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).
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