China

It seems as though China is being a bit hypocritical - telling the U.S. to raise interest rates while still refusing to allow their currency to appreciate.

Where Do We Go From Here: Unofficial RNC Position on the Current Financial Crisis

Today the U.S. faces one of the worst economic crises in recent history. The issue of how to correct our current situation and how to prevent further crises is paramount to the continuation of a growing international economy as well as a resilient domestic economy. The RNC chooses to make two points clear in this debate. First the RNC believes in the power and opportunity of the U.S. free-market economy and in the importance of reasonable business regulations. Second, these regulations should serve to promote confidence in our economy among consumers, entrepreneurs and businesses alike. On the same token, we do not believe in interventionist policies that allow the government to control industry and the market.

The Republican Party believes that economic freedom is the key to a successful and sustainable international political economy and that a level playing field with greater international trade will result in more American jobs, higher wages, and generally a better standard of living. This can go a long way toward ensuring economic stability and growth at home. U.S. strength in exports is what will help pull the country out of its current crisis, as well as help prevent future meltdowns. Up until now the U.S. economy has depended largely on consumer spending. This has naturally begun to change given the disinclination to spend during the economic downturn. In response to this and the weak state of the dollar, U.S. exports have been on the rise. In the beginning of this year, real-goods exports increased $115 billion, or 12%, and have risen across every major category. In March they made up nearly 13.5% of GDP and are still rising. Service exports have also been on the rise. Supporting U.S. export is a key step in righting the U.S. economy and a strong economic future.

The GOP believes that any government involvement in economic affairs must be limited. In accordance with President Obama’s Consumer Protection and Regulatory Enhancement Act of 2009, we believe in the creation of a board to oversee systemic risk and in the consolidation of bank regulation. Under this proposal non-bank financial institutions will be required to meet with a Market Stability and Capital Adequacy Board to determine ant and all steps that can be taken to avoid bankruptcy. In amendment to Obama’s plan, this body will not explicitly classify firms as “too big to fail,” thus avoiding the codification of such an ambiguous term. The Republican Party further purposes the creation of a Chapter 14 bankruptcy proceeding, which, unlike Obama’s plan to nationalize failing financial firms, will expedite the hearing process while still protecting these firms under the FDIC. The RNC believes that bank should be allowed to fail and then restructured through the bankruptcy process. Lastly, under Obama’s plan the Federal Reserve would be allowed to lend to institutions in need with “written permission from the Treasury Department.” We believe the Fed should not have this authority, rather failing firms should be either assumed by the FDIC or forced to file bankruptcy under Chapter 14.

In summation, the RNC believes that non-banks should take responsibility for their risk-taking and through ensuing consequences, i.e. bankruptcy, discouraged from it. We further believe that prudent oversight of these firms will aid in stemming systemic risk. In order to promote the rehabilitation of the U.S. economy, the RNC supports growth in economic exports and believes that this growth will help in preventing future crises.

Interesting Comparison

The Merchant of Venice explains how to solve the financial crisis...

A Brief Critique of The Return of Depression Economics and the Crisis of 2008

Paul Krugman is a New York Times bestselling author and winner of the Nobel Prize in economics. His is also a syndicated columnist for the New York Times and former advisor to Enron. In his most recent book, The Return of Depression Economics and the Crisis of 2008, Krugman revisits his 1999 publication while expanding upon his theories to meet the economic recession of 2008-2009. Specifically, Krugman targets lax regulation in the financial system as the root cause in the U.S. economy’s most recent crisis. He warns that without taking proper measures, our economy could plunge back into the dark days of depression.

Krugman’s book begins with the subject of his first edition of The Return of Depression Economics, the economic crises in Latin America and Southeast Asia. He uses these examples, coupled with a general explanation of the Great Depression to point out that many of the problems faced by international economies have not, in fact, improved much since the 1930s. Krugman goes on to argue that the 2008 financial crisis in America draws many similarities from the international meltdowns from a decade before. By the mid 1990s Japan had been experiencing enormous growth along with sky-high land and stock prices. This financial bubble, Krugman claims, is eerily similar to the housing bubble in the U.S., where the cost of subprime loans surpassed the values of the homes. The author also believes that we are in a “liquidity trap” that is stemming the flow of capital between countries. On the same token, U.S. firms that were once too highly leveraged have now sold their assets in order to raise money and further pushed the markets into recession.

Krugman’s main argument seems to center around the case of shadow banking. Krugman maintains that any entity acting as a bank should be regulated as a bank. If this had been the case, the housing crisis and subsequent recession would not have occurred. Here Krugman makes an interesting point. Perhaps the author is correct – that not enough regulation led to many of our current problems. On the other hand, it seems to me that in some cases the best way to prevent such massive failures is to take away the incentive behind high risk lending and borrowing. By allowing high-risk taking firms to fail, the government is sending a clear message that this kind of policy will not stand, much less be condoned by the fed.

My main issue with Krugman is that his policy advices come too far after the fact. By the time of his publication (December 2008) I think it was clear that large financial firms were operating under too little regulation. The question now is how much and where this regulation should be placed. Perhaps the best idea for mitigating the risk of massive financial failure comes from former chairman of the Federal Reserve, Paul Volker, who argues that financial firms should separate their commercial banking and investment banking into two distinct entities.