(STAR) DEMAND AND SUPPLY By Boo Chanco - The version of the American economic stimulus bill passed by the House includes a provision requiring projects under the package to “Buy American” as a means of stemming the tide of job losses sweeping America. Such a populist move is not surprising. Everywhere in the world we hear the same protectionist demands as the world’s economy undergoes this economic convulsion in the wake of the Wall Street induced financial meltdown.

The problem, however, is not as simple as buying American or buying Filipino for that matter. Economists say protectionism may worsen the severity of the economic recession we are experiencing and make it last longer. American legislators, and even President Obama, may think some amount of protectionism is called for because of the crisis. But beyond going with the flow of popular sentiment, protectionism is likely to plant the seeds of a smaller, slower growing economy and a potential retaliation of America’s trading partners.

As a New York Times op/ed article puts it, “Buy American” risks no one else will. World trade is collapsing, the article worries. “A trade war may be upon us as country after country puts up protectionist barriers to trade. The last thing the world economy needs is for governments to give a further downward shove to trade.” Unfortunately, that seems to be where we are headed.

The Economist recalls that “in 1929 Willis Hawley and Reed Smoot, two protectionist Republicans in Congress, sponsored a bill to raise tariffs to the highest levels America had ever seen. And in the midst of economic distress, the protectionists won. The result was a round of reciprocal tariff hikes elsewhere, and a disastrous collapse in international trade.” What resulted is a deeper global economic slump. It took decades to undo the accumulated trade restrictions of that period. Will the Americans make the same mistake again?

No wonder major American manufacturers who benefit from free trade were quick to caution American legislators on “Buy American”. Caterpillar, the maker of tractors, pointed out that a large part of their sales is abroad. General Electric also expressed apprehension. FedEx CEO Fred Smith argued the provision in the stimulus plan that mandates “Buy American” would ultimately hurt global trade and hurt America.

“The reason it’s not the right thing to do is that the growth of global trade has been enormously beneficial to the United States,” Smith said. But he understands why “Buy American” rings loud at this time. “The problem with trade is that the benefits are diffused and the pain is localized. But the benefits of having a global economy have created an export sector in this country that provides our highest-paying jobs.”

Smith warned “if the Congress passes this buy-American provision, I can assure you — and we operate in 220-some-odd countries around the world and are a huge part of the import-export infrastructure of the United States — we will get retaliation, and it will be American jobs at risk.”

At Davos, Australian Trade Minister Simon Crean told reporters “trade is a stimulus. Trade is not part of the problem, trade is part of the solution.” This is why, he said, he hopes a long-awaited world free trade deal can be wrapped up soon to help countries tackle the global financial crisis. “We are very strongly of the view that the impact of any fiscal stimulus will be diminished unless we also conclude the Doha round.”

Many countries, including Australia, have voiced concern at a “Buy American” measure in US President Barack Obama’s $819 billion stimulus package which bans the use of foreign steel in infrastructure projects. The European Commission’s plans to reintroduce dairy export subsidies have also been seen as a threat to Australian farmers.

But more than developed countries like Australia, developing countries in the Third World more desperately need access to the American market. In our case, America is our largest export market and if protectionist policies are put in place, the misery index among our poverty stricken people will go up faster and higher.

I guess how President Obama responds to this protectionist trend will give the world a better idea of the tone of his administration. Is his perceived and proclaimed difference for real? Will he succumb to populist pressures made more severe because of the economic crisis? Or will he take the infinitely less popular but right approach to world trade and give substance to his protestations of a new kind of American leadership?

Anatomy of a scam

For those of us who are still confused on how a chain of rural banks managed to make its kind of toxic banking to ultimately cost all of us taxpayers P14 billion, I consulted my notes and below is how it is done, step by step according to Ric Tan formerly head of PDIC.

1)Agents of the bank and the company that controls it solicit bank deposits outside the bank premises in far flung areas of Luzon and Visayas provinces bringing with them bank documents such as signature cards which existing regulations require to be accomplished at the bank premises. In this sense, the manner of deposit solicitation violates AntiMoney Laundering Act and BSP Circulars.

2) The agents are paid up to 10 percent commission and given incentives for maintaining the monthly quota of bank deposits solicited.

3) Agents market double-your-money and other high-interest deposit products that allow the depositor to earn interest in advance as well as avail of merchandise such as cell phones, credit card facility and motor vehicles. For example, upon placement of a P200,000 deposit with a maturity period of five years, the depositor is paid the advance interest for the 1st year.

4) Money solicited is deposited directly at the bank’s depository bank.

5) Agents submit the deposit slip and the signature cards signed by the depositor to the bank.

6) Upon receipt of the deposit slip and signature cards from the agents, the bank books the deposit and issues the corresponding certificates of time deposit and other evidence of deposit.

7) Interest income due to depositors who availed of the motor vehicles is remitted directly to the dealer, also owned by the company that controls the bank.

8) Since the bank has no major assets or investments and minimal lending activities from which payments for the interest income on the deposits can be generated, advance interest and interest income on maturing deposits are sourced from newly solicited deposits which explains the importance of maintaining the agents’ monthly quota.

9) Since there appears a cash flow from the bank deposits solicited, it would appear to be covered by deposit insurance. Once the bank is no longer able to pay its maturing obligations and is ordered closed, the deposit insurer pays the deposits

10) The way the deposit products were packaged, almost 100 percent of the banks’ deposit liability falls within the maximum insurance coverage.

Obama calls

From Rosan Cruz.

The phone rings in Malacañang.

Obama: Hello! This is President Obama. Could I please speak to that small but great Filipina who is the idol of all Filipinos?

Ate Glue: Speaking…

Obama: Congratulations Charice! Everyone loved you at the Inaugural ball. Can you please sing in the White House again for a diplomatic function…

Ate Glue: This is President Arroyo…

Obama: Oh, sorry… they programmed the wrong Philippine number in my blackberry… sorry…

Click…dial tone…

Chief News Editor: Sol Jose Vanzi

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