Economic Foreign Policy?

One aspect of the current economic crisis getting attention in Washington, but more so in Chicago at Obama’s transition headquarters is its impact on foreign governments. The crisis, while it is huge here, has potentially even more grave consequences in other parts of the world. There are many Third World countries like Egypt whose governments are already under intense internal pressure. Now add an economic crisis and that pressure could boil over into open rebellion and the collapse of the current government.

This foreign policy impact will require careful management. The traditional institutions, such as the International Monetary Fund, designed to keep the world economy on an even keel are now feeling the strain themselves as the rich countries who provide their financing are all facing budgetary constraints. The medicine the IMF and the World Bank usually mete out in times of crisis are not expansionary. They typically include severe deficit cutting, contraction of domestic demand, and raised interest rates. I think it’s fair to say this combination of policy options is diametrically opposed to those we we need now. Worldwide demand is collapsing. We need expansion, not contraction.

This might result in the need for the US to pump cash into a foreign economy as well as its own. The political difficulties this would present to the Obama administration are obvious. Congress is having a hard enough time passing a bailout of the domestic auto industry, imagine the trouble it would have with a bailout of Egypt.

Not that I should focus too hard on Egypt! There will no doubt be a long line of countries needing aid, some of whom are not warmly regarded in Washington right now [Pakistan for instance].

So as we all obsess about the problems at home we should remember that this is a worldwide problem and that we will most likely have to find a way to stabilize not just the American economy, but the world’s as well.

That real estate bubble of ours has a lot to answer for!