Washington's "solution" : have we all become socialists now?

Business Times - 23 Sep 2008

The US$700b financial bailout plan seems more like a 'European' policy - straight out of the book of, say, a socialist Swedish government


A FEW weeks ago during the crisis in the Caucasus involving Georgia and Russia, Republican presidential candidate John McCain wanted to proclaim his support for the pro-American government in Tbilisi. He declared: 'We are all Georgians today!'

Against the backdrop of the most devastating economic crisis since the Great Depression and as the Bush administration proposed what could become the largest financial bailout in United States history, it is doubtful that anyone in Washington or Wall Street is spending too much time thinking about the fate of Abkhazia or South Ossetia.

And as the plan to give the authority for the US Treasury Department to buy up to US$700 billion in mortgage-related assets - it will raise the national debt ceiling to US$11.3 trillion - is debated, the decision to provide US$1 billion in financial aid to Georgia is not going to be noticed.

As the legendary late Senate majority leader Republican Everett McKinley Dirksen once observed: 'A billion here and a billion there, and pretty soon you're talking real money.'

Yes, indeed! The US$700 billion that the administration estimates will cost to buy the risky investments of financial institutions in coming months is more than what the US is spending on defence (including two wars) this year. In fact, most experts predict that the bailout will probably end up costing more than US$1 trillion in American taxpayer money.

Clearly, last week was the worst for financial markets since 1929. There is gloom in the capital city of what is (was?) the most economically powerful nation on earth over the decisions made in recent days.

I have resided in Washington for close to two decades and have gotten used to the self-assured, if not haughty, attitude exhibited by US officials here. Even in the aftermath of the terrorist attacks in Washington and New York on 9/11 and in the midst of the worst days of the war in Iraq, government spokesmen continued to exude a sense of self-confidence, always turning up with a winning spin to explain this or that setback, promising that America would find a solution and win the day.

But that kind of self-assurance and winning streak is nowhere to be found in Washington today. At times it is seems as though officials and lawmakers, Republican and Democrats, including Treasury Secretary Henry Paulson and Ben Bernanke, chairman of the Federal Reserve - not to mention President George W Bush and the leaders of the US Congress - could not explain what exactly is happening here and how all of this is going to end.

And while Mr McCain and his rival, Democratic presidential candidate Barack Obama, have been trying to demonstrate to the American voters that they would be successful crisis managers and understand the economic problems facing the nation, they still have to come up with a coherent plan.

Moreover, the two need to explain how they would be able to pursue their ambitious government-financed programmes - Mr Obama's expensive plan to reform the healthcare system; Mr McCain's vision of a permanent US military presence in the Middle East - as the American twin deficits continue to expand.

Who exactly is going to pay for all of these costly programmes? The US taxpayer already pays a huge bill for the bailouts, the war in Iraq, the post-hurricanes reconstruction - and, yes, the aid package for Georgia. Now, on top of that, Americans are going to experience more house foreclosures, job losses, stagnant incomes and high gas prices.

But perhaps the most dramatic and indeed historic change in Washington has to do with the way the old economic paradigm of free markets, privatisation and anti-regulation that has dominated economic policymaking here since Ronald Reagan's presidency (and through the Republican and Democratic administrations that followed it) seems to have vanished into thin air.

The American Economic Model or the Washington Consensus that has been celebrated in economic sermons that American officials and pundits have been offering to the rest of the world - the Chinese, the Russians, the Latin Americans, and the East Asians - has suffered a devastating blow. The Chinese, Russians and Latin Americans have been advancing their own model of economic development.

And the irony of all of it is that an administration led by staunch free-market believers - former oil business executives George W Bush and Dick Cheney, former Wall Street operator Henry Paulson and former economics professor Ben Bernanke - is leading a giant government intervention into the private marketplace, presiding over the deaths of prestigious symbols of American capitalism (Lehman Brothers; Merrill Lynch), the nationalisation of financial behemoths like Fannie Mae and Freddie Mac and AIG, and bailing out companies such as Bear Stearns.

These are the kind of policy moves that not so long ago American economic pundits would have described as 'European' associated with the socialist government of, say, Sweden.

'Is that Commissar Paulson who is standing next to Bush?' asked one television commentator as he watched the grave-looking President Bush and his economic advisers, looking grave and sleep-deprived, announce the latest decision to use the power of the government to assist the private sector.

It seems self-reliance, ingenuity and hard work - the central tenets of the American Economic Model - have been tossed by the wayside.

While the Democrats, including Barack Obama, have been suggesting that the current economic crisis should be seen as the responsibility of President Bush and the result of the free-market policies initiated by Ronnie Reagan, it would be misleading to claim that the Democrats were fierce opponents of laissez-faire economics.

Indeed, when Senator Obama appeared with his top economic advisers - including former economic whiz-kids of the administration of Bill Clinton such as former Treasury secretary Robert Rubin - it was difficult not to recall that when the provisions of the Glass-Steagall Act of 1933 that prohibited a bank from owning other financial companies were repealed on Nov 12, 1999 after a push by a McCain supporter, it was signed by President Bill Clinton with Secretary Rubin, a veteran Wall Street investment banker, standing next to him.

Similarly, both Mr McCain and Mr Obama have been recipients of huge contributions from the financial industry; in fact, the Democratic candidate has received more cheques from Wall Street than the pro-business Mr McCain, who has been one of the leading supporters of deregulation in Congress.

Reflecting this Washington-Wall Street political love affair has been last week's spectacle on the election campaign trail: Mr McCain said two of Mr Obama's aides had ties with former executives of the mortgage finance giants Fannie Mae and Freddie Mac, which the government nationalised two weeks ago.

'Senator Obama did nothing and actually profited from this system of abuse and scandal' by accepting contributions from Fannie Mae and Freddie Mac employees, Mr McCain said.

But for some reason, he forgot to mention that three of his campaign managers served as lobbyists for Fannie Mae and Freddie Mac.

Indeed, Mr McCain seems to have transformed himself from a former ardent deregulator into an anti-Wall Street populist, promising to punish the 'greedy' executives in Wall Street and fire the head of the Securities and Exchange Commission (SEC).

To paraphrase Mr McCain's earlier comments regarding the conflict in the Caucasus: 'We're all socialists now.'

But neither Mr McCain nor Mr Obama will be occupying the White House before Jan 20 next year.

So the responsibility for what Washington will or will not be doing in the coming weeks will continue to rest on the Bush administration and the Democratic-controlled Congress.

First, Congress, before leaving for recess next week, will have to approve the legislation that would turn Mr Paulson and Mr Bernanke into Economic Commissars with an authority to dispense billions to the distressed financial sector as they think fit.

Any opposition to the plan may come from conservative Republican lawmakers who have expressed previously strong opposition to the idea of American taxpayer money being used to assist irresponsible investors - the ultimate example of a Moral Hazard. But, in these rushed times, the legislation is likely to pass.

It is not clear, however, if Washington will be able to provide Wall Street with the two ingredients that seem to be missing now - trust and information, a lack of which explains why no one is willing to provide credit to companies and consumers who need it.

If no one knows what's going on in the economy and how much this or that entity is worth, and those who provide the information about these things cannot be trusted, it's difficult to see how the financial markets could be revived anytime soon.

Moreover, the steps the US government has decided to take against short-sellers is creating uncertainty on Wall Street. It could create disincentives for investors to return to do business.

And after so many economic forecasts proved to be so wrong, only a fool would feel confident enough to predict if and how the bailout programme would impact on the long-term health of the economy.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.


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