Business Times - 16 Oct 2008
If economic crisis is not contained, next US govt may alter notions of free-market America
By LEON HADAR
LIKE most journalists, I like irony. We journalists insert 'ironically' into a sentence as a way of underscoring that things didn't work out as planned, such as in: 'Ironically, US Treasury Secretary Henry Paulson had initially been strongly opposed to the idea of federal government investing directly in private banks, which is exactly the policy that the Bush administration announced on Tuesday.'
Or in: 'It's quite ironic that the pro-free market Republican administration of George W Bush that once upon a time was even promoting the idea of privatising the national pension scheme (Social Security) is now presiding over what President Bush described as an 'unprecedented and aggressive' plan to partly nationalise nine major American banks.'
Yes. Some delicious ironies indeed. And there are so many more on the list. Such as the fact that the plan to shift the balance of financial power from Wall Street to Washington has been advanced over by Mr Paulson, a top former Wall Street banker.
Or that the Bush administration seemed to be following the leadership of detested Old Europe whose 'statist' economic policies (not to mention its 'defeatist' foreign policies) have been derided by laissez faire Republicans wearing their favourite Adam Smith ties.
Or that the Republicans who under president Ronald Reagan arrived in Washington in the 1980s to dismantle the New Deal economic policies that had been devised by president Franklin D Roosevelt in response to 1930s Great Depression, ended up adopting a similar set of policies, most dramatically the investment of US$250 billion of taxpayers' money directly in America's banks in exchange for an ownership stake as part of an effort to prevent Great Depression II.
To put it differently, the worst financial crisis since the 1930s required the same kind of policies that were applied by president Roosevelt in resolving that first crisis.
Or that a day before the unveiling of the dramatic proposal that reflected economic principles of John Maynard Keynes - and not by Friedrich Hayek or former Nobel prize winner Milton Friedman - it was announced that this year's Nobel Prize in economics was awarded to one of America's leading Keynesian economists, Paul Krugman. Prof Krugman has been a trenchant critic of the Bush administration's economic policies and only last week called upon Mr Paulson to partly nationalise American banks. Move over Hayek and Friedman, we're all Keynesians now?
Or that the so-called Masters of the Universe, the legendary figures who were celebrated on the pages of Business Week and People, were now on the receiving end of government welfare, being told by government officials in Washington to follow their orders or else!
Hence, according to news reports on Monday, Mr Paulson told the heads of the nine banks (Bank of America, Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo) who agreed to participate in the programme that consideration of national economic interest required them to support the plan.
But then you have to give Mr Bush and Mr Paulson credit for their willingness to dispense with their economic dogma and adjust their economic policies in response to the depressing realities in the financial markets.
Indeed, it was becoming clear that notwithstanding Monday's bullish mood in Wall Street, credit markets remained frozen and investors and officials were continuing to look into the economic abyss.
Thus, Mr Paulson had no other choice but to take a bold and risky move which Mr Bush described on Tuesday as an 'essential short-term measure to ensure the viability' of a distressed financial system.
In fact, US officials emphasised that the - take your pick - extraordinary or dramatic or momentous or historic or unprecedented proposal runs contrary to free-market principles they espouse.
Mr Paulson called parts of the proposal 'objectionable'. At times, he sounded apologetic. 'We regret having to take these actions,' he said.
But Americans were assured the measures would be temporary. 'The government's role will be limited and temporary,' Mr Bush said. 'These measures are not intended to take over the free market, but to preserve it.'
Reflecting the way Washington has been transformed into a follower instead of the leader in the international economic system, the US plan followed similar moves that were announced by European leaders on Monday and were part of the 'collaborative' strategy to restore the confidence among investors that the United States and the other G-7 officials discussed during the weekend in Washington.
At the same time, the decision is a recognition that without a direct and extensive government intervention in the economy, the current economic recession could ignite more layoffs, home foreclosures and personal and business bankruptcies, and turn eventually into another Great Depression that could devastate the foundations of American capitalism.
The conventional wisdom in Washington is that the move announced on Tuesday was temporary and that when the economic conditions improve, Washington would sell the shares.
But if the economic crisis is not be contained any time soon, it's not inconceivable that the next White House and Congress, which are expected to be controlled by the Democrats, will embrace other European-style policies, such as a government-backed healthcare programme, that could alter the traditional notions of free-market America.
Sweden on the Potomac? Watch this space.
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