  Yet change would require less reserve accumulation or – put another way – allowing the currency to appreciate against the US dollar, to which it is now effectively pegged. China needs to manage this “exit” carefully. Moving too fast risks a dollar crisis, with a disorderly drop in the US dollar and a spike in US bond yields. Moving too slow risks a boom-bust cycle in China, with capital inflows and strong monetary growth rates putting upward pressure on asset prices and inflation.

• This is an amazing read on China, written by Christopher Hayes at The Nation. One of the summary paragraphs is particularly interesting, and I quote it below, but I strongly recommend you read the entire article.
  

  We tend to view China as posing an alternative and threatening model for the future, one that's by turns seductive and repulsive, the source of envy and contempt. But after a while I wondered if we aren't in some way converging with our supposed rival. China has managed the transition from a repressive, authoritarian, impoverished country to an industrial, corporatist oligarchy by allowing a loud and raucous debate while also holding tightly onto power. Perhaps we are moving toward the same end from a democratic direction, the roiling public debate and political polarization obscuring the fact that power and money continue to collect and pool among an elite that increasingly views itself as besieged on all sides by a restive and ungrateful populace.

• The title says it all: Why market sentiment has no credibility. Good read at FT.
  
• I don't know who John Kozy is, but I like this paragraph he wrote in his article titled, "The Long Decline of the American Economy":
  

  Ideally, companies exist to provide products and services to people. If the products and services are good, the companies prosper; if they aren't, the companies fail. That's risky, so American companies inverted this model. They fed the public the notion, which has rarely been questioned, that a company's responsibility is solely the financial welfare of its stockholders. Products and services are no longer the goal of business; they are merely means to profit. That reducing quality leads to greater profits quickly became evident. One fewer olive in each jar, one flimsy part in a complex device, one inefficient procedure in a manufacturing process, built-in obsolescence, built-in short product life-cycles, engineered high failure rates. The American quality standard became, "Junk"!

• An excellent argument for a surtax on millionaires, which does a good job of countering an argument I myself believe: that unlimited income potential (where a surtax limits said income potential) is a great motivator for innovation, entrepreneurship, and general hard work. Also, I really like the reasons behind the title of the blog.
  

  The third thing it also might change is the pay that CEOs get. For example, if the top tax bracket were 99%, for all income over $5 million, tax opponents always describe this case as having the effect that people will just stop working after they get to $5 million. That's just not an option for the likes of Peyton Manning, however. What Peyton Manning (or any corporate CEO in the same position) would likely do, however, is settle for just $5 million a year, since all income after that goes to the state. Then, once you get a Republican in office, and they cut that 99% top bracket from $5 million-plus to $25 million plus, Peyton Manning will renegotiate his salary up to $25 million, even though he's still playing 16 NFL games a year...
  So, in this case, tax rates down implies total taxes collected from Peyton Manning up but total "production" from Peyton unchanged, but worsening inequality for the economy and less taxes paid for someone else. So, we'd need to look at whether the consumption spending of people like Tiger Woods, CEOs with their corporate jets, and investment bankers is better for long-run economic growth than the spending of the poor, who spend a large chunk of their disposable income on things such as education and health care...
  This is essentially what has happened in the US, and that is why you shouldn't believe it when economists tell you we shouldn't tax millionaires.
  

"Life is pain, Highness. Anyone who says differently is selling something."

Quick one here. The NYT just published a lengthy article detailing highly questionable behavior by GS during the housing bubble/bust. In short, they created C.D.O.'s of large collections of mortgages that they sold to clients. Simultaneously, they shorted them. Thus, their clients paid GS for instruments that GS created and immediately bet against.

The woeful performance of some C.D.O.’s issued by Goldman made them ideal for betting against. As of September 2007, for example, just five months after Goldman had sold a new Abacus C.D.O., the ratings on 84 percent of the mortgages underlying it had been downgraded, indicating growing concerns about borrowers’ ability to repay the loans, according to research from UBS, the big Swiss bank. Of more than 500 C.D.O.’s analyzed by UBS, only two were worse than the Abacus deal.
Goldman created other mortgage-linked C.D.O.’s that performed poorly, too. One, in October 2006, was a $800 million C.D.O. known as Hudson Mezzanine. It included credit insurance on mortgage and subprime mortgage bonds that were in the ABX index; Hudson buyers would make money if the housing market stayed healthy — but lose money if it collapsed. Goldman kept a significant amount of the financial bets against securities in Hudson, so it would profit if they failed, according to three of the former Goldman employees.
A Goldman salesman involved in Hudson said the deal was one of the earliest in which outside investors raised questions about Goldman’s incentives. “Here we are selling this, but we think the market is going the other way,” he said.

The question now should be, did Goldman advise clients of what they were doing? Goldman does claim they did:

The Goldman salesman said that C.D.O. buyers were not misled because they were advised that Goldman was placing large bets against the securities. “We were very open with all the risks that we thought we sold. When you’re facing a tidal wave of people who want to invest, it’s hard to stop them,” he said.

To be absolutely fair, GS is making a good point. There were probably a ton of blind speculators out there who were happily buying these C.D.O.'s up despite being told that the instruments' very creator was betting against them. However, it seems GS and other banks still worked to tilt the field in their favor, as they were in the best position to understand just how awful the underlying securities in their C.D.O.'s were and what was likely to happen (crash).

Banks also set up ever more complex deals that favored those betting against C.D.O.’s. Morgan Stanley established a series of C.D.O.’s named after United States presidents (Buchanan and Jackson) with an unusual feature: short-sellers could lock in very cheap bets against mortgages, even beyond the life of the mortgage bonds. It was akin to allowing someone paying a low insurance premium for coverage on one automobile to pay the same on another one even if premiums over all had increased because of high accident rates.
At Goldman, Mr. Egol structured some Abacus deals in a way that enabled those betting on a mortgage-market collapse to multiply the value of their bets, to as much as six or seven times the face value of those C.D.O.’s. When the mortgage market tumbled, this meant bigger profits for Goldman and other short sellers — and bigger losses for other investors.

This behavior was not illegal, but perhaps it should be illegal. It simply seems wrong that a bank could create, market, and sell an instrument that it is planning to bet against. This kind of pure profit-chasing can have awful consequences, as we all recently witnessed. One thought I had: require that a bank that creates any security it markets to clients must not be allowed to invest in it. A bank could naturally advise clients on what it has created, but at that point it would have incentive to create securities that have a clear chance at good performance. Naturally, they could still go long or short securities created by other banks. I think this seems like a more balanced state of affairs than what was described in the NYT article.

Executive Pay Disclosure

So, the SEC is making some regulatory changes to how executive compensation is disclosed, the idea being to build on regulations from 2006 that help people understand how stock compensation translates to actual dollars.

Under current rules, companies don't have to reveal the full value of stock options they give an executive. Instead, they must disclose in their annual proxy statements only the portion of an options award that vests that year.
The new rule will require companies to show in a summary table the estimated value of all stock-based awards on the day they are granted. The SEC's 2006 rules had relegated those totals to a separate table that investors often overlook or find hard to decipher.
An example is the case of a company that decides its CEO deserves $10 million worth of stock options, to vest in equal installments over four years. Under current rules, the company would have to include only $2.5 million -- one-fourth of the total -- in the summary table.

Well, that sounds nice. Too bad it won't really do anything worthwhile. Back in 1992, the SEC made some moves to improve transparency of executive pay, which was hailed as a good thing. At the time, it was thought that executive compensation was out of hand and needed to be reined in. Transparency was supposed to be a big step in the right direction, as most thought shareholders would complain over excessive compensation and bring things back to some semblance of normalcy. Guess what happened after that? CEO pay increased 400% between 1992 and 2000! Why? I think it was because CEO's got a good look at what their peers were making, and those who were below average complained until their boards gave them more money, which turned into a continuous cycle of companies wanting to pay "above average" for good CEO's, which naturally raises CEO pay. Good stuff eh? Notice shareholders didn't do squat to alleviate anything.
"We learn from history that we learn nothing from history." - George Bernard Shaw.

I think the real key to 'curing' executive compensation is to approach things from a different angle. Everyone seems to be focused on how much CEO's get paid. Indeed, these recent SEC disclosure moves only serve to better understand the how much aspect. But what about how they get paid? If we understand the structure of pay, perhaps we could get better compensation practices that might of their own accord bring CEO pay to what it really should be (something that should be left to the market, though so far the market has been inept). Harvard Business Review has some excellent columns on this. I quote from the second link:

Let's look at modern executive compensation in this light. It has become dominantly stock-based, such that the biggest rewards come from an increase in stock price following the establishment of the incentive compensation system. How then do executives reap incentive rewards? The answer is simple. Since a stock price is nothing but the market's consensus of expectations about the future performance of their company, executives can only reap a compensation reward if they increase the expectations of future performance above their current level.
Now apply the first test. To what extent do executives have control over increasing the market's expectations about the future performance of the company? Very little. That is proven by the degree to which expectations fluctuate dramatically more than real results of publicly-traded companies. Real results dropped slightly in the fall of 2008 and expectations plummeted to half their previous level.
Then apply the second test. Do we really want first and foremost the expectations of stock market participants to rise regardless of anything else? I guess one could say the answer is yes if expectations could rise forever. But interestingly, that has never happened with any stock - ever. Expectations fluctuate because they are the product of imagination and speculation, not actual company results. What is more true is that we would wish that real variables, like earnings per share or market share or return on invested capital, would grow from their previous levels. If they grow, then expectations and stock price will grow with a sound underpinning rather than through idle speculation.
Because it's impossible to keep expectations rising forever, executives are smart enough to do so in the short term and get out before expectations fall. The very cleverest CEOs (and those who showed no mercy to their successors) like Coke's Robert Goizueta and GE's Jack Welch were able to manage expectations wonderfully until the day of their retirement. But look at what that personal profit-maximizing behavior did to their corporations, and their hapless successors. By focusing on stock-based compensation, we have caused executives to manufacture stock market volatility rather than build long term value. And it isn't their fault; it is the fault of their boards. It is the boards who swallowed the stock-based compensation fallacy - hook, line and sinker.
Fortunately, there is a simple solution. Scrap stock-based compensation entirely and compensate executives on the basis of improving real measures such as EPS, ROIC, and market share. Those are things over which executives exert significant control and if they improve those real results, stock price will follow. It isn't hard or complicated. It just takes going back to principles.

The hard part will be to break the current system, where prospective CEO's seem to be able to dictate highly favorable compensation packages. I don't know how to get corporations to shift their compensation strategies, but I'd prefer it not be through regulation in this case. Government regulation of pay is something I am not in favor of. Goldman Sachs has taken a small step towards tying their executive pay to company performance, but as HBR points out above, they're unfortunately using the wrong metric for performance.

More Reading

• The WSJ has put together its second annual "Future of Finance" convention. There is far too much to link, but here's the summary and the main page. It was, of course, heavily populated by private-sector representatives, so the summary shouldn't be too surprising:
  

  Their recommendations acknowledge the need for a stronger role for government regulators. At the top of their list was a call for increasing the capital that financial institutions must hold, with higher requirements for institutions posing greater risks to the system. Second on the list was a call for the Financial Stability Board to impose toughened regulatory standards across nations.
  
  The financiers, however, shied away from other, more intrusive government actions. They rejected a proposal requiring institutions to get regulatory approval before selling innovative new products. They steered clear of proposals that would force institutions deemed "too big to fail" to divest certain businesses. And they dodged the explosive issue of compensation.
  
  That led one ex-regulator, former Federal Reserve Board Chairman Paul Volcker, to chastise the group for not going far enough. "Wake up, gentlemen," he said. "Your response is inadequate."
  
  But the prevailing sentiment of the largely private-sector gathering was that, while strengthened regulation is clearly needed, there is also a significant risk of overreaction. As hedge-fund manager and philanthropist George Soros warned: Markets fail, but regulators fail as well.
  

• Thankfully, Paul Volker was there, and he had some (in my view) encouraging things to say:
  

  I hear about these wonderful innovations in the financial markets, and they sure as hell need a lot of innovation. I can tell you of two—credit-default swaps and collateralized debt obligations—which took us right to the brink of disaster. Were they wonderful innovations that we want to create more of? You want boards of directors to be informed about all of these innovative new products and to understand them, but I do not know what boards of directors you are talking about. I have been on boards of directors, and the chance that they are going to understand these products that you are dishing out, or that you are going to want to explain it to them, quite frankly, is nil. I mean: Wake up, gentlemen. I can only say that your response is inadequate. I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information.
  

  Here's my favorite part of what he said:
  

  I think that I am probably going to win in the end.
  

  The Baseline Scenario summarizes his position perfectly: "Volker wants tough constraints on banks and their activities, separating the payments system – which must be protected and therefore tightly regulated – from other “extraneous” functions, which includes trading and managing money." I must add, I am very very encouraged by his statement that he believes he will "win in the end." I very much hope he is accurately assessing his impact on swaying Obama, and politicians in general, to make some more fundamental reform.
• Another interview with Volker, from a German paper. Nice to see an international perspective. Volker says the same as what he was saying in WSJ's conference:
  

  SPIEGEL: You have been clear about your ideas. Do you really believe we have to break up the big banks in order to create a more sustainable financial system?
  
  Volcker: Well, breaking them up is difficult. I would prefer to say, let's just slice them up. I don't want them to get heavily involved in capital market activities so my view is: Hedge funds, no. Equity funds, no. Proprietary trading, no. Trading in commodities, no. And that in itself would reduce the size of the big banks. So you get some reduction in size. Equally important, you make them more manageable and easier to deal with if they do get in trouble.
  
  SPIEGEL: Banking should become boring again?
  
  Volcker: Banking will never be boring. Banking is a risky business. They are going to have plenty of activity. They can do underwriting. They can do securitization. They can do a lot of lending. They can do merger and acquisition advice. They can do investment management. These are all client activities. What I don't want them doing is piling on top of that risky capital market business. That also leads to conflicts of interest.
  

• Financial Times has a really interesting post from GS about China's exchange rate, essentially saying GS is no longer convinced that China is artificailly screwing exchange rates. Also, GS is saying that Chinese domestic consumption is skyrocketing. This is really, really interesting, and flies in the face of popular economic commentary. In the long run, this could be a very good thing, assuming it's correct. I don't know if you guys can read it though - it's probably behind a paywall that I am lucky to bypass: my employer gives me access to FT. I really wish stuff like this was freely available!
• Perhaps we need to change BRIC to BIC.
• There's been lots of talk about regulating, or reducing the power of, the Fed. FT (again, likely behind a paywall) writes that the Fed must be protected. Note that I do not quote this, or the previous FT link, because they are behind paywalls. Again, wouldn't it be nice if it was free? Then I could quote and discuss here properly. This is one of the reasons I rarely link them - why bother when the people I know who read this don't care to pay for access? For the record, one can subscribe free and access a whopping 10 articles a month...
• Krugman writes about Samuelson, who passed away Sunday. He was one of the great theoretical economists. He wasn't a Marx or Keynes, both of whom drove a philosophy that altered the world, but he had a tremendous impact on the field of economics itself. He was one of the first to make economics a quantitative field.
• Not sure if I already posted this: Goldman does something truly interesting. They are giving their top 30 executives bonuses in the form of stock that cannot be exercised for 5 years, amongst other interesting changes. This is a very fundamental change in bonus structure that is being done without any kind of formal regulation or law. I wonder if other banks will follow suit. This would be a tremendous step in the right direction. EDIT: Yes, I posted it in my previous "Reading" post, but it bears mentioning again.
  

Reading

• Krugman made a post recently about how many jobs we need and a promotes a plan to do so:
  
  

  The most specific, persuasive case I’ve seen for more Fed action comes from Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics. Basing his analysis on the prior work of none other than Mr. Bernanke himself, in his previous incarnation as an economic researcher, Mr. Gagnon urges the Fed to expand credit by buying a further $2 trillion in assets. Such a program could do a lot to promote faster growth, while having hardly any downside.
  

  When I read this piece, I was a little struck by how casually he used the $2 trillion number. That's a lot of money, and a lot of debt. Thankfully, The Mess That Greenspan Made agrees:
  
  

  Hardly any downside, that is, unless we're in the middle of a long deferred, fundamental change for the U.S. economy in which the credit expansion seen at all levels over the last few decades - government, corporate, and personal - can no longer produce growth.
  
  

• Mish Shedlock points out that the bond market (usually worth keeping an eye on) is starting to worry about our deficit:
  
  

  The so-called yield curve touched 372 basis points, the most in at least 29 years, as the bonds drew a yield of 4.52 percent. The so-called yield curve has widened from 191 basis points at the end of 2008, with the Fed anchoring its target rate at a record-low range of zero to 0.25 percent and the Treasury extending the average maturity of U.S. debt.
  ...
  “The market is continuing to worry about the massive amount of Treasury issuance that’s going to hit the market well into next year,” said Ian Lyngen, senior government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.
  

• JP Morgan is apparently not concerned about anything actually being done with regards to the "too big to fail" issue. No surprise.
  
  

  Overall, we are left with a big bank that is getting bigger.  It has been (relatively) well run by Mr. Dimon, but there are no assurances for the future.  Given that the “Resolution Authority” is at this point a mythical beast – with no potential effect on the problem of “Too Big To Fail” – we should worry a great deal.
  We could set a hard size cap on banks like JPMorgan Chase (e.g., on assets relative to GDP), which could force them to find ways to spin-off businesses – and return to the much smaller and more manageable size of the early 1990s.  There is no evidence this would be disruptive or cause any economic difficulties.  But, for political reasons, this won’t happen any time soon – the size and power of banks like JPMorgan is put to good use on Capitol Hill.
  

• However, Goldman makes a change to its bonus structure. I wonder if this will be beneficial. It's not in line with Dr. Mintzberg's idea of getting rid of bonuses altogether (as the Goldman strategy still presumes stock price is a good measure of corporate performance), but it does feel like a small step in the right direction:
  
  

  With a resurgent Goldman set to award billions of dollars in bonuses — a trove that could rival the record payouts of the bubble years — the bank said that its 30 most-senior executives would be paid in the form of a special stock, rather than in cash.
  

Ratings Agencies Getting Away Clean

The NYT published a pretty scathing article on how Congress is doing just about nothing to the ratings agencies despite their contributions (some of which have been documented on this blog) to the recent financial crisis:

Without question, the credit rating system is one of the capitalism’s strangest hybrids: profit-making companies that perform what is essentially a regulatory role. The companies serve the public, which expect them to stamp their imprimatur on safe securities and safe securities alone. But they also serve their shareholders, who profit whenever that imprimatur shows up on a security, safe or not.
To make matters more complicated, rating agencies are deeply entrenched in millions of transactions. Statutes and rules require that mutual fund and money managers of almost every stripe buy only those bonds that have been given high grades by a Nationally Recognized Statistical Rating Organization, as the agencies are officially known.
But even if there is no foolproof way to reform the rating agencies, the measures that Congress is now backing are strikingly weak, a number of critics say. There is no talk, for instance, about creating a fee-financed, independent credit rating agency, one modeled along the lines of the Public Company Accounting Oversight Board, which was established to oversee auditors after the Enron debacle — an idea floated by Christopher J. Dodd, the Senate Banking Committee chairman as recently as August.
That approach would attack the conflict of interest problem head on.

Double Dip threat is back?

A long while back, I wrote that I believed we would face a double-dip recession, though I certainly got the time-frame wrong.
Krugman just put up a post on the same issue, and it made me think about why we might still be facing this "W" shape recovery. It relates strongly to Brenner's paper below: we're running out of ways to stimulate business activity. There does not seem to be a bubble left to inflate. When government stimulus runs out (and I don't think we'll see another stimulus package - doesn't seem politically feasible right now) next year, who will spend? From Krugman:

Two stories this morning highlight the risks. The WSJ has a report on highway construction titled Job Cuts Loom as Stimulus Fades:

Highway-construction companies around the country, having completed the mostly small projects paid for by the federal economic-stimulus package, are starting to see their business run aground, an ominous sign for the nation’s weak employment picture.

Meanwhile, the ISM for manufacturing suggests that industrial growth is already slowing down.
I’d be more sanguine about all of this if there were any indications that private, final demand is taking off — consumers, business investment, whatever. But I haven’t seen anything suggesting that sort of thing.

Also, deflation is still looming. Japan is already there. America faces the prospect as well, though if the Treasury keeps pumping out dollars, we also face a risk of inflation down the road. Take a look at this, which has more on double-dip risk (emphasis mine):

The Fed has to do one of two things: They either have to pull $1.5 trillion out of the system by June, which would collapse the economy, or face hyperinflation. This is why the Fed has instructed banks to inform them when and how much of the TARP funds they can return. At best they can expect $300 to $400 billion plus the $200 billion the Fed already has in hand.
We believe the Fed will opt for letting the system run into hyperinflation. All signs tell us they cannot risk allowing the undertow of deflation to take over the economy. The system cannot stand such a withdrawal of funds. They also must depend on assistance from Congress in supplying a second stimulus plan. That would probably be $400 to $800 billion. A lack of such funding would send the economy and the stock market into a tailspin. Even with such funding the economy cannot expect any growth to speak of and at best a sideways movement for perhaps a year.

Their belief goes directly counter to my belief that we will not see a second stimulus plan. If we do not, as I believe, we face the deflationary threat and a true double-dip. If, however, another stimulus plan is passed (which seems more and more necessary, though I still think is too politically unacceptable in the short-term), we may be okay for a while yet.

I know this is a highly doom-and-gloom scenario. Hopefully, I'm wrong, and the world economy recovers more smoothly than I expect.

Also, I wanted to post a short follow-up to the Brenner post below. One thing his analysis does is completely destroy the China-decoupling theory. Note that it was a far more popular theory before the recession than it is now, but it does still get some mention. I think the Brenner write-up finishes it off in my mind, but here's some more on it anyway: The China Decoupling Myth.

Robert Brenner Insight

Robert Brenner is a historian at UCLA. My dad recently pointed me to a paper he wrote that has some fascinating analysis of the root causes of where we are today, economically. The title of the paper, in my mind, is somewhat misleading - so for those of you who are sensitive to any perceived attack on modern banking, please keep reading it. Since it's a 74 page paper, however, I would point you also to this article, which does a great job of summarizing Brenner's paper.
My (preliminary and probably poorly thought-out) understanding of his analysis is that we're locked into a strange loop in which East Asian countries have been, since the 1960's, purposefully forcing over-capacity in manufacturing, which causes downward prices, profit margins, and wage pressure internationally. However, this downward pressure affects the very consumers they intend to sell to, so they simultaneously prop up those consumers (mostly, the United States, and I imagine Europe to a lesser degree) by buying up debt (emphasis mine):

Japan had, from the mid 1950s on, deliberately staked its prosperity on the construction of excess global capacity in a series of key industries beginning with textiles and marching up the value-added chain from ship building and steel through machine tools, a wide range of consumer durables, and capital equipment, as well as a host of important upstream components. Japan did not launch industries. Rather, it targeted markets that were already served by existing capacity in other countries. Japanese companies built their own capacity to capture these markets and then, backed by patient financing and enjoying the advantage of an undervalued currency with predictable labor costs and meticulous attention to quality control, flooded global markets with “torrential rain-type exports” to quote a Japanese government term. The result was to destroy profitability in these industries, forcing foreign competitors either to abandon the industry in question or to cut costs drastically – most commonly, by shifting production to low wage, developing countries.

Subsequently, in its momentous shift away from the Stalinist economic model of autarkic industrialization, China would follow the road blazed by Japan: the deliberate creation of overcapacity in targeted industries aimed at the global market and with the necessary cheap financing overseen and/or organized by the state. Deng Xiaoping's visit to Japan in 1978 – the first ever by a de facto head of the Chinese government – may well be the most important foreign trip ever made by a Chinese leader.

These two countries – and the smaller economies of East and Southeast Asia that followed in their wake ¬– could not, however, escape the consequences of their systematic creation of overcapacity and the resultant decline in manufacturing profitability. To save the global system on which they themselves had come to depend, they were forced to turn around and provide the waves of credit that permitted the financial lynchpin of the global capitalist system – the United States ¬– to continue to act as the world's primary engine of demand.

As Brenner notes in discussing how the explosion in deficits by the George W. Bush administration was financed, “... Japanese economic authorities saved the day by unleashing an unprecedented wave of purchases of dollar-denominated assets. Between the start of 2003 and the first quarter of 2004 ... Japan's monetary authorities created 35 trillion yen, equivalent to roughly one percent of world GDP, and used it to buy approximately $320 billion of US government bonds and (the debt of government-sponsored institutions such as Freddie Mac), enough to cover 77 per cent of the US budget deficit during fiscal year 2004. Nor were the Japanese alone. Above all China, but also Korea, Taiwan, and other East Asian governments taken together increased their dollar reserves by $465 billion and $507 billion....”

I want to make it clear that Brenner is not really playing a "blame game", in which he tries to point to East Asia as the bad guy. He spends just as much time criticizing American policy for blatantly encouraging this situation (emphasis mine):

The fundamental source of today’s crisis is the steadily declining vitality of the advanced capitalist economies over three decades, business-cycle by business-cycle, right into the present. The long term weakening of capital accumulation and of aggregate demand has been rooted in a profound system-wide decline and failure to recover of the rate of return on capital, resulting largely—though not only--from a persistent tendency to over-capacity, i.e. oversupply, in global manufacturing industries. From the start of the long downturn in 1973, economic authorities staved off the kind of crises that had historically plagued the capitalist system by resort to ever greater borrowing, public and private, subsidizing demand. But they secured a modicum of stability only at the cost of deepening stagnation, as the ever greater buildup of debt and the failure to disperse over-capacity left the economy ever less responsive to stimulus. ...
To stop the bleeding and insure growth, the Federal Reserve Board turned, from
just after mid-decade, to the desperate remedy pioneered by Japanese economic authorities a decade previously, under similar circumstances. Corporations and households, rather than the government, would henceforth propel the economy forward through titanic bouts of borrowing and deficit spending, made possible by historic increases in their on-paper wealth, themselves enabled by record run-ups in asset prices, the latter animated by low costs of borrowing. Private deficits, corporate and household, would thus replace public ones. The key to the whole process would be an unceasing supply of cheap credit to fuel the asset markets, ultimately insured by the Federal Reserve.
As it turned out, easy money was made available throughout the entire subsequent period. The weakness of business investment made for a sharp reduction in the demand by business for credit. East Asian governments’ unending purchases of dollar-denominated assets with the goal of keeping the value of their currencies down, the competitiveness of their manufacturing up, and the borrowing and the purchasing power of US consumers increasing made for a rising supply of subsidized loans. So the real cost of long term borrowing steadily declined. Meanwhile, the US Central Bank made sure that short term interest rates never rose to such an extent as to jeopardize profit-making in the financial markets by reducing the Federal Funds Rate at every sign of trouble. One has therefore witnessed for the last dozen years or so the extraordinary spectacle of a world economy in which the continuation of capital accumulation has come literally to depend upon historic waves of speculation, carefully nurtured and publicly rationalized by state policy makers and regulators—first in equities between 1995 and 2000, then in housing and leveraged lending between 2000 and 2007. What is good for Goldman Sachs--no longer GM--is what is good for America.

What is missing is a solution. He's a historian, so all he's trying to do is give us the history. Fine. I have to admit, I personally don't see much of a realistic solution. What would probably help is an American acceptance that we've lived well beyond our means and are due for a serious reduction in living standards (completely unacceptable politically, of course). What might simultaneously help is China trying to focus more on domestic consumption as a path to future growth rather than continued exports, but I have no clue what their policies on that are. What will likely happen is we will limp on in this manner for some time yet - Asian exporters will keep flooding us with both cheap goods and plenty of money. I imagine that this can't last indefinitely, but I've no idea what the future really holds.