History of Economic Mismanagement - Part IV

The United States is currently amidst a great economic challenge. While inflation rates remain flat and unemployment rates remain relatively modest, there is no denying that America is faced with great challenges today. At its core, a credit crunch, many argue that this crisis developed in the housing market following a run-up in housing prices through 2007. With that said, it might more likely appear that easy credit, backed by securitized debt obligations, was illegally hiding behind prohibitively ambitious credit ratings. In other words, risk was not being accurately portrayed by the credit rating agencies. This systemic credit bubble has subsequently led to a series of government actions and inactions that have met with wide-spread cynicism and uncertainty. The ambiguity of the situation was further developed by the lack of confidence exhibited by the Treasury Secretary and the President following the change of command. Drawing on the lessons of the past, both Democrats and Republicans have largely put aside any plans to increase taxes that they might otherwise have recommended. Similarly, and in stark contrast to actions during the Great Depression, government regulators have made attempts to maintain low interest rates and have refrained from implementing protectionist tariffs. As of this writing, the largest government bailout stimulus spending plan in history has been passed into law and will soon meet with a skeptic public. While it may appear that regulators are beginning to learn some of the lessons of history, it remains to be seen how these steps will affect our future economic conditions.

One must consider that to prescribe the appropriate medicine, one must first precisely identify the problem or cause. In the case of a financial crisis, there have been many attempts to identify the precise cause of each collapse, generally, without any clear consensus in virtually any regard. How is it possible to prevent a problem from reoccurring if one cannot identify, or agree upon, what the exact problem is to begin with? Consider for example, the Great Depression. While many agree that an asset bubble was met with irresponsible policies, others still argue that the Keynesian solution won the day. Many agree that the Fed should have printed more money at the exact time that they began to hoard it. Others maintain that the problem was, at its root, a fiat problem. According to Say (1803), “money, or specie, as some people call it, is a commodity, whose value is determined by the same general laws, as that of all other commodities; that is to say, rises and falls in proportion to the relative demand and supply” (I.XXI.32). Indeed it would appear that the lessons of history failed to produce a consensus opinion. A more recent paper published by the Federal Reserve in 2003 asserts that “the incomplete and erratic recovery from the Great Depression can be traced to a failure to pursue consistently expansionary policy resulting from an incorrect understanding of monetary policy in an environment of very low short-term nominal interest rates” (Orphanides, p. 1). It follows, therefore, that from that writing the Fed would ensure that interest rates remain low; which, of course, brought us to our more recent credit bubble!

From the macro-political perspective, the conundrum remains a daunting philosophical challenge as much as it is an economical one. From the perspective of an international business manager, the problem does not require prevention but rather identification. International business managers must remain cognizant of interest rates, inflation, credit conditions, and the geo-political climate. In order to properly discount future cash-flows effectively, managers must attempt to recognize the potential for risk that goes beyond their direct operations. They must be aware of political and economical conditions that might affect supply networks and distribution chains. While these challenges remain great, they pale in comparison to those of federal regulators.


References
Das, D. (1999). Asian Economic and Financial Crisis: Causes, Ramifications, Lessons. Retrieved on February 19, 2009 from http://igcc.ucsd.edu/pdf/afc/afc_das.pdf
Gibbon, E. (1776). The Decline and Fall of the Roman Empire. In H. Mueller (Ed.), The Modern Library. New York: Random House Publishing Group.
Madura, J. (2008). International Financial Management (9th ed.). Ohio: Cengage Learning
Orphanides, A. (2003). Monetary Policy in Deflation: The Liquidity Trap in History and Practice [Electronic Version]. Retrieved on February 20, 2009 from http://www.federalreserve.gov/Pubs/feds/2004/200401/200401pap.p
Rome.Info (2009). Fall of the Roman Empire. Retrieved on February 12, 2009 from http://www.rome.info/history/empire/fall/
Say, J. (1803). A Treatise on Political Economy [Electronic Version]. Retrieved on January 25, 2009 from http://www.econlib.org/library/Say/sayT.html
Train, J. (1985). Famous Financial Fiascos. New York: Clarkson N. Potter, Inc., Publishers
U.S. Department of State (2009). Smoot-Hawley Tariff. Retrieved on February 15, 2009 from http://future.state.gov/when/timeline/1921_timeline/smoot_tariff.html