At its core, the financial crisis that emerged in September is simple to understand: it’s a cash shortage. Investment banks, money-center banks, and various other lending institutions found themselves short of the capital they need to back their obligations.
What’s complex is the process of understanding how much money is left, and where it is, in order to restate the value of assets. When that process is complete, investors, savers, consumers, and virtually anyone in the world with even the most basic financial stake can redetermine how much confidence to place in the world’s financial markets. The process, like the market, is global, and that basic fact should instruct how it is addressed.
As I write on the brink of a Presidential election, we’re being offered lots of explanations for these problems and proposals for “solving” them. The temptation to treat the election as a referendum on the crisis is one that should be resisted with every effort, and not only because of federal officials’ reflexive inclination to define the situation in terms of their opportunities. Governments can take actions that enhance or damage their nations’ financial prospects, but no government is going to “solve” this crisis.
To illustrate: a significant cause of the problem (but not the only one) has been consumers defaulting on their loan obligations. This has led to corporate bankruptcies, credit disruptions, and bank failures, but resolving these problems doesn’t alter the circumstances that created them. It merely restates the value of assets.
What’s been more significant than defaults, though fretted over much less, has been the migration of wealth from the world’s commercial, financial, and industrial sectors to raw materials and basic resources. It’s happened thanks to the constant revaluation of assets. In the midst of this crisis, we’ve learned again the difference between paper assets and real wealth. And capital always relocates to places where it appreciates the most.
This movement of wealth accelerated in recent years, and though it has had implications for national and regional economies, it is a movement that is generally indifferent to national borders.
Every nation brings advantages to the global economy. One responsibility of a government is to enhance, or at least not to impede, its national economic standing. In the U.S., taxes, environmental regulations, employment costs, and various other conditions that are directly affected by federal policies, are more to blame for the migration of wealth to other nations than the “greedy companies” that now take the blame for our declining fortunes.
Every plant relocation, every “outsourced” service, every “Made in China” label has been evidence of the shifting monetary advantage. The shift has taken real assets — plants, service centers — and located them where they bring the greatest return to the owner. When the current crisis calms, real assets may have declined in value but they will remain.
This is globalization, much appreciated by consumers for bringing lower prices and greater choices, but maligned (by governments, among others) for the ruthless way it treats inefficient performers and other impediments to capital appreciation.
The crisis that emerged in September is a global development — the result of an infinite number of actions and decisions taken over numerous years. Recent federal responses (recapitalizing banks, for example) may address the bad results, but they will not reverse the trend. They may make things worse. Tariffs will punish consumers with artificially high prices. Government stipends and subsidies will lead to higher tax burdens and interest rates for individuals and corporations. Nationalizing assets will misallocate resources and distort competition.
The best governmental response would be policies that actively engage globalization. Encourage individual consumers by lightening their tax obligations and easing their access to essential products and services. Stimulate technology and business activity by welcoming new capital investments. Identify and highlight the U.S. economy’s competitive advantages in the global economy. Then, get out of the way.