Sheila Bair: 'Insolvent Institutions Should Be Closed'

Sheila Bair: 'Insolvent Institutions Should Be Closed.' By Robert L Pollock
Political Diary
Wall Street Journal, September 27, 2012, 12:28 p.m. ET
http://online.wsj.com/article/SB10000872396390443328404578022363414879722.html

If you were one of the people scratching your forehead in 2008 as the federal government bailed out Bear Stearns, let Lehman Brothers fail, and then showered hundreds of billions of dollars on the banking system to avert the alleged threat of a "systemic" collapse, you were hardly alone. In fact Sheila Bair, then head of the Federal Deposit Insurance Corporation, shared many of your concerns.

Ms. Bair stopped by the Journal Wednesday as part of a tour to promote her new book on the financial crisis. The headline revelations: She was very skeptical about why the likes of Citibank were deemed worthy of moving heaven and earth to save, and she also doesn't quite understand what Tim Geithner and Hank Paulson were talking about when they used the phrase "systemically important" institutions.

Of Mr. Geithner and Citi, Ms. Bair said you just have to "look at his phone logs" to see the outsized concern he had with preserving the financial giant. He was talking with Citi CEO Vikram Pandit a lot, she says. You got the impression "he was going to stand behind Citi management no matter what . . .. He viewed me as a threat with my desire to impose losses on bondholders."

So what would Ms. Bair have done? "At least make them clean up their balance sheet," instead of just throwing money at them. "If our system is so fragile that a blatantly mismanaged, poorly run bank can't be subject to some market discipline because the whole system is gonna come down, let's just socialize everything."

"It was a joke" what happened, Ms. Bair continued. Now "they're a zombie bank," like so many Japanese financial institutions.

So does Ms. Bair think the concept of systemic risk makes any sense at all? "I think it's a really, really overused word. It's never backed with analysis. It's just 'You gotta do this because it's the system.' I think if you're throwing government money around" you better have a good explanation why letting an institution fail through the normal FDIC process would be a problem.

Ms. Bair's radical alternative to panicked and inconsistent decision making in Washington? "The insolvent institutions should be closed."

"The original sin was with Bear Stearns . . .. I've never seen a good analysis why Bearn Stearns was systemic," she says. But after Bear was bailed out in early 2008, the much bigger Lehman Brothers expected a bailout, too. When it didn't get one, the crisis of fall 2008 began in earnest. "There were so many missteps leading up to this that created market uncertainty."

Assessing the Cost of Financial Regulation

Assessing the Cost of Financial Regulation. By Douglas Elliott, Suzanne Salloy, and André Oliveira Santos
IMF Working Paper No. 12/233
http://www.imfbookstore.org/IMFORG/9781475510836

Summary: This study assesses the overall impact on credit of the financial regulatory reforms in Europe, Japan, and the United States. Long-term cost estimates are provided for Basel III capital and liquidity requirements, derivatives reforms, and higher taxes and fees. Overall, average lending rates in the base case would rise by 18 bps in Europe, 8 bps in Japan, and 28 bps in the United States. These results are similar to the official BIS assessments of Basel III and an OECD analysis, but lower as a result of including expense cuts and reductions in the returns required by investors. As a result, they are markedly lower than those of the IIF.

Executive Summary:

Reforming the regulation of financial institutions and markets is critically important and should provide large benefits to society. The recent financial crisis underlined the huge economic costs produced by recessions associated with severe financial crises. However, adding safety margins in the financial system comes at a price. Most notably, the substantially stronger capital and liquidity requirements created under the new Basel III accord have economic costs during the good years, analogous to insurance payments.

There is serious disagreement about how much the additional safety margins will cost.  The Institute of International Finance (IIF), a group sponsored by the financial industry, estimated the proposed reforms will reduce economic output in the advanced economies by approximately 3 percent during 2011–15. Official estimates suggest a much smaller drag. 
Finding an intellectually sound consensus on the costs of reform is critical. If the true price is too high, reforms must be reassessed to improve the cost-benefit ratio. But, if reforms are economically sound, they should be pursued to increase safety and reduce the uncertainty about rules that creates inefficiencies and makes long-term planning difficult.

This study assesses the overall impact on credit of the global financial regulatory initiatives in, Europe, Japan, and the United States. It focuses on the long-term outcomes, rather than transitional costs, and does not attempt to measure the economic benefits of reforms. Academic theory is combined with empirical analyses from industry and official sources, plus financial disclosures by the major financial firms, to reach specific cost estimates. The analysis here does not address the significant adjustments triggered by the financial and Eurozone crises and the potential transitional effects of adjusting to the new regulations.

The study focuses principally on the effects of regulatory changes on banks and their lending. This is for three reasons: banks dominate finance; the reforms are heavily focused on them; and it is harder to estimate the effects on other parts of the system, such as capital markets. Loans, in particular, are a major part of overall credit provision and there is substantially greater data available on lending activities. Where possible, the study also looks at the effects of new regulations on securities holdings by banks and on securities markets.

Measuring the cost of financial reform requires careful consideration of the baselines for comparisons. They should incorporate the higher safety margins that would have been demanded by markets, customers, and managements after the financial crisis, even in the absence of new regulation. Some studies take the approach of assuming all the increases in safety margins are due to regulatory changes, exaggerating the cost of reforms.

A simple model is used to estimate the increase in lending rates required to accommodate the various reforms. The model assumes credit providers need to charge for the combination of: the cost of allocated capital; the cost of other funding; credit losses; administrative costs, and certain miscellaneous factors. The study establishes initial values for these key variables, determines how they would change under regulatory reform, and evaluates the changes in credit pricing and other variables needed to rebalance the equation.  Cost estimates are provided for capital and liquidity requirements, derivatives reforms, and the effects of higher taxes and fees. These categories were chosen after a detailed qualitative assessment of the relative impact of different reforms on credit costs.

Securitization reform was initially chosen as well, but proved impossible to quantify.  Finally, an overall, integrated cost estimate is developed. This involves examining the interactions between these categories and including the effects of mitigating actions likely to be taken by the financial institutions as a result of the reforms in totality. This includes, for example, the room for expense cuts to counteract the need for price increases, to the extent that such cuts were not already included in stand-alone impact estimates.

Lending rates in the base case rise by 18 bps in Europe, 8 bps in Japan, and 28 bps in the United States, in the long run. There is considerable uncertainty about the true cost levels, but a sensitivity analysis shows reasonable changes in assumptions do not alter the conclusions dramatically. The results are broadly in line with previous studies from the official sector, partially because similar methodologies are employed. This paper finds similar first-order effects to the official BIS assessments of Basel III (BCBS (2010) and MAG (2010)) and the analysis at the OECD by Slovik and Cournède (2010). The cost estimates here are, however, markedly lower than those of the IIF.

Three extensions of the methodologies from the official studies, though, lead to substantially lower net costs. The base case shows increases in lending rates of roughly a third to a half of those found in the BIS and OECD studies, despite important commonalities in the core modeling approaches with these studies. First, the baselines chosen here assume a greater hike in safety margins due to market forces, and therefore less of a regulatory effect, than the OECD and IIF studies. (The BIS studies do not reach firm conclusions on the additional capital needs). Industry actions through end-2010 suggest that market forces alone would have produced reactions similar to what was witnessed to that point, even if no regulatory changes were contemplated.

Second, this paper assumes that banks will also react by reducing costs and taking certain other measures that have little effect on credit prices and availability, in addition to the actions assumed in the other studies. The official studies do not do so and the IIF study assumes a fairly low level of change. This accounts for 13 bps of cost reduction in Europe, 10 bps in Japan, and 20 bps in the United States. Third, this paper assumes that equity investors will reduce their required rate of return on bank equity as a result of the safety improvements. Debt investors are assumed to follow suit, although to a much lesser extent. The official studies assume no benefit from investor reactions, for conservatism, and the IIF assumes the benefits, although real, will arise over a longer time-frame than is covered by their projections.

There are important limitations to the analysis presented here. Transition costs are not examined, a number of regulatory reforms are not modeled, judgment has been required in making many of the estimates, the overall modeling approach is relatively simple, and regulatory implementation is assumed to be appropriate, therefore not adding unnecessary costs. Despite these limitations, the results appear to be a balanced, albeit rough, assessment of the likely effects on credit. Further research would be useful to translate the credit impacts into effects on economic output.

Again, all of the analysis is based on the long-run outcome, not taking account of a transition being made in today’s troubled circumstances. To the extent that bank capital or liquidity is difficult or very expensive to raise during the transition period—as they are currently in Europe, a reduction in credit supply would be expected and any increase in lending rates would be magnified, perhaps substantially. Deleveraging is clearly occurring at European banks under today’s conditions in response to financial market, economic, regulatory, and political factors. It is impossible to tell whether any appreciable portion of this reaction is due to anticipation of the Basel III rules. Regardless of the transitional effects, it will be possible, over time, for banks to find the necessary capital and liquidity to provide credit, as long as the pricing is appropriate. Capital and liquidity will flow to banks from other sectors if the price of credit rises more than is justified by the fundamental underlying factors.

The relatively small effects found here strongly suggest that the benefits would indeed outweigh the costs of regulatory reforms in the long run. Banks have a great ability to adapt over time to the reforms without radical actions harming the wider economy.

Full text: http://www.imf.org/external/pubs/cat/longres.aspx?sk=40021.0

Dodd-Frank's 'Orderly Liquidation' Is Out of Order. By Scott Pruitt and Alan Wilson

Dodd-Frank's 'Orderly Liquidation' Is Out of Order. By Scott Pruitt and Alan Wilson
South Carolina, Oklahoma and Michigan join a federal lawsuit to uphold property rights and checks and balances.The Wall Street Journal, September 25, 2012, 7:14 p.m. ET
http://online.wsj.com/article/SB10000872396390444180004578016953529778498.html?mod=WSJ_Opinion_LEFTTopOpinion

'The tendency of the law must always be to narrow the field of uncertainty." Justice Oliver Wendell Holmes wrote that more than a century ago, but the sentiment runs all the way to our nation's roots. Under our Constitution, the rule of law provides the certainty and transparency necessary to protect individual liberty and support economic growth.

But the 2010 federal financial-reform law known as Dodd-Frank continues to undermine economic growth and the rule of law by injecting immense uncertainty into our economy. As law professor David Skeel demonstrated recently in these pages, the law's Title II gives the Treasury secretary and the Federal Deposit Insurance Corp. unprecedented authority to "liquidate" financial companies. This grants immense power to a handful of unelected federal bureaucrats, empowering them to pick winners and losers among a liquidated company's investors. This arrangement destroys rights long protected by bankruptcy law.

For that reason and others, the attorneys general of South Carolina, Oklahoma and Michigan last week joined a federal lawsuit challenging Dodd-Frank's unconstitutional "orderly liquidation" provisions. Dodd-Frank's elimination of investors' rights directly harms our states because state pension funds are partly invested in financial companies. We must raise these constitutional objections now because once a company is liquidated, it will be too late.

Title II eliminates all meaningful judicial review and due process. Once the Treasury secretary orders the liquidation of a financial company, the company has only 24 hours to convince a federal court to overturn that order. Unless the court somehow manages to decide the entire case in the company's favor before the clock expires, the government wins by default and can begin to liquidate the company even as appeals are pending. Dodd-Frank further limits the authority of the courts by prohibiting them from reviewing whether the Treasury secretary's decision was constitutional, or whether the liquidation is actually necessary to protect financial stability.

The Treasury secretary's largely unaccountable decisions in these cases will put investments at risk, and creditors won't know until it is too late. Dodd-Frank prohibits the company from disclosing the liquidation threat before the district court decides the case. Once the liquidation goes forward, the creditors' only recourse will be to plead their case before the FDIC, with minimal judicial review—meaning that creditors' recoveries are "likely to be close to zero," as bankruptcy scholars Douglas Baird and Edward Morrison have put it.

Even more disturbing is the possibility that a company might agree to be "liquidated" and rebuilt under a new banner—like "New Chrysler" replacing "Old Chrysler"—leaving its creditors no right to block the reorganization. Instead, creditors not favored by federal bureaucrats will have little choice but to accept the deal offered to them by the government in a black-box process.

When the federal government replaced "Old Chrysler" with "New Chrysler" in 2009, it told one set of Chrysler's creditors (Indiana's state pension funds) to swallow $6 million in losses. Indiana attempted to defend its employees' pensions in court, but the government shuttered "Old Chrysler" before the Supreme Court could hear Indiana State Police Pension Trust v. Chrysler. Our states face the same threat because they have invested in the debt of financial companies that can be liquidated under Dodd-Frank.

We have taken an oath to uphold the rule of law and defend the Constitution. We are determined to uphold that oath, including defending the Constitution against the overarching power of the federal government.

Our lawsuit attempts to defend the very heart of our Constitution's structure: By committing such broad power to federal bureaucrats and nullifying critical checks and balances, Dodd-Frank's "orderly liquidation" authority violates the Constitution's separation of powers, the Fifth Amendment's guarantee of due process, and the guarantee of "uniform" bankruptcy laws.

The president and Congress can easily repair these constitutional violations by amending Dodd-Frank, restoring the rights long protected by federal bankruptcy law and reaffirming the Constitution's checks and balances. Until then, we will vigorously defend the rule of law through this litigation. The hard-earned pension contributions and tax payments of our citizens deserve nothing less.

Mr. Pruitt is attorney general of Oklahoma. Mr. Wilson is attorney general of South Carolina.

Benchmarking Financial Systems with a New Database - by Martin Cihak, Asli Demirgüç-Kunt, and Erik Feyen

Benchmarking Financial Systems with a New Database
By Martin Cihak, co-authors: Asli Demirgüç-Kunt, Erik Feyen
Mon, Sep 24, 2012 4:23pm

How do financial systems around the world stack up? Which one has the highest number of bank accounts per capita? Where in the world do we find the lowest interest rate spreads, and where are they the highest? Which country has the most active stock market? Has competition among banks increased or decreased in recent years? Are financial institutions and financial markets in developed economies more or less stable than those in developing ones? Answers to these and many other interesting questions can be found in the Global Financial Development Database, accompanying the 2013 Global Financial Development Report. Both the database and the report were published earlier this month.

The Global Financial Development Database is the most comprehensive publicly available dataset on financial development. It contains over 70 financial system indicators for more than 200 economies on an annual basis from 1960 to 2010. All these indicators are categorized in four broad categories: (a) size of financial institutions and markets (financial depth), (b) degree to which individuals can and do use financial services (access), (c) efficiency of financial intermediaries and markets in intermediating resources and facilitating financial transactions (efficiency), and (d) stability of financial institutions and markets (stability). The selection of these indicators, their detailed definitions and links between the empirical data and the conceptual literature on financial development are discussed in an underlying working paper.

Considerable effort was involved in collecting, cleaning and checking this unique database, which builds upon and improves upon several existing data sources. One of the earlier efforts in this area was the Database on Financial Development and Structure, introduced in Beck, Demirgüç-Kunt, and Levine (2000), and subsequently updated several times. The Global Financial Development Database extends, updates and recalculates these country-by-country indicators, many of which are based on underlying data for individual institutions and markets. (For completeness, the Database on Financial Development and Structure has now been updated again, to be consistent with the more comprehensive Global Financial Development Database.)

In addition to the large electronic file with the Global Financial Development Database, there is also a smaller, pocket version of the dataset, published as the Little Data Book on Financial Development. The booklet shows a subset of indicators for the four categories of financial system characteristics (depth, access, efficiency, and stability) explored in the main database. The data are shown for individual countries as well as for country groups.

Complete text: http://blogs.worldbank.org/allaboutfinance/benchmarking-financial-systems-with-a-new-database

New Report Aims to Improve the Science Behind Regulatory Decision-Making

http://www.americanchemistry.com/Media/PressReleasesTranscripts/ACC-news-releases/New-Report-Aims-to-Improve-the-Science-Behind-Regulatory-Decision-Making.html

WASHINGTON, D.C. (September 18, 2012) – Scientists and policy experts from industry, government, and nonprofit sectors reached consensus on ways to improve the rigor and transparency of regulatory decision-making in a report being released today. The Research Integrity Roundtable, a cross-sector working group convened and facilitated by The Keystone Center, an independent public policy organization, is releasing the new report to improve the scientific analysis and independent expert reviews which underpin many important regulatory decisions. The report, Model Practices and Procedures for Improving the Use of Science in Regulatory Decision-Making, builds on the work of the Bipartisan Policy Center (BPC) in its 2009 report Science for Policy Project: Improving the Use of Science in Regulatory Policy.

"Americans need to have confidence in a U.S. regulatory system that encourages rational, science-based decision-making," said Mike Walls, Vice President of Regulatory and Technical Affairs for the American Chemistry Council (ACC), one of the sponsors of the Keystone Roundtable. "For this report, a broad spectrum of stakeholders came together to identify and help resolve some of the more troubling inconsistencies and roadblocks at the intersection of science and regulatory policy."

Controversies surrounding a regulatory decision often arise over the composition and transparency of scientific advisory panels and the scientific analysis used to support such decisions. The Roundtable's report is the product of 18 months of deliberations among experts from advocacy groups, professional associations and industry, as well as liaisons from several key Federal agencies. The report centers on two main public policy challenges that lead to controversy in the regulatory process: appointments of scientific experts, and the conduct of systematic scientific reviews.

The Roundtable's recommendations aim to improve the selection process for scientists on federal advisory panels and the scientific analysis used to draw conclusions that inform policy. The report seeks to maximize transparency and objectivity at every step in the regulatory decision-making process by informing the formation of scientific advisory committees and use of systematic reviews. The Roundtable's report offers specific recommendations for improving expert panel selection by better addressing potential conflicts of interest and bias. In addition, the report recommends ways to improve systematic reviews of scientific studies by outlining a step-by-step process, and by calling for clearer criteria to determine the relevance and credibility of studies.

"Conflicted experts and poor scientific assessments threaten the scientific integrity of agency decision making as well as the public's faith in agencies to protect their health and safety," said Francesca Grifo, Senior Scientist and Science Policy Fellow for the Union of Concerned Scientists. "Given the abundance of inflamed partisan dialogue around regulatory issues, it was refreshing to be a part of a rational and respectful roundtable. If adopted by agencies, the changes recommended in the report have the potential to reduce the ability of narrow interests to weaken regulations' power to protect the public good."

The Keystone Center and members of the Research Integrity Roundtable welcome additional conversations and dialogue on the matters explored in and recommendations presented in this report.

For more information, access the Roundtable's website at: www.Keystone.org/researchintegrity.

A European Deposit Insurance and Resolution Fund: An Update

A European Deposit Insurance and Resolution Fund: An Update. By Dirk Schoenmaker, Duisenberg School of Finance; VU University Amsterdam, and Daniel Gros, Centre for European Policy Studies, Brussels; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Duisenberg School of Finance Policy Paper Series No. 26
September 12, 2012
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2052886

Abstract:    

Cross-border banking is currently not stable in Europe. Cross-border banks need a European safety net. Moreover, a truly integrated European-level banking system may help to break the diabolical loop between the solvency of the domestic banking system and the fiscal standing of the national sovereign.

This policy paper first sketches the building blocks of a Banking Union. Importantly, a new European Deposit Insurance and Resolution Authority (EDIRA) should start simultaneously with the ECB assuming supervisory powers. A combination of European supervision and local resolution cannot work because it is not ‘incentive compatible’. Next, this paper proposes a transition period to gradually phase in the European deposit insurance coverage. Finally, we calculate that a European Deposit Insurance Fund would amount to about €30-50 billion for the 75 euro area banks that were subject to the EBA stress tests. This Fund could be created over a period of time through risk-based deposit insurance premiums levied on these banks. Once up and running, the Fund would then turn into a European Deposit Insurance and Resolution Fund to also deal with the resolution of one or more of these European banks.

Keywords: financial stability, banking, deposit insurance, resolution
JEL Classification: F36, F42, F51, G28

The Rough Road to Progress Against Alzheimer's Disease

The Rough Road to Progress Against Alzheimer's Disease
 PhRMA
Sep 13, 2012
http://www.innovation.org/index.cfm/NewsCenter/Newsletters?NID=205


Two high-profile Alzheimer’s drug development failures were announced in recent weeks shining a spotlight on the challenges and frustrations inherent in Alzheimer’s research. Alzheimer’s disease is among the most devastating and costly illnesses we face and the need for new treatments will only become more acute as our population ages.

Understanding a disease and developing medicines to treat it is always a herculean task but Alzheimer’s brings particular challenges and long odds. A new report from the Pharmaceutical Research and Manufacturers of America (PhRMA), "Researching Alzheimer’s Medicines: Setbacks and Stepping Stones", examines the complexities of researching and treating Alzheimer’s and drug development success rates in recent years.

Since 1998, there have been 101 unsuccessful attempts to develop drugs to treat Alzheimer’s—or as some call them “failures,” according to the new analysis. In that time three new medicines have been approved to treat the symptoms of Alzheimer’s disease; however, for every research project that succeeded, 34 failed to yield a new medicine.

These “failures” may appear to be dead ends – a waste of time and resources – but to researchers they are both an inevitable and necessary part of making progress. These setbacks often contribute to eventual success by helping guide and redirect research on potential new drugs. In fact, the recent unsuccessful trials have provided a wealth of new information which researchers are now sifting through to inform their ongoing research.

Alzheimer’s disease is the sixth leading cause of death in the United States today, with 5.4 million people currently affected.^[i]  By 2050, the number of Americans with the disease is projected to reach 13.5 million at a cost of over $1.1 trillion unless new treatments to prevent, arrest or cure the disease are found.^[ii]  According to the Alzheimer’s Association a new medicine that delays the onset of the disease could change that trajectory and save $447 billion a year by 2050.

According to another new report, researchers are currently working on nearly 100 medicines in development for Alzheimer’s and other dementias. Although research is not a straight, predictable path, with continued dedication, we will make a difference for every person at risk of suffering from this terrible, debilitating disease.

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^[i]Alzheimer's Association, “Factsheet,” (March 2012), http://www.alz.org/documents_custom/2012_facts_figures_fact_sheet.pdf 
^[ii]Alzheimer's Association, 2012 Alzheimer's Disease Facts and Figures, Alzheimer's and Dementia, Volume 8, Issue 2

China's Solyndra Economy. By Patrick Chovanec

China's Solyndra Economy. By Patrick Chovanec
Government subsidies to green energy and high-speed rail have led to mounting losses and costly bailouts. This is not a road the U.S. should travel.WSJ, September 11, 2012, 7:21 p.m. ET
http://online.wsj.com/article/SB10000872396390443686004577634220147568022.html

On Aug. 3, the owner of Chengxing Solar Company leapt from the sixth floor of his office building in Jinhua, China. Li Fei killed himself after his company was unable to repay a $3 million bank loan it had guaranteed for another Chinese solar company that defaulted. One local financial newspaper called Li's suicide "a sign of the imminent collapse facing the Chinese photovoltaic industry" due to overcapacity and mounting debts.

President Barack Obama has held up China's investments in green energy and high-speed rail as examples of the kind of state-led industrial policy that America should be emulating. The real lesson is precisely the opposite. State subsidies have spawned dozens of Chinese Solyndras that are now on the verge of collapse.

Unveiled in 2010, Beijing's 12th Five-Year Plan identified solar and wind power and electric automobiles as "strategic emerging industries" that would receive substantial state support. Investors piled into the favored sectors, confident the government's backing would guarantee success. Barely two years later, all three industries are in dire straits.

This summer, the NYSE-listed LDK Solar, the world's second largest polysilicon solar wafer producer, defaulted on $95 billion owed to over 20 suppliers. The company lost $589 million in the fourth quarter of 2011 and another $185 million in the first quarter of 2012, and has shed nearly 10,000 jobs. The government in LDK's home province of Jiangxi scrambled to pledge $315 million in public bailout funds, terrified that any further defaults could pull down hundreds of local companies.

Chinese solar companies blame many of their woes on the antidumping tariffs recently imposed by the U.S. and Europe. The real problem, however, is rampant overinvestment driven largely by subsidies. Since 2010, the price of polysilicon wafers used to make solar cells has dropped 73%, according to Maxim Group, while the price of solar cells has fallen 68% and the price of solar modules 57%. At these prices, even low-cost Chinese producers are finding it impossible to break even.

Wind power is seeing similar overcapacity. China's top wind turbine manufacturers, Goldwind and Sinovel, saw their earnings plummet by 83% and 96% respectively in the first half of 2012, year-on-year. Domestic wind farm operators Huaneng and Datang saw profits plunge 63% and 76%, respectively, due to low capacity utilization. China's national electricity regulator, SERC, reported that 53% of the wind power generated in Inner Mongolia province in the first half of this year was wasted. One analyst told China Securities Journal that "40-50% of wind power projects are left idle," with many not even connected to the grid.

A few years ago, Shenzhen-based BYD (short for "Build Your Dreams") was a media darling that brought in Warren Buffett as an investor. It was going to make China the dominant player in electric automobiles. Despite gorging on green energy subsidies, BYD sold barely 8,000 hybrids and 400 fully electric cars last year, while hemorrhaging cash on an ill-fated solar venture. Company profits for the first half of 2012 plunged 94% year-on-year.

China's high-speed rail ambitions put the Ministry of Railways so deeply in debt that by the end of last year it was forced to halt all construction and ask Beijing for a $126 billion bailout. Central authorities agreed to give it $31.5 billion to pay its state-owned suppliers and avoid an outright default, and had to issue a blanket guarantee on its bonds to help it raise more. While a handful of high-traffic lines, such as the Shanghai-Beijing route, have some prospect of breaking even, Prof. Zhao Jian of Beijing Jiaotong University compared the rest of the network to "a 160-story luxury hotel where only 11 stories are used and the occupancy rate of those floors is below 50%."

China's Railway Ministry racked up $1.4 billion in losses for the first six months of this year, and an internal audit has uncovered dangerous defects due to lax construction on 12 new lines, which will have to be repaired at the cost of billions more. Minister Liu Zhijun, the architect of China's high-speed rail system, was fired in February 2011 and will soon be prosecuted on corruption charges that reportedly include embezzling some $120 million. One of his lieutenants, the deputy chief engineer, is alleged to have funneled $2.8 billion into an offshore bank account.

Many in Washington have developed a serious case of China-envy, seeing it as an exemplar of how to run an economy. In fact, Beijing's mandarins are no better at picking winners, and just as prone to blow money on boondoggles, as their Beltway counterparts.

In his State of the Union address earlier this year, President Obama declared, "I will not cede the wind or solar or battery industry to China . . . because we refuse to make the same commitment here." Given what's really happening in China, he may want to think again.

Mr. Chovanec is an associate professor of practice at Tsinghua University's School of Economics and Management in Beijing, China.