The Intersection of Business and Government

Does China Have the US Over a Metal Barrel?
It’s well known that China is the largest purchaser of America’s federal debt issued by the U.S. Treasury in the form of official government bonds. There is always a concern that China could significantly pull back from its purchases or cease them entirely. If China would do that, there is little doubt our economy would be thrown into chaos.

What is less understood is how China’s control of so-called rare earth metals could harm our national security—both economically and militarily.

Surprisingly, it appears the Trump administration is uninterested in addressing this situation during the current bilateral trade negotiations with China.

Rare earth minerals are important because they are essential ingredients for producing technological equipment, smartphones, automobiles, and military missiles. About ten years ago, China, which controlled practically the entire world’s production of rare earth minerals, placed a 40 % export quota on them. This was an attempt to coerce tech companies to move their production to China thus making it easier to steal the intellectual property involved in the production. Global prices of the minerals increased dramatically.

In 2012 the U.S., Japan and the EU filed a complaint with the World Trade Organization on the grounds that export quotas were prohibited by the WTO. The petitioners prevailed but China figured a way around the loss by establishing artificially lower prices for the minerals within China. This induced some U.S., Japanese and EU companies to move their production to China.

With the WTO being thwarted, China is now upping the ante by spear heading the formation of an alternative multinational trade organization that it hopes will one day replace the WTO. It’s very important for the administration to require any trade agreement with China to include a resolution of the availability and pricing of rare earth metals. Our future depends on it.

Here We Go Again: More Leverage Lending
It’s been over a decade since banks and other lending institutions made risky loans that resulted in the financial crisis and subsequent great recession.

Since then congress has put reforms in place to limit activity by lenders to reduce their risk and required banks to pass various tests to assure their financial solvency.

Now several financial regulators are raising new concerns that banks may be, once again, extending loans to overextended borrowers that could pose risks to financial markets. This time banks are making loans to highly indebted companies.

Securities and Exchange Commission Chairman Jay Clayton recently said he saw a pattern similar to the period before the 2008 financial crisis. “To the extent that large concentrations of leveraged loans with long settlement cycles are in funds, that’s a case where liquidity expectations may be out of whack,” Clayton told an industry audience.

Recent testimony by Fed Chairman Jerome Powell to the House Financial Services Committee, warned that in an economic downturn, leveraged lending would “have an amplification effect.”

Former regulatory officials have noted the parallel between subprime mortgage loans, the leveraged buildup that ensued, and the financial collapse that followed. Experts have noted that even if the leveraged loans were to be immediately sold off by banks, there would likely be entanglements with other financial institutions that could result with weaker banks pulling down stronger ones.