Where's Smoot? An Upset Victory for Global Cooperation Reduces Financial Risk

Where's Smoot?  Remember the early days of the bursting real estate bubble, financial crisis and recession that we hope won't turn into a depression?  Talking heads everywhere warned of the dangers and financial risks of protectionism.  High tariffs would stop trade and freeze already struggling economies the world over, just as the Smoot-Hawley Tariff of 1930 had kicked off a global round of protectionism that deepened the Great Depression.  OK, nitpickers, maybe US tariffs were below the world averages even after Smoot-Hawley, the rest of the world still reacted with more tariffs.  Besides, if Smoot didn't contribute mightily to the Great Depression, then why did they flop him end-to-end all the way across the Harvard Bridge and turn him into a unit of measure?  Different Smoot?  Are you positive, I've never met even one Smoot in my whole life?

Smoot(s) notwithstanding, what actually happened to protectionism in the latest recession?  The World Trade Organization says not very much, according to a report prepared by the WTO for the G-20 leaders that was obtained by Reuters.  The G-20 pledged to avoid protectionist measures at summits in London and Pittsburgh last year, and while some members have implemented measures to restrict trade, the WTO says their scope has been limited and the Group has averted protectionist escalation thus far. 

It's not just tariffs, or rather, the lack thereof.  The G-20 and G-6 produced a semblance of coordination and cooperation in developing stimulus packages.  The European Union is standing by Greece (which means it will eventually stand by Spain and Italy) in the face of national deficits that could put serious pressure on the Euro and cause other financial risks for member nations.  The EU is even pausing in its regulatory revenge on the hedge funds – a revenge based on fairly skimpy evidence of counterproductive conduct by the hedge funds in the case of Greece and other sovereigns in financial straits- to listen to the plaint of the UK, a hedge fund home ground that does not want to lose any part of its financial business.

In sum, the shocking truth is that the world's politicians may actually have learned something since 1930, or perhaps learned something from 1930.  There is always a slight chance that the UK and Iceland will go to war over lost bank deposits and funds frozen in retaliation, but so far the world's handling of this extremely serious and somewhat global recession is impressive.  In November of 2008, I would have put odds at twenty to one against the level of global cooperation we have seen to date.  Fortunately for me, AIG had no swap on this event available for trading.

Photo Credit: Karen Horton