Such is the panic that has gripped Americans, in no small measure thanks to the dire disaster warnings of President George W. Bush himself, many are extremely grateful that Congress has finally passed the rescue package to bail out US banks by buying their “toxic loans” at a likely cost to the US taxpayer of up to $700 billion.
“Main Street” resents the bailout of Wall Street but there is a general acceptance, albeit through gritted teeth, that if the massive financial rescue had not gone ahead, everyone would have suffered from an economic collapse and this is almost certainly true.
The problem is that America has been here before and each time it has been the ordinary Joe Public who has picked up the tab. The Wall Street Crash of 1929 had a variety of causes but what spun the markets into collapse was the existence of a pyramid of holding companies and investment trusts that had no other purpose than to hold shares in each other.
Thus the profits in a rising market were magnified as shares rose. However when the markets turned down, the inverse effect kicked in and this apparently magical method of making money led to a rapid collapse of the house of cards that these companies had constituted.
Part of the problem with the 1929 crash was lack of regulation. The US financial authorities, of course, acted to ensure that such a disaster would never occur again. And with the occasional hiccups, for a little over 50 years, there was no financial meltdown. But in 1982 Congress was persuaded to liberalize regulation of the Savings and Loan (S&L) industry to encourage its growth, hitherto hindered by “unnecessary limitations” on where and how it could invest. The result eventually was the collapse of some 650 of these S&L companies — once a byword for prudent investment. The cost to the US taxpayer was ultimately $1.4 trillion — which given inflation is a significantly larger sum than that being laid out this week to rescue Wall Street from its latest piece of snake-oil salesmanship.
The common denominator to each and every financial collapse worldwide — and the Americans are not alone in suffering these disasters, which began with the British South Sea Bubble of the 1720s — is not, however, simply lack of regulation. It is rather the idea that fortunes can be made at a distant remove from economic fundamentals. In essence banking involves providing the funding to allow a business to produce goods that it can sell at a margin, repay the loan and take the difference to invest in further production and productive capacity. Bankers and indeed shareholders invest in good companies. They are the only absolute producers of value. There will be other investment opportunities such as in commodities like oil and gold, but in essence all of these investments are made in visible, calculable assets.
The minute the investment itself becomes invisible, it can neither be properly regulated nor assessed. That is what has produced this latest financial wreck.
