By Michael R. Czinkota
The U.S. needs $700 billion as an initial protective embankment against economic collapse. Other countries appear to require similarly large sums to stem the onslaught of uncertainty.
But hurricane Katrina showed us that the water tends to spill over the dam. Is entrepreneurship dead? Has socialism taken over? Well, it depends on the alternatives.
In the U.S., there are many problems with the bailout. Taxpayers are facing a triple whammy ― their retirement benefits and investments in the stock markets have declined precipitously; their taxes are not used for social services, health care, or social security; and there will be new taxes in the future.
What about industry sector preferences: Should the finance sector be coddled? If not _ what about U.S. auto makers? How about the shoemakers who had to abandon the rubber footwear market to foreign competitors?
Then there is the responsibility issue: Should all the CEOs who received huge bonuses last year or the year before have to give their money back through legislative procedures? What about shareholders who sold high, or the real estate owners who moved before the tsunami hit?
How about the MBA programs that produced so many greedy people without a moral compass? Is it time now for schools with large endowments to make payments to the downtrodden who lost their retirement due to MBA actions?
The bailout makes sense in light of four global dimensions: calibration, time, perception, and trust.
Today it is very difficult to determine the worth of assets. Value linkages, global connections, goodwill, and knowledge all affect the worth of activities, yet, their impact can change at a moment's notice.
We need to develop new tools to recalibrate our definition of value in order to understand, predict and avoid severe fluctuations. Until then, mechanisms which provide stability are essential.
We need to revisit the role of time, and integrate sustainability and context. For example, how do we assess long-term gains and losses? Is it worth it to plant walnut trees today, even though they will only mature in 30 years?
Why should business rewards be linked to a one-year period? Maybe the Soviets were right with their five-year plans.
Perception and trust transcend reality. The Roman grain merchant did not know exactly what was happening in the provinces. But he did know of Pompeius' fleet which kept the trade routes safe from pirates. His feeling of safety and trust drove markets up and prices down.
Today, broad based and simultaneous changes in perception and trust can still trigger severe markets gyrations. Just because U.S. debt is rated AAA does not mean it has to stay that way.
Here is the bottom line: It is imperative to employ both public and private resources to maintain the functioning of the global financial and trade system, and to do so with haste and an emphasis on trust.
It is unseemly, unproductive and uninformed to expend major time and create growing risk for minor gains.
Yet, the financial decisions are not anymore solely for the U.S. to make and bear. Now is he time for global collaboration ― for the endorsement of common goals and measures funded jointly by world leaders. A collapse of business networks would reverse the gains of many decades of cultural collaboration, better relationships and an increase in psychological proximity.
Some may think that existing safety mechanisms will keep us safe, but they really can't. Just consider the U.S. Federal Deposit Insurance Corporation (FDIC), for example.
It insures $4.4 trillion worth of U.S. bank deposits with a mere $45 billion in funds. If depositors lost confidence in this insurance, its resources would be drained in a matter of hours.
It makes sense to use government resources in a crisis. Swift timing is crucial when markets can shift overnight. Given the risks involved, it is better to err on the side of too much assistance, which can always be gradually reduced.
An error of too harsh a restriction can be ruinous. Just like Richard Nixon's visit to China, it is notable that Republicans, who typically oppose government involvement, have introduced the bailout. That confirms the true need for it.
It is crucial, though, that this turmoil not be an opportunity for petty politics and expenditures.
Government has a role to provide oversight and subsequent regulation in order to keep the playing field level and ready for the game. It is not particularly good at playing the game itself and often precipitates unintended consequences.
The objective must be flexible stability and continuity. That means there should be no limits or boundaries on the support which may be needed eventually. However, there also must remain a degree of risk ― firms should not become reliant on public funds.
Government needs to be like a life guard, whose role is not to always swim out to rescue drowning tourists, but whose whistle, and mere presence reduces horseplay. We need to take action now. Only the terrorists would gain from a collapse of the Western economies.
Michael R. Czinkota teaches international business at Georgetown University and the University of Birmingham in the U.K. He served in several policy positions in the U.S. Commerce Department during the Reagan administration. He can be reached at czinkotm@georgetown.edu.