This paper addresses several interconnected topics in international economics. It begins by drawing parallels between a current account surplus and foreign investment, explaining how a favorable trade balance reflects a vested economic interest between nations. It then examines moral hazard problems that arise during financial crises, particularly regarding government bailouts of financial institutions. The paper proceeds to outline steps proposed to prevent exchange rate crises, including federal intervention, regulatory oversight, and currency management strategies. Finally, it analyzes the motivations behind Canada's proposal of the Canada–U.S. Free Trade Agreement and Mexico's support for NAFTA, highlighting the economic, cultural, and globalization-related factors driving both countries' trade decisions.
There are definite parallels between a current account surplus and a foreign investment. In fact, it is not incorrect to consider the former as equivalent to the latter. The reason such a statement is accurate lies in the very definitions of these terms, which involve both denotative and connotative dimensions.
The congruence between a foreign investment and a current account surplus is grounded in the denotation of a current account. This term is generally understood as a record of the services and goods that flow into and out of a particular country, as outlined in Gerber's International Economics. In terms of connotation, this concept is suggestive of trade and of international commerce in particular. The goods and services that enter and leave a country are connotative of the forms of trade that countries engage in internationally.
Thus, a current account surplus is akin to a favorable trade balance between international entities. If one country has such a surplus, it means that it has a favorable balance of trade. That balance can be considered analogous to an investment by another country — specifically an investment in goods or services. The latter country certainly has a vested interest in the monetary affairs of the former, and one which is advantageous to the former. That relationship can in some instances be advantageous to both countries, but it is certainly beneficial to the country that holds the current account surplus.
Several moral hazard problems emerge in response to a financial crisis. One of the most prominent pertains to the nature of governmental intervention during such a crisis. There is a danger that financial institutions assisted by the government can take that help for granted. Consequently, they have less incentive to be fiscally responsible and moderate, and a greater incentive to take risks, since they know they have a proverbial safety net in the form of potential federal intervention.
Ultimately, the moral hazard exists for the federal government and the nation as a whole. Banks can become accustomed to government influence and aid in times of need. The government then faces a situation in which it may need to bail out banks during crises to avoid an even larger national crisis. Alternatively, it may face situations in which assisting financial institutions is disadvantageous because those institutions will essentially be taking advantage of that help.
The financial institutions face a similar dilemma: they do require assistance on one hand, yet may become dependent upon it on the other. All of these problems, viewed from varying perspectives, are intrinsically related. The moral dimension of these problems centers on the question of whether it is right for the government to assist institutions that can be deliberately irresponsible for their own gain. In some instances, it may not be.
"Federal intervention and regulatory steps to prevent crises"
"Canada's economic and cultural reasons for the FTA"
"Mexico's economic incentives for supporting NAFTA"
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