Updated Sunday, June 28, 2009 11:18 am TWN, By Arthur I. Cyr, Special to The China Post

U.S. 'recession and regulation'

At the same time, the openness and flexibility of American financial policies regarding currency control for more than one-half century, combined with sometimes startling determination in seeking to open foreign markets, have proven very beneficial over the long term. The restrictive efforts to control national currency practiced by Britain before World War II, and in extreme fashion by Japan since that time, have proven much less effective and profitable. In the case of the United States, promotion of capitalism has been very congruent with generally successful foreign policy and growth of prosperity at home and abroad. Arguably this has particularly important significance for Asia, where investment and trade relations are growing rapidly.

Second, steady interest-rate cuts have diminishing positive effect. During the Great Depression, British economist John Maynard Keynes warned about what he described as the “liquidity trap.” A slowing economy is like to a great sailing ship trapped in a calm windless sea. As interest rates approach zero, government loses fundamental leverage. In this context, the recent indications of rising market interest rates are reassuring concerning expansion of demand and recovery, contrary to much commentary.

Bernanke has been aggressive in asserting fresh financial leadership. He has actively promoted global cooperation, especially among the G-20 rich nations, including financial swap agreements. Interplay with Bank of America and other firms reflects commitment to managing private capital for the public good. Switzerland and other governments are cooperating in promoting financial transparency.

Third, strong New Deal style government regulation is essential. In retrospect, abolition in the mid-1970s of fixed brokerage commissions and in the late 1990s of the Glass-Steagall Act, which segregated commercial banking from other financial services, were very serious mistakes.

During the presidential campaign, nominees Obama and Sen. John McCain emphasized the importance of economic regulation, and Congress collectively is now doing the same. Simply bailing out failed financiers is not enough.

Arthur I. Cyr is Clausen Distinguished Professor at Carthage College in Wisconsin and author of 'After the Cold War' (NYU Press and Palgrave/Macmillan). He can be reached at acyr@carthage.edu

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