Free trade no answer to credit crisis

Written By: - Date published: 10:41 am, November 24th, 2008 - 13 comments
Categories: economy, International - Tags:

Free trade is basically a good idea. We live on a world of limited resources, we should use those resources as efficiently and sustainability as possible. Trade barriers that distort the costs of production in different countries undermine the efficiency of resource use. Ideally, we wouldn’t have them – but we would also need consistent labour and environmental standards between countries so that we don’t end up distorting the use of resources in a way that advantages those with weaker standards instead of those with the most efficient processes.

It would be a mistake, however, to think that free trade is an answer to the financial crisis we are facing right now. The financial crisis was not created by trade protectionism, it was caused by insufficient controls on greedy and irresponsible money traders. So, more free trade isn’t go to address the underlying problem with our global economy, it’s just going to give it a fleeting boost. It’s a bit like giving caffeine to a seriously injured person. Sure, they’re going to feel better for a while but once that passes, they’re still going to be in trouble unless you start treating what’s actually wrong with them.

Indeed, our experience increasingly says that free trade without proper regulation of international capital creates more trouble than good. By opening themselves up, countries are left at the mercy of money traders who have the power to collapse currencies and plunge economies into chaos, and can have a profit motive to do so without any responsibility for the consequences of their actions on ordinary people. We only need to look to New Zealand for an example – we have been subject to several attacks on our currency which have hurt our trade and we are constantly threatened with capital flight if we want to implement policies that are good for New Zealand but bad for rich foreigners’ profit margins.

That the leaders at APEC have jumped on the Doha Round of free trade negotiations as a response to the financial crisis is a cause for concern. It looks like they are dropping much needed reforms of the finance markets into the too-hard basket. Sure, a bit more free trade might mitigate the problems for now but, soon enough, we will again be paying the price for letting gamblers play with the fate of our economies.

13 comments on “Free trade no answer to credit crisis ”

  1. higherstandard 1

    Hold on SP you sound like Key !

    Both free trade and reforms are obviously important they have commented on the reforms as per below.

    “The current situation highlights the importance of ongoing financial sector reform in our economies and the valuable role played by APEC?s financial sector capacity building work. We welcome continued development and innovation in the financial sector and believe that as financial systems deepen and become more complex, regulatory and supervisory tools must be more effective. The crisis also highlights the need to develop more effective standards of corporate governance and risk management as well as the importance of social responsibility in the financial sector. ”

    I wouldn’t hold you breath on free trade moving ahead or financial reforms – APEC and similar meeting have a tendency to be waffle fests.

  2. Stephen 2

    Free trade may or may not be a panacea, but it seems to now be ‘conventional wisdom’ that protectionism to ‘protect jobs’ etc. will be quite bad (i.e. the Depression), so at least no ones talking about that . I was afraid that’s what this post was going to be about – phew!

  3. Phil 3

    By opening themselves up, countries are left at the mercy of money traders who have the power to collapse currencies and plunge economies into chaos

    That’s simply not accurate. Not opening up a currency is ultimately what causes ‘attacks’ (emotive language yours, not mine).

    At the simplest level, the value of a currency is a derivation of the relative strength of your economy vs the rest of the world. Left to float of it’s own devices, the opportunity for a trader to profit on currency is really only availabe through arbitrage, or astute assessment of fundamental economic factors (GDP, interest rates, inflation rates etc).

    However, when you have a government or central bank defending a particular level of currency valuation, it becomes very easy to attack when that level becomes unjustified (ie, when you’re defending a ‘high’ exchange rate and your economy weakens). That’s what we saw here pre-float, and what we’ve seen internationally with the Indonesians, the South Americans, the East Asians….

  4. The current credit crisis was the inevitable side effect of banks trying to spread the risk of shaky sub-prime debt in an environment of easy credit and monetary inflation. Free trade puts the brakes on this kind of excessive production of credit, by destroying its incentives. Why create risky vehicles for profit when credit can be used to better advantage in creating more exports?

    Currency speculation is something that occurs in all economic environments except one using the gold standard. There is no link between speculation and free trade at all. The New Zealand dollar is currently vulnerable to speculation because we are over- leveraged with cheap overseas credit, not because we have an open market.

  5. lprent 5

    Mac: You’re forgetting the hot-potato solution. You create risky debt and pass it on to someone who is willing to handle it for a short period. They in turn attempt to find a sucker/investor to offload it to. The end-game is to not be the person handling the risky debt at the end.

    This is the old shell/pyramid game. Guess what, it is a lot easier than working at something productive – well at least if you’re sure you’re not going to be the sucker holding at the end. Of course no-one intends to be the sucker…

    There is only one general solution to this (well apart from doing some severe darwin-nowing with death camps for stupidity). That is to regulate and make financial pyramid schemes illegal. But it has to be done world-wide. The NZ/aussie banks are in reasonably good shape because there is/was pretty good restrictions of the level of risk allowed in their assets. However, like everyone else, we still get the full effects of stupidity in the US and European central banks.

  6. That is to regulate and make financial pyramid schemes illegal.

    You’ll get no argument from me there, nor, I suspect, would you get one from John Key. However, as more and more credit is absorbed in trade, rather than speculation, I think you will find that the only people willing to risk their cash in such financial pyramid schemes are the terminally stupid.

  7. djp 7

    The financial crisis was not created by trade protectionism, it was caused by insufficient controls on greedy and irresponsible money traders

    Whatever… the financial crisis was created by easy credit from govt empowered agencies and govt intervention (think Freddie Mac, Fannie Mae, Zero-Downpayment Act etc)

  8. lprent 8

    Mac: Yes they are terminally stupid. However they are also probably a high proportion of investors. It all comes down to perceived risk levels versus returns.

    The problem is that a lot of people who are investing have spent a life working in companies involved in trade (ie the retired – the biggest investor group). They have a strong perception of risk levels involved in trade and the often low returns. They also look at the bright shiny returns from various types of ‘secured’ investments and perceive a low risk with a good return (eg NZ’s finance firms). We’re not talking MBA’s here. We’re talking people that prefer to invest directly rather than get done with the scam overheads of managed funds.

    So in effect as a broker/finance firm/…. what you have to do is to create the perception of a fund with a safe investment with a good return. Doesn’t have to be a great return, in fact those should be avoided because they will scare off the punters, and drop the return to short-con ummm fund creator.

    Almost of the really interesting finance scams operate like that. From the tulip in the 17th onwards to the current mortgage derivatives (removing risk).

  9. Ari 9

    Whatever the financial crisis was created by easy credit from govt empowered agencies and govt intervention (think Freddie Mac, Fannie Mae, Zero-Downpayment Act etc)

    I’ll acknowledge that this is part (but not whole) of the problem in specifically the USA. Which in turn came from the culture of non-assistance in the USA where “socialised” solutions are routinely derided and instead debt-based and user*-pays solutions are the norm. Yuck. If they had a government more like ours with, for example, state housing, they might be better off with less risky loans.

    *Read: the person who can least afford it.

  10. Pascal's bookie 10

    Freddie and Fannie make a useful scapegoat, and they certainly made some bad decisions, but they were far less culpable than others.

  11. Josh On 11

    “Free trade is basically a good idea.”
    People accuse socialism of being a good idea – I am glad that now “free trade” has achieved this status. The difference I believe is that socialism is possible. Free trade, has been anything but free, even without official protections, trade is conducted with warships and structural adjustment programs – both of which have had devastating effects ion the world. It is time to abandon the Utopian notion that capitalism can work.

    “it was caused by insufficient controls on greedy and irresponsible money traders”
    It used to be said that the genius of capitalism was that it incorporated human greed into the equation, apparently it requires a Goldilocks standard of greed. Too little and you get no “innovation”, too much and you get a credit crunch. The reality is that it is a system that encourages and rewards greed at every step – exaggerated and distorting a human capacity fro survival.

  12. sean 12

    “Currency speculation is something that occurs in all economic environments except one using the gold standard.”

    Speculative attacks on the US currency when it was on the gold standard pushed it off the gold standard. Govt attempts to peg a currency to *any* notional standard make it vulnerable to speculative attack, including the gold standard.

    “the financial crisis was created by easy credit from govt empowered agencies”

    This is a really funny conspiracy theory. And amazingly durable in the face of the facts.

    1) The subprime crisis is only one part of the credit derivatives problem. All credit was badly underpriced. The media and blogososphere go on about subprimes because the public understands retail credit but has no idea how wholesale credit markets work. The CDS market is over US$10 trillion, US failing subprime mortgages losses are probably only around half a trillion. The sub-prime crisis is a part of the problem, and was the triggering cause, but the wholesale credit markets were a bubble waiting to burst and the govt didn’t blow that bubble.

    2) Look at the stats about US mortgages:
    http://economistsview.typepad.com/.shared/image.html?/photos/uncategorized/2008/09/24/gse.gif
    What changed during the housing bubble was the growth of mortgage-back securities by non-bank issuers – from nearly zero to nearly 20% of US mortgages. Freddie and Fannie’s market share *declined* during the housing bubble. These were people taking Freddie and Fannie’s market by engaging in lending that F&F weren’t allowed to – sub-prime mortgages – and spinning them into CDOs which they then sold at unrealistic prices.

    F&F responded by also moving into the subprime market in 2005-2006. F&F screwed up badly, and there was very dodgy hiring of their own regulators involved. But they were the late-comers to the sub-prime party, not the guys throwing it.

  13. sean 13

    “The NZ/aussie banks are in reasonably good shape because there is/was pretty good restrictions of the level of risk allowed in their assets.”

    Nope. They’re in good shape because we don’t have deep credit markets.

    Our regulation isn’t better than the UKs.

    Nor (to be honest) is it the regulations that were at fault. They tend to be principle-based and insist on use of “good practice and procedures in valuing assets”. But they needed to be enforced more stringently. The regulators needed to push harder for better stress tests and more realistic pricing algorithms. But to do that there would have to have been some political pressure on (or help for) the regulators, which was very much lacking.

Recent Comments

Recent Posts

  • EV road user charges bill passes
    Transport Minister Simeon Brown has welcomed the passing of legislation to move light electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs) into the road user charges system from 1 April.  “It was always intended that EVs and PHEVs would be exempt from road user charges until they reached two ...
    BeehiveBy beehive.govt.nz
    1 day ago
  • Bill targets illegal, unregulated fishing in international waters
    New Zealand is strengthening its ability to combat illegal fishing outside its domestic waters and beef up regulation for its own commercial fishers in international waters through a Bill which had its first reading in Parliament today. The Fisheries (International Fishing and Other Matters) Amendment Bill 2023 sets out stronger ...
    BeehiveBy beehive.govt.nz
    1 day ago
  • Reserve Bank appointments
    Economists Carl Hansen and Professor Prasanna Gai have been appointed to the Reserve Bank Monetary Policy Committee, Finance Minister Nicola Willis announced today. The Monetary Policy Committee (MPC) is the independent decision-making body that sets the Official Cash Rate which determines interest rates.  Carl Hansen, the executive director of Capital ...
    BeehiveBy beehive.govt.nz
    1 day ago
  • Stronger protections for apartment owners
    Apartment owners and buyers will soon have greater protections as further changes to the law on unit titles come into effect, Housing Minister Chris Bishop says. “The Unit Titles (Strengthening Body Corporate Governance and Other Matters) Amendment Act had already introduced some changes in December 2022 and May 2023, and ...
    BeehiveBy beehive.govt.nz
    1 day ago
  • Travel focused on traditional partners and Middle East
    Foreign Minister Winston Peters will travel to Egypt and Europe from this weekend.    “This travel will focus on a range of New Zealand’s traditional diplomatic and security partnerships while enabling broad engagement on the urgent situation in Gaza,” Mr Peters says.   Mr Peters will attend the NATO Foreign ...
    BeehiveBy beehive.govt.nz
    1 day ago
  • Keep safe on our roads this Easter
    Transport Minister Simeon Brown is encouraging all road users to stay safe, plan their journeys ahead of time, and be patient with other drivers while travelling around this Easter long weekend. “Road safety is a responsibility we all share, and with increased traffic on our roads expected this Easter we ...
    BeehiveBy beehive.govt.nz
    1 day ago
  • Cost of living support for over 1.4 million Kiwis
    About 1.4 million New Zealanders will receive cost of living relief through increased government assistance from April 1 909,000 pensioners get a boost to Superannuation, including 5000 veterans 371,000 working-age beneficiaries will get higher payments 45,000 students will see an increase in their allowance Over a quarter of New Zealanders ...
    BeehiveBy beehive.govt.nz
    1 day ago
  • Tenancy reviews for social housing restart
    Ensuring social housing is being provided to those with the greatest needs is front of mind as the Government restarts social housing tenancy reviews, Associate Housing Minister Tama Potaka says. “Our relentless focus on building a strong economy is to ensure we can deliver better public services such as social ...
    BeehiveBy beehive.govt.nz
    1 day ago
  • Kermadec Ocean Sanctuary plan halted
    The Kermadec Ocean Sanctuary will not go ahead, with Cabinet deciding to stop work on the proposed reserve and remove the Bill that would have established it from Parliament’s order paper. “The Kermadec Ocean Sanctuary Bill would have created a 620,000 sq km economic no-go zone,” Oceans and Fisheries Minister ...
    BeehiveBy beehive.govt.nz
    1 day ago
  • Cutting all that dam red tape
    Dam safety regulations are being amended so that smaller dams won’t be subject to excessive compliance costs, Minister for Building and Construction Chris Penk says. “The coalition Government is focused on reducing costs and removing unnecessary red tape so we can get the economy back on track.  “Dam safety regulations ...
    BeehiveBy beehive.govt.nz
    1 day ago
  • Drought support extended to parts of North Island
    The coalition Government is expanding the medium-scale adverse event classification to parts of the North Island as dry weather conditions persist, Agriculture Minister Todd McClay announced today. “I have made the decision to expand the medium-scale adverse event classification already in place for parts of the South Island to also cover the ...
    BeehiveBy beehive.govt.nz
    1 day ago
  • Passage of major tax bill welcomed
    The passing of legislation giving effect to coalition Government tax commitments has been welcomed by Finance Minister Nicola Willis.  “The Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Bill will help place New Zealand on a more secure economic footing, improve outcomes for New Zealanders, and make our tax system ...
    BeehiveBy beehive.govt.nz
    2 days ago
  • Lifting economy through science, tertiary sectors
    Science, Innovation and Technology Minister Judith Collins and Tertiary Education and Skills Minister Penny Simmonds today announced plans to transform our science and university sectors to boost the economy. Two advisory groups, chaired by Professor Sir Peter Gluckman, will advise the Government on how these sectors can play a greater ...
    BeehiveBy beehive.govt.nz
    2 days ago
  • Government announces Budget priorities
    The Budget will deliver urgently-needed tax relief to hard-working New Zealanders while putting the government’s finances back on a sustainable track, Finance Minister Nicola Willis says.  The Finance Minister made the comments at the release of the Budget Policy Statement setting out the Government’s Budget objectives. “The coalition Government intends ...
    BeehiveBy beehive.govt.nz
    2 days ago
  • Government to consider accommodation solution
    The coalition Government will look at options to address a zoning issue that limits how much financial support Queenstown residents can get for accommodation. Cabinet has agreed on a response to the Petitions Committee, which had recommended the geographic information MSD uses to determine how much accommodation supplement can be ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • Government approves extension to Royal Commission of Inquiry into Abuse in Care
    Cabinet has agreed to a short extension to the final reporting timeframe for the Royal Commission into Abuse in Care from 28 March 2024 to 26 June 2024, Internal Affairs Minister Brooke van Velden says.                                         “The Royal Commission wrote to me on 16 February 2024, requesting that I consider an ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • $18m boost for Kiwis travelling to health treatment
    The coalition Government is delivering an $18 million boost to New Zealanders needing to travel for specialist health treatment, Health Minister Dr Shane Reti says.   “These changes are long overdue – the National Travel Assistance (NTA) scheme saw its last increase to mileage and accommodation rates way back in 2009.  ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • PM’s Prizes for Space to showcase sector’s talent
    The Government is recognising the innovative and rising talent in New Zealand’s growing space sector, with the Prime Minister and Space Minister Judith Collins announcing the new Prime Minister’s Prizes for Space today. “New Zealand has a growing reputation as a high-value partner for space missions and research. I am ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • Concerns conveyed to China over cyber activity
    Foreign Minister Winston Peters has confirmed New Zealand’s concerns about cyber activity have been conveyed directly to the Chinese Government.     “The Prime Minister and Minister Collins have expressed concerns today about malicious cyber activity, attributed to groups sponsored by the Chinese Government, targeting democratic institutions in both New ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • Independent Reviewers appointed for School Property Inquiry
    Independent Reviewers appointed for School Property Inquiry Education Minister Erica Stanford today announced the appointment of three independent reviewers to lead the Ministerial Inquiry into the Ministry of Education’s School Property Function.  The Inquiry will be led by former Minister of Foreign Affairs Murray McCully. “There is a clear need ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • Brynderwyns open for Easter
    State Highway 1 across the Brynderwyns will be open for Easter weekend, with work currently underway to ensure the resilience of this critical route being paused for Easter Weekend to allow holiday makers to travel north, Transport Minister Simeon Brown says. “Today I visited the Brynderwyn Hills construction site, where ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • Speech to the Infrastructure Funding & Financing Conference
    Introduction Good morning to you all, and thanks for having me bright and early today. I am absolutely delighted to be the Minister for Infrastructure alongside the Minister of Housing and Resource Management Reform. I know the Prime Minister sees the three roles as closely connected and he wants me ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • Parliamentary network breached by the PRC
    New Zealand stands with the United Kingdom in its condemnation of People’s Republic of China (PRC) state-backed malicious cyber activity impacting its Electoral Commission and targeting Members of the UK Parliament. “The use of cyber-enabled espionage operations to interfere with democratic institutions and processes anywhere is unacceptable,” Minister Responsible for ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • NZ to provide support for Solomon Islands election
    Foreign Minister Winston Peters and Defence Minister Judith Collins today announced New Zealand will provide logistics support for the upcoming Solomon Islands election. “We’re sending a team of New Zealand Defence Force personnel and two NH90 helicopters to provide logistics support for the election on 17 April, at the request ...
    BeehiveBy beehive.govt.nz
    4 days ago
  • NZ-EU FTA gains Royal Assent for 1 May entry to force
    The European Union Free Trade Agreement Legislation Amendment Bill received Royal Assent today, completing the process for New Zealand’s ratification of its free trade agreement with the European Union.    “I am pleased to announce that today, in a small ceremony at the Beehive, New Zealand notified the European Union ...
    BeehiveBy beehive.govt.nz
    4 days ago
  • COVID-19 inquiry attracts 11,000 submissions
    Public consultation on the terms of reference for the Royal Commission into COVID-19 Lessons has concluded, Internal Affairs Minister Hon Brooke van Velden says.  “I have been advised that there were over 11,000 submissions made through the Royal Commission’s online consultation portal.” Expanding the scope of the Royal Commission of ...
    BeehiveBy beehive.govt.nz
    4 days ago
  • Families to receive up to $75 a week help with ECE fees
    Hardworking families are set to benefit from a new credit to help them meet their early childcare education (ECE) costs, Finance Minister Nicola Willis says. From 1 July, parents and caregivers of young children will be supported to manage the rising cost of living with a partial reimbursement of their ...
    BeehiveBy beehive.govt.nz
    4 days ago
  • Unlocking a sustainable, low-emissions future
    A specialised Independent Technical Advisory Group (ITAG) tasked with preparing and publishing independent non-binding advice on the design of a "green" (sustainable finance) taxonomy rulebook is being established, Climate Change Minister Simon Watts says.  “Comprising experts and market participants, the ITAG's primary goal is to deliver comprehensive recommendations to the ...
    BeehiveBy beehive.govt.nz
    4 days ago
  • Chief of Army thanked for his service
    Defence Minister Judith Collins has thanked the Chief of Army, Major General John Boswell, DSD, for his service as he leaves the Army after 40 years. “I would like to thank Major General Boswell for his contribution to the Army and the wider New Zealand Defence Force, undertaking many different ...
    BeehiveBy beehive.govt.nz
    4 days ago
  • Minister to meet Australian counterparts and Manufacturing Industry Leaders
    25 March 2024 Minister to meet Australian counterparts and Manufacturing Industry Leaders Small Business, Manufacturing, Commerce and Consumer Affairs Minister Andrew Bayly will travel to Australia for a series of bi-lateral meetings and manufacturing visits. During the visit, Minister Bayly will meet with his Australian counterparts, Senator Tim Ayres, Ed ...
    BeehiveBy beehive.govt.nz
    4 days ago
  • Government commits nearly $3 million for period products in schools
    Government commits almost $3 million for period products in schools The Coalition Government has committed $2.9 million to ensure intermediate and secondary schools continue providing period products to those who need them, Minister of Education Erica Stanford announced today. “This is an issue of dignity and ensuring young women don’t ...
    BeehiveBy beehive.govt.nz
    5 days ago
  • Speech – Making it easier to build.
    Good morning, it’s great to be here.   First, I would like to acknowledge the New Zealand Institute of Building Surveyors and thank you for the opportunity to be here this morning.  I would like to use this opportunity to outline the Government’s ambitious plan and what we hope to ...
    BeehiveBy beehive.govt.nz
    6 days ago
  • Pacific youth to shine from boost to Polyfest
    Minister for Pacific Peoples Dr Shane Reti has announced the Government’s commitment to the Auckland Secondary Schools Māori and Pacific Islands Cultural Festival, more commonly known as Polyfest. “The Ministry for Pacific Peoples is a longtime supporter of Polyfest and, as it celebrates 49 years in 2024, I’m proud to ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • 2024 Ngarimu VC and 28th (Māori) Battalion Memorial Scholarships announced
    ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Speech to Breast Cancer Foundation – Insights Conference
    Before moving onto the substance of today’s address, I want to recognise the very significant and ongoing contribution the Breast Cancer Foundation makes to support the lives of New Zealand women and their families living with breast cancer. I very much enjoy working with you. I also want to recognise ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Kiwi research soars to International Space Station
    New Zealand has notched up a first with the launch of University of Canterbury research to the International Space Station, Science, Innovation and Technology and Space Minister Judith Collins says. The hardware, developed by Dr Sarah Kessans, is designed to operate autonomously in orbit, allowing scientists on Earth to study ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Speech to the New Zealand Planning Institute
    Introduction Thank you for inviting me to speak with you today and I’m sorry I can’t be there in person. Yesterday I started in Wellington for Breakfast TV, spoke to a property conference in Auckland, and finished the day speaking to local government in Christchurch, so it would have been ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Support for Northland emergency response centre
    The Coalition Government is contributing more than $1 million to support the establishment of an emergency multi-agency coordination centre in Northland. Emergency Management and Recovery Minister Mark Mitchell announced the contribution today during a visit of the Whangārei site where the facility will be constructed.  “Northland has faced a number ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Celebrating 20 years of Whakaata Māori
    New Zealanders have enjoyed a broader range of voices telling the story of Aotearoa thanks to the creation of Whakaata Māori 20 years ago, says Māori Development Minister Tama Potaka. The minister spoke at a celebration marking the national indigenous media organisation’s 20th anniversary at their studio in Auckland on ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Some commercial fishery catch limits increased
    Commercial catch limits for some fisheries have been increased following a review showing stocks are healthy and abundant, Ocean and Fisheries Minister Shane Jones says. The changes, along with some other catch limit changes and management settings, begin coming into effect from 1 April 2024. "Regular biannual reviews of fish ...
    BeehiveBy beehive.govt.nz
    1 week ago

Page generated in The Standard by Wordpress at 2024-03-29T05:20:58+00:00