After implementing the largest government bail-out in history, the US continues to tell other nations, "do as I say, not as I do"
France was bad enough, but now Senator Bunning's beloved country has turned into the Evil Empire itself. The US government is using $700bn of taxpayers' money to buy up the "toxic assets" choking up the financial system and – horror of the horrors – partially nationalising the US banking system.
President George Bush, however, did not see things quite that way. Announcing the bail-out package, he argued that, rather than being "socialist", the plan was simply a continuation of the American system of free enterprise, which "rests on the conviction that the federal government should interfere in the market place only when necessary". Obviously, in his view, nationalising a huge chunk of the financial sector was one of those "necessary" things.
Bush's statement is not only an ultimate example of political doublespeak – one of the biggest state interventions in history is dressed up as another workday market process – but it also reveals America's long-standing pragmatism towards the free market. Throughout history, Americans have supported the free market when it suits them but not when it doesn't.
Today, the US is the self-proclaimed defender of free trade and free finance, but in the days when it was struggling to catch up with Europe, it resorted to the most blatant kinds of protectionism both in trade and finance. Between the 1830s and the 1940s, the country had the highest average industrial tariff in the world. In the 19th century, non-resident shareholders in US banks could not even vote in shareholders' meetings, while foreign investment in coastal shipping was banned.
After it became the top dog, the US started to champion free trade and unregulated finance because that suited its interests. However, the US government still dishes out huge subsidies where it feels necessary. Its agricultural subsidies are notorious, but the proportion of publicly-funded research and development is also the highest in the world.
Now that the financial markets are crumbling and the real economy is sliding into a recession, the US government is using all the policies that its cherished free-market doctrine denounces – nationalisation, budget deficits, lax monetary policy and what not.
The unfortunate thing, however, is that American pragmatism does not extend beyond its borders. In a version of "don't try this at home", Americans tell other people that they should all adopt the free-market, free-trade model. However big their financial crises are, other countries are told that they should let the markets correct themselves.
Of course, other rich countries do not have to listen to US advice, although Japan did so in the 1990s and made its infamous financial crisis even worse by trying to get out of it without public bail-outs. However, the story is different for developing countries. They cannot ignore US advice, or else they will not get the endorsement from the US-dominated International Monetary Fund, which is important in getting access to the international capital market.
So in its 1997 financial crisis, Indonesia was forced by the IMF to close 16 banks at the same time, prompting a bank run. It was made to raise interest rates to 80%, and the president of Indonesia was humiliated by being photographed signing terms of agreement with the IMF, while the Fund's managing director stood over him with arms folded. Similarly, Korea had to shut down close to a quarter of its financial institutions and raise interest rates to 30%. The country was forced to run a budget surplus, despite the fact it had the then second lowest public debt (as a proportion of GDP) in the OECD. Only when its economy took a nosedive for six months, it was allowed to run a small budget deficit equivalent to 0.8% of GDP, when the $700bn bail-out package alone will increase US budget deficit by 5% of its GDP.
The recent crisis in the US has exposed the limits of the free-market doctrine that has ruled most of the world in the last quarter of a century. True to its history of pragmatism, the US is dealing with it by ditching free-market policies when "necessary", which at this moment happens to be almost all the time.
However, the US needs to go a step further. It should openly admit that, if markets need the state, it is better to have the state intervene regularly and prevent a free-market mess from developing because the clean-up comes at much higher costs to the taxpayers. It would help the world even more if the US accepted that all countries, and not just itself, have the right to use a pragmatic mix of the market and state intervention according to their own "necessities", as Mr Bush put it so succinctly.
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