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A Global Economic Rule : Big Government Bails Out Bad Corporate Finance November 24, 2008

Posted by Daniel Downs in capitalism, corporations, Democrats, economy, globalism, monetary policy, national debt, politics, Republicans, war.
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“If companies (e.g., banks) are big enough, and the country is rich enough, corporate managers and investors can use the government as the ultimate insurance policy to bail them out if speculative risks go wrong.”

— Robert A. Isaak (2005)

The above quote (also was written in Here’s A Thought section) is a rule of the global economy, according to Pace University professor of International Management Robert A. Isaak. This rule is evident in the history of the concept of competitive advantage that began with Adam Smith’s Wealth of Nations was further developed by British Economist David Ricardo. Competitive Advantage is Ricardo’s application of Smith’s idea about growing national economies by maximizing individual interests. Ricardo’s believed all nations would benefit more equally if all nations concentrated on one or few competitive strengths like producing steel, automobiles, oil, computer technology, etc. This was Ricardo’s idea of balancing trade and maximizing national prosperity.

German economist Frederick List and British philosopher John Stuart Mills both saw the necessity of protectionist policies by means of tariffs to allow the incubation and maturation of new national specializations, especially new manufactured goods and new technologies. These policies worked well for many years. The British hegemony of the 19th Century and America’s domination during the 20th Century prove that competitive advantage works. However, global economic hegemony is not possible without possessing the world’s key reserve currency.

America assumed global economic leadership (hegemony) with the creation of International Monetary Fund (IMF), World Bank, and General Agreement on Tariffs and Trade (GATT) at Bretton Woods. Through these institutions, America gained control of the global economy. At the same time. the dollar was fixed to the value of gold, which in 1934 was $34 an ounce.

American politicians began violating these policies of their own making to fund the rebuilding of countries devastated during World War II. It was not out of the goodness of their hearts; the aim of the Marshall Plan was economic growth and the creation of deterrence against Soviet aggression. Under the leadership of President Lyndon Johnson, our government continued to print money (increase the national debt) to fund the Vietnam War and his Great Society programs, which were meant to further the socialist domestic programs of FDR’s New Deal.

Yes, Democrats believe in war and its debt. FDR, LBJ, John F. Kennedy, Bill Clinton were all Democrats and warring commanders-in-chief. Don’t expect Obama to be any less. This means Republicans like Bush are no more warmongers than democrats.

When it comes to screwing up the economy, liberals in Republican garb deserve as much credit as democrats. This is especially true of Richard Nixon, who removed America’s global currency from the gold standard. Why? He had to maintain big government spending. While Charles de Gaulle was dumping the U.S. dollard for gold, Nixon was dumping gold for a new system of floating IOUs. According to Professor Isaak,

Now a dollar was a good as you think it is. That paper IOU in your pocket is just a piece of paper based on a lot of belief. Currencies have become bets placed on the short-term futures of the national (or regional) economies that they represent. As money not just paper but credit cards and blips on computer screens, not only did the world economy speed up, but the uncertainty about the value of any of these symbolic commodities increased as well.

Liquid gold — oil — became one of those industry favored by competitive advantage with the legal blessing of government. Before the 1970s, western nations held that advantage. Then arose a bunch of disgruntled Arabs who formed OPEC to take away some of that economic advantage for themselves. Today, we here more about OPEC than the western oil cartel. But, as Equatorial Guinea’s national leader has demonstrated, the blessing of competitive advantage conferred on EG by the American oil cartel does not benefit the poor natives who still live on $1 a day. The citizens of EG do not benefit from their God-given natural resource. Only tyrants, both African EG and American, do.

When the World Trade Organization (WTO) replaced GATT, the rules changed to further benefit only the rich and powerful nations. The same has occurred with massive revolution of information distribution. The rich came to own and control the media, the cheap and often free means of information and its distribution, only to dominate culture, politics, and the economy. Only those who gain the attention of the world’s masses can control the information economy and modern technology–so much for democracy and capitalism.

Anyway, as an example of how the above quote works, Professor Isaak uses the rise of Mexico as a competitive oil producer. When oil was discovered in Mexico, Marxist economists from the Cambridge School of Economics in England advised Mexican officials to take out more loans than they could afford to pay back. By doing so, the Marxist believed “Mexico would ‘have the banks by the debt,’ and the U.S. government would have to step in and bail out the banks or the banks would have to write off the debts to avoid a global financial crisis.” This worked for by the 1980s the price oil fell making it impossible for Mexico to repay their loans, which initiated the severe economic recession of the 1980s.

Whereas British Marxist saw the demise of American hegemony, David Rockefeller, head of Chase Manhattan Bank, saw Mexico’s liquid gold as a treasure to be exploited. He too encourage Mexico to take out huge loans knowing the principal would not likely be paid back. Rockefeller believed that Mexican oil profits would continue to increase, which meant enormous repayment of loan interest. Based on this hypothetical growth, he and other American and European bankers believed risk would be worth it. However, his expectations were crushed with steep declines in oil prices.

As reported in 1987 by Melanie S.Tammen of The Heritage Foundation, Mexico’s oil-based debt was $100 billion and almost $30 billion was owed to American banks. Federal Reserve Chairman Paul Volcker encouraged Mexico to increase borrowing based on the belief that it would spur economic growth as well as solve the international crisis that began in 1982. By 1987, the American government initiated a 14 billion dollar bailout of our failing banks. This plan was the brain-child of both Fed Chairman Paul Volcker and James Baker, Treasury Secretary to Republican President Ronald Regan.

We should not forget that this was also the decade of gasoline rationing and the savings and loan debacle.

In 1995, oil-rich and Marxist Mexico was bailed out again. Fed Chairman Paul Volcker again advised Democrat President Bill Clinton to help bailout the Mexican economy as well our banks. This time the it took $50 billion.

Obama and other Democrats claim deregulation is one of the main underlying causes of the current economic crisis and bailouts. They were right. What they and the media withheld from the American public is the fact that deregulation began under Democrat President Jimmy Carter, a Democrat-controlled Congress, and a Supreme Court favoring deregulation.

Thus, Isaak shows why Rep. Ron Paul’s advocacy of returning the dollar to the gold standard, the economy to the original ideal of capitalism, and limiting federal government and its spending are necessary now. America’s political and corporate leaders are leading us down the path to disaster. If Gerald Celente of Trends Research Institute is correct, they are leading us into a crisis worse than the great depression, one resembling communist Union of Soviet Socialist Republics’ (USSR) pre-Perestroika food lines.

Sources:

Robert A. Isaak, The Globalization Gap: How the Rich Get Richer and the Poor Get left Further Behind (Upper Saddle River, NJ: FT Printice-Hall, 2005), pp.161-182.

Heritage Foundation, Foreign Aid and Trade, Backgrounder #588, September 25, 1987

PRWeb, August 20, 2008

The Democratic Party Community Blog, October 11, 2007; Pipeline News, February 7, 2006

Trends Research Institute

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