[...]so I am not in favour of protectionism, as I just said, I am just in favour of European measures – measures decided at the European level – that would prove to our citizens that we are taking into account their fears and worries and that we are trying to protect our European economy, that we are trying to protect our industries. This is a very difficult balance we have to find, but this is not protectionism. Protectionism means today that the UK would take some very concrete measures just to protect one of its plants, in New Hampshire for example, or London. Or that France would take some very national measures just to protect one of its industries or one of its plants in Normandie or the south of France without taking into account the interest of the UK and Germany and Spain and Italy. That’s the difference between the two ways of protectin industries and protecting our economies[...]

I just give a concrete example. The concrete example that is to me the best example of what we need today, si the automotive industry. If we don’t take any kind of measure to support the automotive industry in France, the UK, and also in Italy with Fiat, the automotive industry in Europe will disappear in a few months, or let’s say in two years. Just because the US on their side, has decided to give more than twenty-five billion dollars to General Motors, in direct help to General Motors: Twenty-five billion dollars. If we just say that’s a problem with the US. They should not give twenty-five billion dollars to the GM, that’s unacceptable and I’m not happy with that measure. If we just say this, letting our automotive industry die in a few months, I can assure you we run the risk of having very big political troubles in a few months or a few weeks.

That is why we need to support our automotive industry, even if it is not allowed by the Commission to day, we have to find the right balance, but we have to support our automotive industry. That is really the line we need to draw between saving our industries, doing our best so that no industry disappears in the coming months and doing things that would only mean that we are attached, and that we are in favour of protectionism.

I know the difference is very hard to see and that the line is very hard to draw, but this is the difference between protectionism as such and defending our industry.

You are quite right, Mr. Le Mair. The difference is difficult to see. In fact, what you’re describing sounds like the definition of a trade war. Or was the difference that measures to protect EU industries from US competition is not protectionism since it allows intra-EU competition? A trade war over automobiles between the EU and the US is for some reason not the same as a trade war between the US and France?

Domestic political pressures seems to have politicians grasping at straws and scrambling towards protectionist measures. That doesn’t seem like a good way for the world economy to pull itself out of the pinch it’s in.

We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports.

The report states that the developed economies resort to subsidizing of export industries, while the developing use a number of different measures, among them imposing tariffs. According to the World Bank, this is testimony of the superior financial strength of the developed economies. The generated deficits might however increase pressure to “wall off” the economy, by which I assume they mean increasing trade tariffs.

When the rich countries of the world resort to direct subsidies for business, as is the case with the American car industry subsidies, the poorer countries should have reason to fear. Neither rich nor poor countries can afford to stop trading, but the fact that the richer countries have access to subsidies and the poor countries must wall off trade might prove very bad news for the poorer countries in the long run.

Find the rather short and easily read report here:

http://siteresources.worldbank.org/NEWS/Resources/Trade_Note_37.pdf

The spectacular collapse of some of the post-communist tiger economies led to demands at an EU summit in Brussels for a rescue fund of €190 billion (£170 billion) to stop social collapse in the Eastern nations spilling over into the rest of Europe.

The plea, led by Hungary, was rejected in a bad-tempered meeting of the 27 European leaders, dominated by fears that Western EU countries would rather prop up their own large industries and jobs at the expense of the East.

Ferenc Gyurcsany, the Hungarian leader, openly raised the spectre of collapse in Eastern Europe and the creation of a new Iron Curtain.

“Central Europe’s refinancing needs in 2009 could total €300 billion, 30 per cent of the region’s GDP,” he said in a paper calling for a fund of €160 billion to €190 billion to be set up by the richer EU members.

“A significant crisis in Eastern Europe would trigger political tensions and immigration pressures. With a Central and Eastern European population of 350 million, of which 100 million are in the EU, a 10 per cent increase in unemployment would lead to at least five million unemployed people within the EU.” (timesonline.co.uk)

Yahoo! News doesn’t have quite the same bleak outlook:

However, EU leaders opted instead for a case-by-case approach to helping troubled countries in the region “on the basis of all available instruments,” according to a statement issued after the summit.

“This idea of dividing up into old member state countries, eurozone countries, non-eurozone countries, north against south, or east against west, that is clearly an approach we rejected,” said.

European Commission President Jose Manuel Barroso said it was the eastern European countries that had said “they do not want a programme just for them.” as “there is a great diversity of situations.” (news.yahoo.com)

So, the EU family has either let its poor eastern brothers out to dry, or it is just about to implement case-by-case help packages. If no action is taken at all, it could become a massive problem for the EU as the crisis is likely to spill over into the political sphere. Not only should we expect to see much less public support for the union, but also, as Professor Nouriel Robini writes:

Deeply unpopular austerity measures, including slashed public wages, tax hikes and curbs on social spending will keep fanning public discontent in the Baltic states, Hungary and Romania. Dissatisfaction linked to the economic woes will be amplified in the countries where governments have been weakened by high-profile corruption and fraud scandals (Latvia, Lithuania, Hungary, Romania and Bulgaria).

The political forces most likely to benefit from public disaffection are those running on populist platforms, which could disrupt efforts to battle the effects of the economic crisis. Latvia could be a case in point, as there are growing concerns that the coming election campaign might suspend the fiscal austerity measures required by the IMF bail-out package. Two other political hot spots that are at risk of early elections are Romania and Estonia, while Bulgarian national elections are due in mid-2009.

In sum, the crisis could put the E.U.’s free market rules under pressure. A big rise in support for populist and radical parties in the region could put social, structural and environmental reforms on hold and even call into question the economic and political model Eastern European countries have followed since the 1990s. (Forbes.com)

And should this come true, the EU is in great trouble. I have been a EU sceptic for quite a while, at least as far as Norwegian membership is concerned. But as much as I might dislike some aspects of the EU, I don’t want to see a massive economic downturn spreading all over Europe.

[youtube=http://www.youtube.com/watch?v=Q0zEXdDO5JU]

[youtube=http://www.youtube.com/watch?v=iYhDkZjKBEw]

Thanks to NRKBeta for the tip.

The banks, on the other hand, are holding their ace, being the necessary lifeline business needs to stay afloat. Despite packages and central bank interest cuts, Norwegian banks are still holding back on loans to business and have been slow to cut interest rates. This is becoming a major problem for businesses that used to finance activities in the international bonds market. Current estimates are that Norwegian companies need to refinance about NOK 90 billions in bonds this year(2). With a dried up international finance market this needs to be replaced with domestic loans. Bank manager Wærstad is trying to make Prime Minister Stoltenberg play his capital ace before she needs to play hers – extending refinancing loans at acceptable terms to private business.

Both players have more cards in their hands. What Aftenposten designates as Wærsted’s jack is the fact that Norwegian banks are still making money. None of them are threatened by bankruptcy just yet, and can afford to wait. On the other hand, Stoltenberg holds a jack of his own – that bank losses will begin to increase as business get into trouble because of tight lending.

These cards all seem to amount to a classical scenario from game theory: The Chicken Game, also known as the Hawk-Dove game. Neither player wants to yield, but the worst possible outcome for both is if neither yields and they crash. And this all fits rather well. The worst possible outcome for the banks is is nobody extends credit to private business and we start to see mass bankruptcies. This will in turn give banks problems with getting their money back, getting them in trouble. The government on the other hand doesn’t want to hand out free money, but mass bankruptcies will lead to massive unemployment at a great political cost.

The last cards seem to me to be a different altogether, or possible strategies for avoiding the chicken game. The last of Stoltenberg’s cards Aftenposten identifies is the opportunity the government has to circumvent banks and start lending money to business directly. A number of government institutions already exist to support business. Already the semi-governmental export finance institution Eksportfinans has already received a substantial crisis package. Stoltenberg might also channel more money into various development and venture capital funds, or even in the last instance start a complete government bank.

The last cards the banks hold, according to Aftenposten is the opportunity to say no to help from the government if there are too many strings attached. Management bonuses and pay raises is a particular point the government wants to curb, not unlike the recent statements by Obama (Yahoo! News, Marketwatch) This seems to me like the one point where the analogies falter somewhat. Firstly, Norway doesn’t quite compare to the United States when it comes to executive bonuses. They are substantial, but not on the billion dollar level we’ve seen in banks like Merril-Lynch across the pond. Secondly, even if they should want to play hard ball with the government, I fail to see how refusing government subsidies or better than market rate loans from the government is likely to be a win situation for the banks.

Wærsted seems to agree this card is so poor she doesn’t want to play it. Today she, along with a number of finance top manager colleagues went public with a promise not to take any pay raises this year.  Even though they claim this has been the plan all along, it seems like a way to make themselves more acceptable to receive good terms on the new bank relief package promised by the government to be announced soon.

In the end, it looks to me like a piece of journalism in which Aftenposten wants to make this whole thing seem like an interesting game. In reality the government knows business depends on the banks, and the banks know they can’t run forever with nearly no access to international financing. Government can’t do away with the banking sector, but it really looks like Stoltenberg is holding the best cards.

The jews did it

8. The current financial crisis which is destroying the economies of the U.S. Britain and in fact all the countries of the world is due to manipulations of banks, financial institutions and the monetary system by Jewish supporters of Israel. (chedet.co.cc)

And why is this interesting? Because this isn’t just some random crackpot blogger. This is the man who led Malaysia for just about three decades and has been seen as one of the more prominent moderate voices of the Muslim world. This is the man who crossed the IMF and handled the previous finance crisis in ’98 in his own way. This is a man many still listen to.

How the financial crisis helps Israel is still somewhat unclear to me.

The package expands the national budget directly with about 2o billion NOK (roughly 2.2 billion € or 2.86 b$), with nearly 17 billions increased expenditure and over 3 billion worth of tax cuts. With secondary effects, the government estimates a total expansive effect of 27 billion NOK, reducing the substantial oil-boosted government surplus. When correcting for petroleum-based offshore income, the government now estimates a government deficit of 119 billion NOK for 2009. This sums up to an expansion of the oil-corrected government budget of 2.3%, substantially higher than the 1.5% goal set by the EU.This represents a deviation for what has been known as Handlingsregelen, a term that can be roughly translated into the Rule of Thumb (or the Budgetary Rule according to Wikipedia). It states that only 4% of the expected capital gains from the government pension fund (formerly The Petroleum Fund) should be spent each year. This fund is in turn comprised of all the government surplus from the Norwegian offshore petroleum activity.

This is also a powerful political broadside before the upcoming parliament elections in Norway. The expansion of the budget, heavily focused towards public expenditure gives the package a strong leftist profile as well as allowing the government to support popular causes such as strengthening the economy of municipalities (which are responsible for primary education and care for the elderly among other things), more public building projects and increased spending on education and research.

This certainly represents a bold move, and a classical Keynesian one. It will be interesting to see if Norway’s oil economy will allow the government to soften the blow and if this was the right way to do it. Personally, I applaude.

You can find the details of the package here (PDF – in Norwegian).

The finance crisis certainly took a turn for the unexpected today when the US House of Representatives turned down the $700 billion rescue package proposed by president Bush. Of course it was controversial for USA to consider this in the first place, given that they have been the largest driving force in pushing the International Monetary Fund to try and discourage other governments from doing the same in times of crisis. Wall Street seems to have expected them to go through with it this time though, as the news brought the biggest plummet in stock prices in American history. So how could they possibly risk the crisis getting even worse?

There are a lot of different reasons, possibly as many as the 227 congressmen that voted against. Here are a few. Off the top of my head I’ll try to point to a few.

USA would certainly lose some support for their great crusade for economic liberalization throughout the world if they had gone through with it. One of the demands the US has made through the IMF in former finance crises have been that they don’t bail out companies in trouble. The market is supposed to be allowed to weed out companies which have taken too great risks.

One blogger who took this view is former Malaysian Prime Minister, Tun Mahathir Mohamad. On his blog chedet.com, he’s pondering the current finance cisis, as do most of us who take an interest in what goes on in the world. And he’s got some quite understandable grievances. During the Asian finance crisis in the late 90s, he was among those exposed to great pressure to let failing banks go bankrupt, to restrain government spending and generally run a tight ship economically speaking. It’s not hard to feel cheated when USA faces a crise of similar proportions and congress seemed about to deal out an amazingly huge number of dollars to bail out companies on the verge of bankruptcy. And I suspect Tun Mahathir isn’t the only one to feel this way. A lot of world leaders dependent on the IMF in times of crisis would have legitimate reasons to refuse to be forced to take the same measures.

Another important reason could be that the American government doesn’t really have this money. According to IMF, the US government for example only has 72 billion USD in foreign currency reserves. That’s only one tenth of the money they proposed to spend on the rescue package. USA already owes a daunting 13 trillion dollars(!!) (according to the US Treasury) to other countries as a result of buying more from other countries than they sell each year. This certainly isn’t going to help…

Other than this, a lot of congressmen are ideologically opposed to the bailout to begin with. They believe very strongly in the market, and consider it completely wrong to stop the market from punishing the companies that have taken too big risks. Consequences be damned.

A more compelling reason to the man in the street would probably be that a lot of people have gotten extremely rich from managing the economy poorly. Banking exectuives and shareholders have reaped enormous profits from the buying and selling of debts people should never have been allowed to take out to begin with. And of course it’s unfair if the companies that have allowed them to do this are bailed out when their bluff is called.

Whatever the reason – not introducing any measures at all sounds really risky to me as well. As much as I’d like to see the greedy bastards who brought this crisis upon the world punished, it’s hard to see that happening without the rest of us getting punished too.

I’m lucky enough to be living in a country so rich our government will be able to cushion any blow to the world economy enough that nobody will starve. I fear for all those who live in countries who don’t. And the only ones who get a say are the Americans…

Other things written about this:

• The Monkey Cage: “Parallels“
• Voting while intoxicated: “The Fall“
• Chedet.com: “The United States“
• Political Animal on presidential impotence.