Growing up in the 1950s, I learned a lot about scare tactics. In those days, some people imagined a Commie under every bed, as the phrase went. Only in retrospect did I learn
of the many careers derailed and lives ruined from Hollywood to Foggy Bottom by such irresponsible hysteria. These days, it’s not Commies but protectionists – aka fair traders, trade skeptics, populists, nationalists, etc. – who are thought to be crowded into America’s sleeping quarters.
Almost daily, we get new warnings about the dangers of “protectionism.” The WTO, the World Bank, The Economist, The New York Times, The Washington Post, a host of ivory tower academics, and other apologists for the globalization model that helped bring us to the current ruinous conditions, all denounce protectionism wherever they see it – and they seem to see it everywhere.
The common, usually unstated, assumption in this hysteria is that anything that reduces import levels constitutes protectionism and therefore, especially in these troubled times, is to be shunned. In these tirades, illegal actions are indiscriminately lumped together with legal challenges to illegal measures. But, dumping is a beggar-thy-neighbor action; antidumping is by agreement the corrective measure. Subsidies can be trade distorting and injurious; when they are, countervailing duties are by agreement the corrective measure. Violation of any WTO rules surely is protectionist; seeking a remedy under established dispute settlement procedures just as surely is not. But the press and the experts they choose to cite, including the very guardians of the institutions charged with making the trading system work, use such a broad brush that it takes all of them to lift it.
Let’s slow down and think about this for a moment. Any thing that reduces imports is a danger to the trading system? A recession? A new and better product? Investment in expanded production capacity? Increased domestic savings? Obviously not.
Everyone knows that in the 1930s, when the law of the jungle prevailed in international trade, competitive protectionism deepened the depression. The system of trade laws and contractual obligations established since 1933 have reduced the scope for such ruinous behavior. Some, but only some, recognize that competitive currency devaluations were at least as significant an element in the beggar-thy-neighbor race among nations in the ‘30s. If you are opposed to trade-distorting practices – and I am -- you would work to end mercantilist currency policies, a particularly malicious form of protectionism. Persistently undervalued currencies not only create an artificial two-way trade advantage but leave the protectionist governments with a stash of hard currencies – free money, in effect – to use however they see fit. I don’t hear much talk from the average “free trader” about this practice. Yet, unlike trade protectionism, currency protectionism is beyond the reach of current rules and institutions.
So, as we head into the G-20 summit in London this week, let’s be impeccable with our word, clear in our reasoning, and discerning in our diagnoses. Let’s stop sowing distrust, killing dialog with name-calling, and diverting attention from real issues. This international economic system no longer works very well. It can only be remade by a concerted effort of statesmen of high intellect, uncommon inventiveness and profound good will. The constant drumbeat of fear based on false assumptions and hysterical misreading of events hinders, not enhances, their work.
Charles Blum
Monday, March 30, 2009
Monday, March 16, 2009
CONFIDENCE GAMES
If you thought that monumental greed, unbridled ego, colossally poor judgment, and grossly negligent regulatory “oversight” accounted for most of the financial meltdown, you might be mistaken. At least Steve Forbes wants you to accept a much simpler explanation. “Mark-to-market accounting,” he asserts, “is the principal reason why our financial system is in a meltdown.”
I’m no CPA, but as I understand it, mark-to-market requires a financial institution to reduce the value of an asset on its books when the market value of that asset – what someone else is willing to pay for it at this moment – falls.
This is, of course, highly inconvenient and might have serious consequences for those high-flying financial institutions that threw caution to the winds in pursuit of competitive profits (and fabulous bonuses for certain personnel), even if they existed only on paper. But the solution to their problem is to allow them to invent a more flattering value based on some phony market situation sometime in the past?
Bernie Madoff made up tens of billions of dollars in phony profits and lived the high life. Ramalinga Raju made up a billion dollars in bank deposits and more than 10,000 employees and lived the high life. Both used phony numbers to make their con games work. The longer they were able to keep their scams going the greater the losses their victims had to suffer.
Now Forbes wants the SEC to enable the banks to do the same thing. Only this time it would not be part of the problem, it’s supposedly a major part of the solution. Is he kidding?
If some banks are “too big to fail,” all of them are too human not to fail in some judgments at some point. Why should the government create moral hazard by insuring their losses and, as AIG and others seem to have managed, their bonuses, too? We need less accounting gimmickry, more transparency, constant and effective oversight, and swift and certain justice – and we need all that now more than ever.
Charles Blum
I’m no CPA, but as I understand it, mark-to-market requires a financial institution to reduce the value of an asset on its books when the market value of that asset – what someone else is willing to pay for it at this moment – falls.
This is, of course, highly inconvenient and might have serious consequences for those high-flying financial institutions that threw caution to the winds in pursuit of competitive profits (and fabulous bonuses for certain personnel), even if they existed only on paper. But the solution to their problem is to allow them to invent a more flattering value based on some phony market situation sometime in the past?
Bernie Madoff made up tens of billions of dollars in phony profits and lived the high life. Ramalinga Raju made up a billion dollars in bank deposits and more than 10,000 employees and lived the high life. Both used phony numbers to make their con games work. The longer they were able to keep their scams going the greater the losses their victims had to suffer.
Now Forbes wants the SEC to enable the banks to do the same thing. Only this time it would not be part of the problem, it’s supposedly a major part of the solution. Is he kidding?
If some banks are “too big to fail,” all of them are too human not to fail in some judgments at some point. Why should the government create moral hazard by insuring their losses and, as AIG and others seem to have managed, their bonuses, too? We need less accounting gimmickry, more transparency, constant and effective oversight, and swift and certain justice – and we need all that now more than ever.
Charles Blum
RR’s 3 R’s
There are a few preliminary signs that the Obama administration is preparing to take a fresh look at the trade policy that helped get us into the global mess we’re in. Thus far, nothing revolutionary has emerged, just a hopeful emphasis on enforcing our legal rights and a healthy skepticism about new agreements for agreements’ sake.
In addition, there are signs of fresh thinking being undertaken at the Office of the US Trade Representative, my old agency. This will take time, and I’d urge them to take the all the time needed to get it right.
For starters, though, it might be instructive to reexamine the rhetoric and record of Ronald Reagan. Though sometimes derided as simplistic, Reagan at his best was a principled pragmatist. Nowhere was that more in evidence than in his trade policy.
Reagan believed and publicly argued that “free trade must be fair.” In other words, free trade and fair trade were complementary, not polar opposites.
He made this clear in his radio address of August 2, 1986. (The transcript can be read at http://www.reagan.utexas.edu/archives/speeches/1986/080286a.htm.) In just a few minutes, Reagan laid out three characteristics of his trade policy that are still on point:
• Reciprocity: “Free and fair trade with free and fair traders” was his motto to get the best treatment in trade, a nation would have to give it to others. In fact, reciprocal market access was the essential feature of Cordell Hull’s reciprocal trade agreements that helped lift the world from the Great Depression and later formed a major foundation for the General Agreement on Tariffs and Trade negotiated in 1947. It’s plain wrong to consider reciprocity as a code word for protectionism. In fact, reciprocal trade undid the 1930 Smoot-Hawley tariffs and opened the way to sustained economic growth in the world.
• Respect for Rules: In another context, Reagan famously said “trust, but verify.” That’s why we must not only have trade rules but also be willing to enforce them. Reagan objected to countries that didn’t “play by the rules” and that got an “unfair advantage” by subsidizing their industries. On the other side of the coin, protectionism – transgression of the agreed rules – invited retaliation by aggrieved trading partners and was to be avoided.
• Results-Oriented: A free and fair trade policy was expected to produce fair and equitable results. A key to good results was “toughness.” Reagan said: “We’ve been tough with those nations who’ve been unfair in their trading practices, and that toughness has produced results.”
Reciprocity. Respect for Rules. Results-oriented. Sounds like the making a pretty good trade policy for the Obama administration, too.
Charles Blum
In addition, there are signs of fresh thinking being undertaken at the Office of the US Trade Representative, my old agency. This will take time, and I’d urge them to take the all the time needed to get it right.
For starters, though, it might be instructive to reexamine the rhetoric and record of Ronald Reagan. Though sometimes derided as simplistic, Reagan at his best was a principled pragmatist. Nowhere was that more in evidence than in his trade policy.
Reagan believed and publicly argued that “free trade must be fair.” In other words, free trade and fair trade were complementary, not polar opposites.
He made this clear in his radio address of August 2, 1986. (The transcript can be read at http://www.reagan.utexas.edu/archives/speeches/1986/080286a.htm.) In just a few minutes, Reagan laid out three characteristics of his trade policy that are still on point:
• Reciprocity: “Free and fair trade with free and fair traders” was his motto to get the best treatment in trade, a nation would have to give it to others. In fact, reciprocal market access was the essential feature of Cordell Hull’s reciprocal trade agreements that helped lift the world from the Great Depression and later formed a major foundation for the General Agreement on Tariffs and Trade negotiated in 1947. It’s plain wrong to consider reciprocity as a code word for protectionism. In fact, reciprocal trade undid the 1930 Smoot-Hawley tariffs and opened the way to sustained economic growth in the world.
• Respect for Rules: In another context, Reagan famously said “trust, but verify.” That’s why we must not only have trade rules but also be willing to enforce them. Reagan objected to countries that didn’t “play by the rules” and that got an “unfair advantage” by subsidizing their industries. On the other side of the coin, protectionism – transgression of the agreed rules – invited retaliation by aggrieved trading partners and was to be avoided.
• Results-Oriented: A free and fair trade policy was expected to produce fair and equitable results. A key to good results was “toughness.” Reagan said: “We’ve been tough with those nations who’ve been unfair in their trading practices, and that toughness has produced results.”
Reciprocity. Respect for Rules. Results-oriented. Sounds like the making a pretty good trade policy for the Obama administration, too.
Charles Blum
LIVING AND DYING BY THE SWORD
According to a Washington Post dispatch today from Shanghai, Chinese exports plummeted by 25 percent in February. Economists reportedly were “shocked” by the news.
Shocked? Like Captain Renault in Casablanca? No, really shocked. Two Merrill Lynch economists called the $64.9 billion export level an “ugly number” and lamented that “the export slowdown has finally come to China.”
Now, wait a minute! One of my intellectual heroes, Herb Stein, said famously that “if a thing cannot go on forever, it will stop.” A mercantilist trade boom predicated on artificially cheap export prices and the recycling of dollars into consumer debt for buyers of the same goods cannot go on forever. It is stopping now. Not a shock. Not even a surprise. A certainty.
Even the New York Times editorial page got it partly right today I opining that China’s leaders “need to understand that export-led growth no longer works for them or the world.” Of course, the Times went on to urge the Obama administration to back off on China’s undervalued currency, one of the pistons driving the country’s export machine.
The China-based economists don’t see everything as lost, however. They credit Beijing for vigorous – one expert calls them ”drastic” -- measures to help the domestic economy. Aside from a 5 percent tax break on small autos, however, much of the stimulus is aimed at more investment rather than more domestic consumption. More investment in production facilities will only add to the burden of overcapacity, deflating prices and creating surpluses that will seek a market outside of China. If that’s what easy credit results in, China’s “drastic” measures might just be making a bad situation worse.
Live by the sword, die by the sword. The current global economic model is broken. Export-led growth won’t work for large economies. As the Times correctly said, neither China nor the world benefits. At least from this time forward, there is absolutely no basis for anyone, not even professional economists and editorial writers, to be “shocked” by perfectly predictable developments.
Charles Blum
Shocked? Like Captain Renault in Casablanca? No, really shocked. Two Merrill Lynch economists called the $64.9 billion export level an “ugly number” and lamented that “the export slowdown has finally come to China.”
Now, wait a minute! One of my intellectual heroes, Herb Stein, said famously that “if a thing cannot go on forever, it will stop.” A mercantilist trade boom predicated on artificially cheap export prices and the recycling of dollars into consumer debt for buyers of the same goods cannot go on forever. It is stopping now. Not a shock. Not even a surprise. A certainty.
Even the New York Times editorial page got it partly right today I opining that China’s leaders “need to understand that export-led growth no longer works for them or the world.” Of course, the Times went on to urge the Obama administration to back off on China’s undervalued currency, one of the pistons driving the country’s export machine.
The China-based economists don’t see everything as lost, however. They credit Beijing for vigorous – one expert calls them ”drastic” -- measures to help the domestic economy. Aside from a 5 percent tax break on small autos, however, much of the stimulus is aimed at more investment rather than more domestic consumption. More investment in production facilities will only add to the burden of overcapacity, deflating prices and creating surpluses that will seek a market outside of China. If that’s what easy credit results in, China’s “drastic” measures might just be making a bad situation worse.
Live by the sword, die by the sword. The current global economic model is broken. Export-led growth won’t work for large economies. As the Times correctly said, neither China nor the world benefits. At least from this time forward, there is absolutely no basis for anyone, not even professional economists and editorial writers, to be “shocked” by perfectly predictable developments.
Charles Blum
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