Peter Morici is an economist and professor at the Robert H. Smith School of Business at the University of Maryland. He is a recognized expert on international economics, industrial policy and macroeconomics. Prior to joining the university, he served as director of the Office of Economics at the US International Trade Commission.

The US recession is a wake up call. Americans need to confront some false gods--free trade, gas guzzlers and Wall Street.

In the 1990s, the US launched the World Trade Organization and opened trade with China. Americans were to import more tee-shirts and TVs and sell more software and sophisticated services to a world hungry for US knowhow. That would move Americans into better paying jobs.

Unfortunately, the US welcomed imports with more enthusiasm than China and other developing countries, who kept high tariffs and notorious regulatory barriers to purchases of western products. America’s CEOs and bankers learned how to outsource just about everyone’s job but their own—radiologists and computer engineers joined textile workers among trade-displaced workers.

Since the last recession, imports have jumped nearly $1 trillion, while exports are up only about $650 billion, and the trade deficit now exceeds $700 billion. For most Americans inflation-adjusted wages have stagnated or fallen, while corporate CEOs and bankers get fat on bonuses and can’t lose stock options.

China is the biggest problem. It subsidizes foreign purchases of its currency, the yuan, more than $460 billion a year, making Chinese products artificially cheap at Wal-Mart. The US trade gap with the Middle Kingdom has swelled to $250 billion.

Mercantilist growth in China and elsewhere in Asia has pushed up global oil prices nearly five fold in six years, and the US oil deficit is now $350 billion and rising.

To raise our kids, finance a huge trade deficit and generally live beyond our means, Americans borrowed from foreigners.

Essentially, the banks wrote ever-more creative mortgages and extended excessive credit card and auto loans. The banks bundled those markers into highly complex bonds, designed to generate fat paydays for loan brokers and bank executives, and sold risk-laden securities to foreign governments, insurance companies, pension funds, and wealthy investors.

When the worst of the bogus bonds collapsed, those backed by risking adjustable rate mortgages, the banks got stuck with billions of yet unsold bonds. Bear Stearns collapsed, and the Federal Reserve loaned the banks and Wall Street securities dealers $600 billion against shaky bonds on a 90-day revolving basis. That essentially socializes the banks’ losses on bad bonds.

You have to love Ben Bernanke’s ideas about free trade and capitalism. If you are an autoworker and lose your job to Korean imports, as a good economist, he tells you to go to school and find another job. If you are a New York banker caught paying yourself too much and run short of foreign investors to fleece, he makes you a big loan lets you hunt for other unwitting clients.

Now foreign investors are nervous about all the money they have lent Americans and the integrity of US banks. They are fleeing dollar investments for euro-denominated securities, gold, oil, and just about anything sounder than the greenback.

Americans are forced to cut back, not just on purchases of cheap Chinese coffee makers, but also products made in America. That pushes the economy into recession.

Digging out requires us to cut the trade deficit and clean up Wall Street. Simply, we need to burn less gas, balance commerce with China and live within our means.

We can either let the price of gas double to force conservation or accept tougher mileage standards. Fifty miles a gallon by 2020, instead of the 35 currently planned, is achievable, but means more hybrids and lighter vehicles.

As long as China subsidizes the sale of yuan to Wal-Mart and other US importers, the US Treasury should tax dollar-yuan conversions. When China stops manipulating currency markets, the tax would stop. That would reduce imports from and exports to China, create new jobs in the US, raise US productivity and workers incomes, and reduce the federal deficit.

Ben Bernanke has given the banks a lot and received little in return, except a lot of bad loans. He should condition the Fed’s largesse on reforms at the big banks, even if that means lower pay for Wall Street big wigs.

Let the bankers try earning their money. Just like the rest of us.

Peter Morici,

Professor, Robert H. Smith School of Business, University of Maryland,

College Park, MD 20742-1815,

703 549 4338 Phone

703 618 4338 Cell Phone

pmorici@rhsmith.umd.edu

http://www.smith.umd.edu/lbpp/faculty/morici.html

http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm