The facts are grimmer than people would like to admit: Iceland’s economy is expected to contract by 10%, Spain has an unemployment rate of 14.4% It is no wonder that unemployment is seen as causing a "threat to stability." That is because it is booming world wide. There is a bull market for bear claws across hiring.
However, there is an open question, is this "threat to stability," really as bad as the New York Times presents it? The Financial Times admits that the goal of policy makers is not to restore world growth and employment, but instead to protect the current trade and financial system. What is interesting, is that given a choice even conservatives are now saying it is time to nationalize the banks:
“I think they know how big it is, but they don’t want to say how big it is. It’s so big they can’t acknowledge it,” said John H. Makin, an economist at the American Enterprise Institute, referring to administration officials. “The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks.”
So when it comes time to vote the banks, or the current trade regime off the island, the banks are set to be snuffed out. The G7 ministers are fine on big stimulus bills, nationalization, but "protectionism," is dangerous:
But in a statement after the meeting, new US Treasury Secretary Timothy Geithner dismissed such concerns.
"All countries need to sustain a commitment to open trade and investment policies which are essential to economic growth and prosperity," he said.
Ministers also called for urgent reform to the International Monetary Fund, saying the crisis had shown weaknesses in the world financial system.
"We agree that a reformed IMF, endowed with additional resources, is crucial to respond effectively and and flexibly to the current crisis," the ministers’ statement said.
Other points included:
- Praise for recent economic moves by China;
- Help for banks; and
- The need for a speedy end to the Doha talks on world trade
The G7 comprises the US, the UK, Japan, Germany, France, Italy and Canada
What is going on here is this: the people who have risen to the top of the current financial pyramid have done so by exploiting a relatively simple system which swaps US paper, for foreign oil, and turns the result into suburbia. Then the rest of the world sells things to fill suburbia with. We are not in paradise, but we are bobos.
This means that protecting that basic mechanism is paramount. Virtually every business model requires protectionism: the US home industry is sheltered from the outside. The ability to sell into the US is what the economies of virtually every other developed, or developing, nation relies on. What has happened right now is that the satellites of these nations are getting hit very hard, harder, even than the core exporters to the US. Consider that Spain, Ireland, and Iceland – three of the hardest hit nations – were offshoring havens, not for the US, but for the United Kingdom.
Last year Ha-Joon Chang outlined what he called "the case for forward looking protectionism." But even this does not utter a word about what is the most important engine of protectionism in the US: the systematic favoring of industries which, because of their costs of transportation or location, or economic sensitivity, do not face significant competition from abroad. Free trade rests on the idea of comparative advantage, which means the converse, trade regimes which are not about comparative advantage, are not really about free trade but in some other mechanism.
During the Asian financial crisis, many nations, lead by Malaysia, engaged in practices which were condemned as protectionist: including currency controls. But, in general, the nations that did this recovered more quickly, and remained healthier. The orthodoxy that allowing free capital flows as the superior option was disproven. Now here is the crucial point: we have admitted that banks are bankrupt, and they need to be nationalized. But the trade order relies on the banks and their capital flows. The obvious conclusion is that if the banks that ran the capital flows are bankrupt, then the theory that the capital flows themselves are an essential engine of progress is also bankrupt.
What has crushed the economies of Britain, Spain, and Iceland, and constricted even the Chinese Dragon, is that too much of global production is focused on consumption for the US, and too little to meet the wider needs of a wider world. This focus on ultra-consumption has left these economies with no base should the cream of US demand fall. It is unhealthy for everyone, because what is happening is not nations trading goods that all desire to produce one global market, but nations fighting, still, to satiate the desires of the US consumer, with goods that have no real value to their own populations relative to what needs to be done.