The series of recent US bailouts represents, in the most literal sense, the end, for practical purposes, of US private capitalism. Very soon, the US government will own the better part of the US securitisation market; much of the insurance market; all the risky parts of the mortgage market; and the relevant parts of the wholesale money markets. People say "There must be much tighter regulation of financial markets in the future", but, as my co-guest pointed out on Bloomberg yesterday lunchtime, since the US government has nationalised all the relevant parts of the US financial services industry, the question of regulation doesn't really arise!
No-one should under-estimate the implications this will have for international politics for decades to come. The US government has decided it could find $1,000,000,000,000 to bail out rich lenders that had made bad decisions (shareholders have been wiped out, but those that lent too much - one of the errors at the core of the problem - have been saved!). In the future, US taxes will need to service this debt. What argument is anyone going to be able to offer as to why these taxes should be paid by the poor? Higher tax rates for the wealthy in America will represent social justice - otherwise we will be taxing the poor to fund subsidies paid to the rich! Again, who is going to be interested in the future when some fancy Wall Street type sits in a TV studio and criticizes subsidies paid out to farmers or car workers? You got paid $1,000,000,000,000 to bail you out! Who are you to complain about a measly few billions to help out someone else? Similarly, wealthy Americans in the future had better pause a moment before complaining about a few paltry dollars given to single mothers or young unemployed boys on benefits. You got paid $1,000,000,000,000 to bail you out! Who are you to complain about money that people use to buy food?
Politics will be profoundly affected by this. It must. More than that. It should.
Another interesting point is how close to the Chinese model the US model has become. State capitalism (i.e. the state providing the capital to fund businesses), as opposed to private capitalism (involving private capitalists), appears to be all the rage. People wondered whether state capitalism could survive without democracy, but it seems that private capitalism could not survive with democracy. The intellectual implications of this may take decades to be worked through.
The US administration's decisions here seem little short of shambolic, and the result is a disaster. Events have driven them from one act to another, without a plan, without a goal, each time only trying to shore up matters to the end of the week. What was the point of saving Bear Stearns, in retrospect? It was supposed to prevent chaos, but make no mistake: this current scenario is pretty much as bad as it could get. There would always have been the option to nationalise absolutely everything bad!
In a market economy, people take risks, and when those risks go bad the people that made the bad choices have to suffer. People say: but what about all the innocent companies that dealt with the fools that went bust? Well, what about all the innocent shopkeepers etc. that serviced the populations of mining towns or car workers or in rural communities?
So, am I saying the authorities should have twiddled their fingers whilst the financial system collapsed? It is now being considered whether a rescue package in the UK, similar to the US scheme, should be pursued? Am I recommending that nothing be done?
Far from it! My challenge to policymakers is this: If you really had $1,000,000,000,000 to chuck around (despite all the claims that government debt levels were maxed out - claims I have been rubbishing for months, to much derision from others) - if you really have these absolutely incredible extra sums to spend, is this truly the best way to spend it? Or is it chucking good money after bad? If the UK government decides it needs some more humble sum - let's say just £100,000,000,000 - why is this the best way to spend that money? Might it not be better to let the fools and the unlucky go bust, then to spend these gargantuan sums on tax cuts to provide relief to the real economy? Indeed, since it is real economy problems that lie at the root here, mightn't tax cuts even turn some of these bad debts good?
Another thing. Japanese debt to GDP is around 175 per cent. That is a legacy of sustained fiscal action - large budget deficits - through its period of deflation in the 1990s. We are increasingly likely to face a similar scenario. For all that many readers doubtless have thought my pieces about the need for larger fiscal deficits eccentric and far from the policy debate, the reality is this: fiscal deficits are going to be huge and sustained. Forget all this nonsense of whether UK debt break Gordon Brown's fiscal rules. That paradigm is dead. UK borrowing this year will probably reach £70bn, setting aside any adjustments for financial sector bailouts. Next year it may be closer to £100bn. The fiscal rules are gone.
Cameron and Osborne have resisted strong pressure to support silly regulation (e.g. the short selling restriction) and Cameron has urged that we should not allow the financial crisis to be used by the enemies of the Market. Good for them. But what do they want do instead? I want us to oppose any more bailouts, and say that we would use the money saved to provide temporary tax cuts to assist the economy through what will be a nasty recession. That's my plan. If our Shadow Treasury team doesn't like that, and isn't going to go along with Brownite drift to destruction or crisis-driven nationalisation of private capitalism, what is their plan?
Obama says "It is critical at this point that the markets and the public have confidence that their work will be unimpeded by partisan wrangling, and that leaders in both parties work in concert to solve the problem at hand." That is utter nonsense. Does he think that normal politics is some kind of pointless game, with debates for fun, and that the process of adversarial political conflict doesn't improve policymaking? And he calls himself a "Democract"? Consensus is what you seek when matters are unimportant, and you can afford to put things through on the nod without debating them properly or considering all the alternatives. This is a matter far too important for consensus. We need the Conservative Party to come up with its alternative to Brown's surrender to events. We need a coherent plan.
Guys, it's time. We need to know what it is that you would do, and we need to know now.
