WHEN American economist Ann Lee predicted the global financial crisis before it finally hit in 2008, American policy makers doubted her, but their Chinese counterparts gave her the benefit of the doubt.

"I had predicted the credit crisis as early as in 2005, and in 2006 I wrote a 30-page paper titled 'Wall Street's House of Cards' that was sent to US government officials such as former National Economic Council (NEC) director, Lawrence Lindsay, and former commissioner of the US Securities and Exchange Commission (SEC) Annette Nazareth, who dismissed it," Ann Lee writes in her book, "What the US Can Learn From China." She is a finance and economics professor at New York University.

"I also sent the piece to dozens of policy journals whose editors initially expressed interest," she says. "But upon reading its contents, they responded to me by saying either that the concept of regulating credit derivatives was too esoteric...or that the idea of increased financial regulation was just flat out against the politics of the think tank publications connected to the financial institutions that were their large donors."

At the beginning of 2008, before the global financial market crashed, she had a chance to talk to Chinese officials and scholars when she taught graduate finance and economics as a visiting professor at Peking University.

A dose of skepticism

"Though some of them, notably from the Ministry of Finance, found my forecast of a global financial collapse unbelievable, they nonetheless listened with interest to observations and analyses..." she says. "Suffice it to say, the Chinese officials with whom I had come into contact showed greater receptiveness to my warnings about the unsustainable financial system than their American counterparts."

So begins her articulate argument about what the US can learn from China: a healthy dose of skepticism about fancy financialization.

Indeed, as early as in 2002 when I studied US corporate and securities laws in California, I was taught that credit derivatives were no less than revolutionary because they could spread the issuing bank's financial risks so far and wide that the bank could never fail.

"To put it in stark terms, there would be no China miracle if China followed the same monetary and fiscal policies as the United States," observes the author. "Unquestioningly, its economy would be ruined like the economies of so many other nations that have let Wall Street get ahead of the real economy."

What's financialization and what's the harm in it? The author cites two definitions.

One defines it as "a pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production." (Great Krippner of the University of California, Los Angeles)

The other defines it as "a process whereby financial services, broadly construed, take over the dominant economic, cultural and political role in a national economy (Kevin Phillips in his 2006 book, "American Theocracy.")

The tail wags the dog

"Whichever definition one uses, financialization describes a classic case of the tail wagging the dog," Lee writes. "Rather than Wall Street serving the real economy, Wall Street has enslaved it."

On the harm of financialization, she says: "Crisis is a natural state of affairs for financialization since the problem is never solved."

From the Latin American crisis all the way down to the Long-Term Capital Management scandal, the Russian crisis, the Asian crisis, the dot-com bubble and finally the subprime crisis, "none of the underlying problems were fixed, the most egregious one being too much capital from too much leverage."

Lee minces no words against financialization that has come to define the American way of life. "If financialization is left unchecked, America will lose its competitiveness ... and will slowly transform into a society that may more resemble a caste."

She compares robber barons with financial elites. While both cornered American wealth, she points out "the robber barons at least built great infrastructure for America, such as railroads, while Wall Street titans have left nothing of lasting value for society."

All of this Wall Street-style capital havoc had been wrecked on nations, especially poor ones, for decades until China came onto the scene, she says.

"During the Asian crisis of 1997, China watched closely how financial capital affected the real economy of all their neighbors from Malaysia to South Korea," she says. "Rather than listen to the Washington Consensus, they (Chinese officials) decided to...focus instead on developing their real economy first. As a result, their industrial sector grew rapidly, protected by an environment of stable prices due to a tight rein on the financial sector and a pegged exchange rate."

Foreign currency manipulation

Focusing on the real economy is not just the only way to prosperity, but a necessary defense against attacks from foreign currency manipulators, she points out.

"Wall Street has had decades of practice outsmarting and neutralizing developing countries with financial warfare through financialization and is ready to make China its next victim," she warns. "China represents the last and final frontier for the financiers to prey with abandon, and Wall Street can't wait."

She justifies China's flexible system of pegging its currency to the dollar.

"If China is forced to decouple its yuan peg to the US dollar due to painfully high inflation that it is importing as a result of loose US monetary policies, sophisticated hedge fund managers and other currency speculators will pounce on the opportunity to attack China's currency," she warns. "Speculators can easily drive the value of the yuan to extreme highs or lows since they can all make the same one-way bets."

The reader can reasonably infer from Lee's analyses that the US has espoused financialization only to hurt itself as well as other nations. It's a game in which no one wins, and the US had better abandon it.

"The United States could take a page out of China's playbook by restricting banks to traditional banking activities - making loans and take deposits - as one possible solution," she suggests. "As Americans, we knew the wisdom of curbing financial power back in the 1930s. We need to reinstate those financial regulations in order to nurse the global economy back to health."

Developing the real economy first is just one aspect the author says the US can learn from China. Confucian values, which focus on education, earned authority and respect for the elderly, are also worth learning.

The author acknowledges that China has many problems and can learn a lot from the US as well, but the US has nothing to lose in learning the best from China.

A caveat for the reader is that the author's argument is best in financial areas, but her observation of China's broader society and politics sometimes borders on over idealization and simplification.