Walking the Walk

There are cracks showing in the global leader's assurances that the "lessons learned" from the Great Depression would be kept. There is backsliding.

Here is a bit from an article by Nobel prize-winning economist Joseph Stiglitz:

At their November 2008 summit the G-20 leaders strongly condemned protectionism and committed themselves not to engage in it. Unfortunately, a World Bank study notes that 17 of the 20 countries have actually undertaken new protectionist measures, most notably the US with the “buy American” provision included in its stimulus package.

And here is an article by a Swiss economist, Charles Wyplosz, pointing out that the Swiss are starting competitive devaluations:

When the Swiss National Bank (SNB) recently brought its interest rate down to 0.25 percent, it announced that it would engage in “quantitative easing,” following in the footsteps of the US Federal Reserve and the Bank of England. More surprising was the simultaneous announcement that it was intervening on the foreign-exchange market with the aim of reversing the appreciation of the franc. Will this be the first salvo in a war of competitive devaluations?

It is too easy to think the Great Depression was caused by leaders who simply misruled, who just made one mistake after another. No. In the real world people express good intentions but backslide, or they cut corners, or make exceptions. There is a sudden break from before to after. The Great Depression grew over progressively worse over 4 years and then lingered for another 6 years as people made some mistakes, then other mistakes, and yet more mistakes. It was a slippery slope. It wasn't a clear "today we change the rules!" moment. And the economic deterioration was a lot like it is today. Most "important" people telling the populace that "the economy is sound" or that there were problems but that key people (think Bernanke or Geithner) are "on the job" and busy fixing the problem. But the problem didn't get fixed. The assurances that things were sound or would soon be rosy started sounding phoney. People quietly shifted into despair. Nobody could believe that things could be allowed to get as bad as they were. (Does this sound familiar? It sure does to me.)

The US stimulus plan with the "buy America" provision may not be as bad as the Smoot-Hawley Tariff Act, but it bears a close family resemblance. The Swiss intervention into foreign exchange market is a kissing cousin to the currency devaluations of the Great Depression (here, here, and here)