WORLD leaders are in New York — not to find out first hand what is happening on Wall Street but for the annual UN General Assembly. The truth is, however, that most are far more concerned about the market volatility and how it will affect their economies than with any of the issues on the UN agenda.
The renewed volatility in the markets, with shares and the dollar again diving, is wholly due to fears that the politicians in Washington will not deliver on the massive $700-billion bailout package devised by US Treasury Secretary Henry Paulson. On Monday, those fears wiped out all the gains made on Friday following the announcement of the plan.
Unfortunately there is every reason to believe that the politicians will stall the plan because, with elections only six weeks away, neither the Republicans nor the Democrats can resist the urge to use the mess to beat political drums. The Democrats blame “failed’’ Bush administration policies for the turmoil and insist that their support for the rescue package will have to come with strings attached; Democrat Nancy Pelosi, the House speaker, wants the plan to include provisions for job creation and help for the taxpayer. For many Republicans, equally alarmed at the cost of the plan, it goes against all their free-market principles. They believe that collapsing banks and institutions should go to the wall.
The Republicans could counter the Democrats’ insinuation that the Bush administration was responsible for the deregulation that enabled the chaos to happen. It was the Clinton administration that deregulated the US financial industry. Its Financial Services Modernization Act in 1999 swept aside all restrictions on the integration of American banking, insurance and stock trading and was largely responsible for the economic boom that is now associated with the Clinton era. But Republicans can hardly blame Democrats for that; they supported the act at the time and still believe passionately in deregulation. However, they have been anything but consistent. President Bush helped bail out Bear Stearns in March, then let Lehman Brothers go to the wall; he backed Freddie Mac and Fannie Mae, supported insurance giant AIG, helped broker a rescue plan for Merrill Lynch and then came up with a package of staggering proportions for state support for the market. For a president committed to the free market, it looks inconsistent. That inconsistency, now fully in the spotlight, may still do massive damage to Republican hopes in November.
Meanwhile, there is a powerful feeling among the general public that the bailout rewards rich bankers for their selfishness and incompetence and is thus immoral. The price of government intervention may have to be an end to deregulation. There is no reason either why the government should not take equity stakes in banks in return for buying up their bad debt — which can be sold when the market revives. It would go some way to covering the cost to the taxpayer. All this will be thrashed out in Congress and will mean that whatever help is finally provided is going to take time — which is not what the market wants to hear. But it has to be. At the end of the day, even if they are clearly playing to an audience of soon-to-be voters, America’s politicians are not out to sabotage a rescue deal. It is simply that they realize that knee-jerk responses and blank checks are not answers.
