Depressions Attract Protectionism

Depressions, and severe recessions, attract protectionism.  It’s the nature of the beast.  So long as political pressures are “to do whatever it takes to create prosperity” at home in the short-run, governments will target spending to domestic firms (an increasingly squishy concept in a global world).  What politician would defend to local constituents a bailout package where foreign firms directly benefit from the expenditure of domestic tax dollars?

Though I did not vote for him, I appreciate the principled approach that President Obama is taking here.  He is taking a longer view, and wants to avoid trade wars.  Few politicians take the longer view; that is why they not statesmen.

By their nature, economic crises make people short-termers.  They look to what will help themselves survive amid volatility.  The long-term good of many would involve patience, and a willingness to not press for short-term advantage.  Perhaps Kings could do that, though often they didn’t, but democratic officials are on a short leash from their electorates.

Even Authoritarian places like China tend toward protectionism, though.  Their legitimacy is based on their ability to deliver continued prosperity.  There is increasing unrest in China during this slowdown; expect the Chinese government to do what it can to appease its populace, including measures that protect local businesses.

That’s why I am not surprised at protectionist impulses at this time.  They are short-term rational for politicians, while long-term irrational for economies.  This is just another reason why we are foolish to trust in politicians to assure our economic well-being.  Their short-term orientation is out of sync with what it takes to manage an economy.

We will be best off if after this crisis we realize that the government played a starring role in creating it, and mismanaging it.  Were there businessmen to blame?  Yes, but they took their cues from financial regulators that stopped regulating, and an accomodative monetary policy.  The government did not do its job right, assuring the value of currency/credit.


Additional Notes:

1) Now Barney Frank wants to hand over oversight of systemic Risk to the Federal Reserve.  As if they can do their current job well — the Peter Principle is in action here.  I was joking about it last year, but why not create the Federal Office for Oversight of Leverage [FOOL]?  After all, the tasks of monetary policy are considerably different from those of containing systemic risk, even though they are related.

2) Speed really benefitted us during the original passage of the TARP, right?  No, it didn’t.  So where does Timothy Geithner get off urging speed at this point?  Speed does not eliminate bad debts.  Speed does allow for many venal legislators to push their own pet projects, and use a crisis to disguise their efforts.

3) Read Yves Smith’s piece:The Bad Bank Assets Proposal: Even Worse Than You Imagined.  Our government resists letting banks fail, and then letting the FDIC/RTC2 reconcile them.  They would rather intervene to let marginal or defunct entities live.