BUSINESS/ Protection Racket

Francis Cianfrocca dissects the roots and impacts of the banking crisis and asks whether we are likely to see a resurgence of protectionism. A sample:

Everywhere in the world for a good twenty years now, the real rate of return on economically-productive investments has tended to be well below its previous trendline. During that time, rates on the short-term debt of high-rated governments have tended to be in the range of one percent as opposed to the historical two or more percent.
That’s one point. Another one (famously dubbed “the conundrum” by Alan Greenspan) was the fact that the interest rate on the economically-meaningful 10-year Treasury note remained depressed even as the Fed increased interest rates during the middle years of the past decade, fueling the housing bubble among other things.
Broadly speaking, there’s no business model available for banks under such conditions. To survive, they need to increase the yields they earn, by dialing up risk, leverage, or the term structure of their asset portfolios. As it turns out, bankers did all of that, and even resorted to inventing phantom assets, like CDO-squareds, that weren’t even based on actual economic value….the underlying drivers are clear enough to see.
And they’re still in place today. Too much credit had been created in the hunt for yield. The developed countries in 2008 and 2009 faced the prospect of seeing that mountain of credit deflate, so they socialized it instead.

His last line sums up in a nutshell why protectionism appeals to the Left. Read the whole thing.

3 thoughts on “BUSINESS/ Protection Racket”

  1. The frustrating thing about protectionism, which, I should point out, can be a favorite of businesses as well as the left, is that it tends to be raised in the circumstances in which it will do the most harm. As Francis points out, protectionism will result in lower growth, which is really not what you want when deflation is a prospect.
    The reason why it is frustrating is that the US for years has freely traded with nations that have not been nearly as forthcoming about lowering their trade barriers (and revaluing their currency). Regardless of the narrow interests of the parties who often advocate protectionism, the US should have been using more of its economic clout to pry open the markets of those whom we trade. China is an obvious example, but there are others.
    Ideally, this would take place in good economic times because such measures will certainly result in less overall growth, as Francis notes. The right has made this more difficult because they treat free trade as some sort untouchable principle rather than something that should be bargained internationally with some backbone.
    The fact of the matter is that there has never been any such thing as free trade, nor will there ever will be. We should have been using our leverage when times were better rather than waiting until now.

  2. To anyone still bothering to read this thread, this is the best short article I’ve seen as to why relying on current macroeconomic theories as a solution to this crisis is foolish (and Robert Samuelson is no dummy):
    As much as this article points out the problems with Keynesianism, it should also be a clear message to conservatives that that they don’t know nearly as much about economics as they think they do.

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