Comrade Bush: The Most Big Government US President since World War II

History is in making as we you read this. What we know so far is that as a response to the most serious financial crisis since World War II, President George W. Bush has initiated the largest expansion of peace-time government the free world has ever known. Perhaps the Chinese brainwashed him at the Beijing Olympics....he has made Hugo Chavez look like Ronald Reagan.

Over the last few months, the US government has bailed out Bear Stearns with a $30bn financial guarantee given to its acquirer, nationalised the two largest mortgage financiers in the world (representing over 85% of US residential mortgages) and guaranteed their $5,400bn debt, nationalised the largest insurer in the world (whilst giving it a $85bn loan) and given a blanket guarantee of $3,400bn to US money market mutual funds.

But, as you will probably have heard by now, its not stopping there. Bush and Treasury Secretary Paulson (the former head of Goldman Sachs) have initiated a program to directly bail out the banks that made huge mistakes: he’s going to buy all their dodgy assets and put them, most probably, into deep freeze. That way, the banks can rid themselves of their problem assets and start afresh – they can get back to “business as usual”. The total cost to the US taxpayer: somewhere between $1,000bn - $2,000bn depending on the final details of the bank bailout plan.

Just to put this into some perspective, the US federal budget deficit is already projected to be around $425bn this year, its highest ever (but it would have been manageable had it stopped there). Bush’s financial interventions are already expected to cost $200-300bn extra this year alone, with an ultimate cost of many times that. There’s no question that his successor will have to raise taxes. On the national debt front, Bush was already projected to leave office with the highest public debt/GDP ratio (68.2%) since Harry Truman. But now, if you add the $5,400bn Fannie and Freddie debt (as Congress has already demanded) and the $3,400bn of mutual fund guarantees, that ratio would be around 192%, the highest in the developed world, and somewhere up there between Zimbabwe and Lebanon.

This is not to argue that this financial crisis is not serious and unprecedented. That is obvious for all to see. But the answer is not for government to get knee-deep into the workings of the free market economy and bail out those that made bad decisions with taxpayers money. The lessons to be drawn are that financial markets need to be more transparent, with tougher scrutiny and enforcement by the authorities. Tim Montgomerie’s insight yesterday was also spot on: bankers are a lot smarter than the regulators. We need better regulation, and smarter regulators. We need to encourage private sector solutions (such as Lloyds/HBOS, BOA/Merrill) and not be afraid to let companies fail if they screw up (such as Lehman Brothers – a moment when I thought Bush was actually coming to his senses).

Bush’s bailout will seemingly lessen the force of this financial hurricane, but the ultimate cost paid by ordinary US citizens will worsen. Once it sinks in, the US dollar will dive, taxes will rise, less will be spent on the military (endangering national security), inflation will rise (as the US inevitably trys to inflate itself out of its huge national debt burden) and unemployment will soar (already 6.1%, the highest in 14 years). But most of all, Bush has insured that the next financial hurricane will return a lot quicker than it would have otherwise as the only lesson global financiers would have learned is that, when the going gets tough, the taxpayer bails them out.

Given the size and influence of the US economy, the repercussions to the UK are not to be underestimated. In the post-war period, we have often taken our financial lead from the US – as we will in this instance too. The economic clock will be turned back to more state intervention, bureaucracy and control.

For all its problems over the last couple of years, the global economy has enjoyed extraordinary prosperity and growth over the last three decades. As the world, led by the US and UK, has deregulated, privatised, cut taxes and government spending, more people have enjoyed an increase in living standards than at any other time in world history. But now, due to the biggest of Big Government peace-time interventions we have ever seen in the free world, Bush has put all that at risk.

Despite Bush’s social conservative successes and his strong response to 9/11, his handling of this financial crisis will be his unmaking. He has decisively moved the American political fulcrum to the Left, and left an almighty economic mess that will take years to undo. The global capital of Big Government today is not Moscow or Beijing, but Washington DC. I am not sure what happened to the George W. Bush that the American people twice elected and I supported, but we will all pay the price for his economic policy failures.