Monday, September 29, 2008

More on the bailout

Yes, I know the thing is going to the House today. You can read the whole proposal here. I wrote about the new, improved plan here but nowsome points we have not heard much of here.

All the following is from yesterday's Sunday Herald out of Scotland. The BBC also touches on the wider effects of our financial problems/
Bonfire of the vanities THE ECONOMIC MELTDOWN: Why did the deal to rescue the American economy go up in flames? James Cusick rakes through the ashes

George Bush is good at creating fear. He used fear to win approval for the Iraq war in 2003. He used the same speech, with just a tweak here and there, to warn that a collapse of the largest economy in the world couldn't be ruled out if Congress backed away and killed off the $700 billion bail out package that has been on the table for a week.

As an insurance policy, while the Hill talked, Bush and Treasury Secretary Henry Paulson had dispatched David McCormick, to Asia. As the Treasury's senior official for international policy, McCormick's mission implausible was to reassure the Chinese, and other huge holders of US treasury bonds, that the US's markers were still good. Don't dump our bonds' and give us more time' would have been McCormick's basic message.

If China and other wealth centres in Asia don't like what they are seeing and hearing in Washington, these global investors can act. Saving the US won't be on their agenda. Central banks round the world could conclude the US is currently incapable of solving its problems. They would begin selling off their gargantuan holdings of US debt, sending US interests rates sky-high and producing an international run on the dollar that would cripple an already struggling economy. The rest of the global economy could only look on and pray as the effects of the failure rippled outwards from Washington and New York's banks.

Not much noise here about how much we are in hock to the Chinese. At this point, I say that George W. has sold us out pretty much to them. Not wanting to sound jingoistic here because the point is not that the Chinese bought our bonds. Someone else could have bought them and we would be in the same spot. No, the point is about taxes and Republican ideology. Instead of looking at taxes as meaning we pay as we go, the President used Treasury bonds as irresponsibly as a drunk with a credit card.

Three centuries of banking history … undone in one decade points out the banking problem extends beyond our shores:

EVENTS OF the past week have taught how the art of politics is sometimes ill-suited to reality. For example, as the US financial system hurtles towards the precipice, legislators and central bankers in Washington DC have been haranguing each other in different languages, each one it seems incapable of understanding the other.

Closer to home, politicians have struggled to find a response to the demise of the Bank of Scotland, an institution older than the UK, and one in which our economy and national culture are deeply entangled. It has suited no party to call this disaster by its proper name.

It has not helped that the loss of yet another major public company headquarters, with all its unspinnably-negative implications for the client business base, for jobs and for customer service, has been presented as a thrilling last-minute escape from a far worse fate.

Likewise, the mysterious processes that led to the end of HBOS have not made the result any more palatable. That the death of this institution should be agreed by Lloyds TSB chief executive Eric Daniels and Andy Hornby, the HBOS chief executive, over "a quiet drink" six weeks ago (if that was indeed when the decision was first made) seems grotesquely inappropriate.

For me, Call to sack HBOS directors and Labour’s glee at the fall of HBOS risks backfiring show the kind of political problems we avoided here. All which make our bailout sound a bit more palatable but palatable in the difference between being forced to spinach and drinking cod liver oil.

But this article also makes a point useful as we go forward in America:

And, to delve even further back, into the ancient historical period of 2001, there are dormant but still unanswered questions to be asked: why was the Halifax/BoS deal done on terms so beneficial to Halifax? Was the Bank of Scotland management at the time negligent in bidding for NatWest without a plan B? And what was the state of HBOS's checks and balances to ensure that no unacceptable risks were taken?

By "unacceptable" in this context, I mean potentially fatal.

Finally:

Bailing out on the old capitalist model

IN 1776, a moral philosophy professor from the University of Glasgow, Adam Smith, wrote the first seminal account of economics. His book The Wealth Of Nations was published at the start of the industrial revolution, yet Smith's foresight appears extraordinary. He said "All money is a matter of belief", an observation, which had it been quoted in Washington last week, would have met with universal approval.

As key figures in the Democrat and Republican parties argue over the $700-billion bail-out package drawn up by the US Treasury secretary, Hank Paulson, there should be agreement that because the world has lost nearly all belief in America's banks, something has to be done to restore that belief.

***

While the UK government has yet to suggest anything as radical as Paulson's rescue operation, the UK Treasury and the Bank of England are engaged in bailing out banks and institutions that have indulged in extreme profit taking. But now there is a downturn, it seems that it is not the banks' fault but is the duty of the government to bail them, and the system, out.

The harsh economic reality is that there has been no sudden failure. The problem lies in a decade and more of deregulation which, were it fair and just, would see every banker who received multi-million dollar bonuses being told to repay the money to bail out the US economy. Of course, any such demands would end up in corporate America's rubbish bin. The ordinary tax payer doesn't have the option of refusing to pay up and the US economy has run out of time to look at other options.

A deal should be agreed tomorrow before Wall Street opens for business. But the warnings should be noted. When the rules of the new capitalism become evident, and the banks regenerate, ordinary taxpayers should be given a guarantee that they will not be required to foot the bill in another crisis.

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