Those US Republicans who questioned the wisdom of the President Bush’s $700-billion financial bailout package may be right after all. Quite apart from the questionable ethics of rescuing bankers from the consequences of their own greed and incompetence, they questioned whether such a move would restore confidence to the market and stabilize it. How long, they wondered, would it be before it again collapsed?
They did not have to wait long to find out. A weekend is what it took. Last Friday, it was all smiles in Washington, on Wall Street and in stock exchanges around the world as the US House of Representatives did a U-turn, voted the bill through and sent it to President Bush to sign. But by Monday, pandemonium had again broken out in the markets. Analysts said that the chaos was because the Europeans had not come up with a rescue package of their own but the facts do not support that. Shares on Asian and the New York markets did not plunge on Monday purely because of fears about recession in Europe; they plunged because of fears about recession at home — the result of a banking system that was finally seen to be in gridlock. There is good reason for the market angst. With panicking banks having stopped lending both to each other and to business, the financial wheels needed to facilitate international trade are also in danger of grinding to a halt. In Japan, the situation is acute; local companies need dollars to purchase goods, but cannot get them because US banks will not lend them to their banks. Yet, yesterday, markets in Europe were more stable as investors snapped up bargains, although banking shares were still on the down.
This frenzied down-up, down-up activity on the markets plus the message to governments from the banking industry that the $700-billion bailout is not enough to resolve the crisis and that they will have to come up with much more (seen in the UK yesterday when top bankers berated the finance minister for not coming up with a rescue plan to their liking) is dangerous — not merely because of the damage it is doing to economies. There is an even bigger danger. The chaos and the behavior of investors and financiers, not least their seemingly insatiable demands for money from governments, threatens the very nature of the free-market system. Belief in that system is being eroded and that is very worrying.
As it is, bankers and financiers, acting like villainous, greedy cuckoos, screaming for ever more food, have made themselves the most despised people on earth. Meanwhile, governments are being forced to effectively nationalize banks and institutions in order to save people’s jobs, homes, pensions and investments and central banks are having to take over the banks’ role as a lender to keep businesses up and running. In Iceland such is the scale of the crisis that the government is talking of the country itself facing bankruptcy. The consequence of all this is that people and governments may start to believe that the private sector has proved to be incapable of running the world’s financial systems and that these should therefore be left to the state sector instead.
That is a very bad idea. What is needed in the world’s economic life support systems is transparency, not state control. Twenty years ago, communism came tumbling down under the weight of its own incompetence and malevolence and state-controlled economies were shown to be an unworkable disaster. That remains true. The failures of deregulation should not encourage anyone to think that state control is the answer to the present crisis. What is needed is confidence — and the best way to confidence is through transparency, in which banks and financial institutions can be seen to be doing what they say they are doing, and have sufficient assets to cover all eventualities.
