The G-20 Summit: Beware the FreePassers!

The G-20 summit was a true public relations success. Despite low expectations, the spin at the close of the conference promoted the concept that there was a consensus among the nations that participated.

The FreePasser Issues Still Remain!

However, despite the public claims of success, serious economic problems underlying the current global financial crisis still remain. These issues were largely avoided when it became evident that an agreement on them was not forthcoming. Our financial problems have developed as a result of globalization of the financial system, and any solution will require true global cooperation.

There is serious disagreement between governments regarding the use of fiscal stimulus. The United States and Great Britain favor it but much of Europe, particularly Germany, is against it. Unless the United States erects protectionist barriers, much of this stimulus which is funded by deficit spending may leak outside the country. Other countries will receive the benefits at the American taxpayer’s expense. And since there will be no increased stimulus by these countries, we will receive no corresponding benefit. In essence, these countries will become true FreePassers.

There are similar problems with bank bailouts, as we saw with American International Group (AIG). Several foreign banks with Credit Default Swaps with AIG were only able to be paid because of cash injections by the U.S. government.

The Threat of Protectionism Unless the FreePasser Issue Is Addressed

The entire world must be on the same page for any potential solution to alleviate the current crisis. Otherwise the more conservative countries, such as Germany, will continue to benefit from the actions of the more aggressive countries, such as the United States. This is an unfair and unstable situation. Protectionist sentiments can develop in the United States as a result with potentially disastrous consequences.

We saw this with the Smoot Hawley Tariff Act under the Hoover administration, which caused huge problems for the American economy. In addition, it was an indirect cause of the trade dispute between Japan and the United States that led to World War II.

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