The G20 have chosen to go with China, not the U.S., where fear and loathing of Obamanomics have seized the economy

The G20 appears to be placing a large bet on China’s policymakers. At their summit last month, one developed country after another, bar the US, said they would cut fiscal deficits.

“If these economies all decide to reduce their budget deficits, what will drive global growth?” asked Simon Johnson, the former IMF chief economist. “The answer in Toronto was obvious: China.”

China’s economy needs to slow from the turbocharged growth in the second half of last year and first quarter of this, which was fuelled by a huge increase in bank lending. But the second-quarter figures will be one of the early signs of whether China can pull off a measured cooling or whether the economy will slump when stimulus is taken away.

The Chinese economy is going through two delicate transitions. Worried about overheating, Beijing has applied the brakes in the two sectors that helped propel the recovery from the financial crisis last year, ordering a clampdown on property speculation and limiting lending to local government infrastructure projects.

At the same time, it is trying to find a growth model that relies less on the 20 per cent-plus increases in exports that it enjoyed for most of the past decade.

“The economy is not facing a hard landing but the current slowdown is leading China into growth below 10 per cent in the years ahead,” Mark Williams at Capital Economics says.

One of the keys to whether China will avoid an abrupt slowdown is the performance of the property sector. Since the introduction of policies to limit speculation in mid-April, the market has almost come to a standstill. Standard Chartered reports that sales are down 60 per cent in 14 big cities.

Obama and his colleagues grope for villain

The bloated egos attending the G20 conference in London congratulated themselves on a historic accomplishment Thursday, having pledged $1.1 trillion they don't have to combat a problem they continue to misdiagnose.

The new demon they are going to slay is secret international banking that allows high-rollers to move money anonymously.

What did secret banking have to do with the oollapse of the U.S. housing market and the resulting recession?

Probably nothing.

What about hedge funds, which also had a target pinned to their backs? Probably nothing.

If the G20 dandies really wanted to deal with the basic problem, they would have called for the immediate abolition of Freddie Mac and Fannie Mae. Had those two government-sponsored enterprises not existed, millions of bad credit risks would not have gotten mortgages, the housing bubble would not have happened, and international dandies would not now be pretending to pick up the pieces of a wrecked world economy.

Why do the dandies ignore Fannie and Freddie? Because any suggestion that Fannie and Freddie were central to the debacle would rankle Barack (Alexander the Great) Obama, whose Democrat Party used both Bannie and Freddie as a hiring hall for out-of-work politicians and a source of big-time campaign contributions.

What Fannie and Freddie did was to separate home mortgages from the traditional constraint of risk. Under the previous system, a local lender would assess the credit-worthiness of applicants. Those who had a long record of paying their bills on time, as well as adequate incomes, received mortgages at modest interest rates. Those who didn't have good records had to pay higher interest rates, and sometimes were refused any mortgage.

All that changed when Fannie and Freddie came on the scene. Now, local lenders cared little, or not at all, about credit-worthiness because they held the morgage for only a day or two before selling it to Fannie or Freddie.

Fannie and Freddie didn't have any big worries either becaue they quickly bundled mortgages as securities and sold them to investment banks, which bundled them again. The concepts of risk and credit-worthiness vanished, only to reappear suddenly and ominously when the American economy flattened out and the bad risks began defaulting on mortgages.

Government policy and public pressure groups such as ACORN, with whom Obama had a long relationship, were major contibutors to the debacle. Head fakes, like the ones so absurdly on display in London, won't change that history.