In the early hours of yesterday morning, as he was flying back from America,
Gordon Brown walked to the rear of his Boeing 777 to address reporters in
the cheap seats.
The global financial system was teetering on the brink, lawmakers in
Washington were at loggerheads over what to do and the reporters, tired
after a long trip, were getting stuck into the champagne. If ever there was
the moment for an inspired bon mot, this was it.
Not for Brown. With typical leadenness, he reached for a statistic. “There is
a 90%-95% correlation between economic indicators and what voters think of
the government,” he told the assembled media, who promptly concentrated on
their fizz.
In his own dour way, however, Brown had hit the nail on the head. The banking
meltdown besetting the world was moving beyond Wall Street, the City and
other financial centres. It was moving beyond consumers’ immediate fears
over their high street accounts.
By fateful symmetry, the economic crisis was colliding with politics on a
momentous scale. When the meltdown went critical last week, America was
entering the final 40 days of the election to choose its next president. The
wrangling over the biggest financial bail-out in history is now becoming a
battle over power and the soul of US capitalism that has dominated the West
in recent years.
Should ordinary taxpayers bail out the rich? Would delay hurt the poor even
more? Is the bail-out really socialism by the back door? In the White House
and on Washington’s Capitol Hill, Democrats, Republicans and presidential
candidates argued while smoke rose from the burning banks.
One US economist said decisions taken now would “shape the type of capitalism
we will live in for the next 50 years”.
The fallout also spells a changing political mood for Britain. Brown,
addressing the United Nations in New York, had declared the need for a “new
global order founded on transparency, not opacity” to control finance. “The
age of irresponsibility must be ended,” he said.
He should know, the Tories were quick to retort. As David Cameron, the party’s
leader, witheringly pointed out: “Yes, this prime minister has got
experience: he has got the experience of building up the biggest budget
deficit of any industrialised country; he has got the experience of
designing the regulatory system that failed to prevent the first run on a
bank in Britain in 150 years.
“He has got the experience of saying year after year, ‘I have ended boom and
bust’. And yet now we face really difficult economic circumstances. I don’t
think that is the experience we need right now.”
Members of the US Senate and House of Representatives argued into the small
hours over ways to stave off collapse in the financial system and appease
the anger of voters. A deal could be announced today.
In Britain the need for action was driven home as Bradford & Bingley came
under pressure with its shares falling to an all-time low. The Treasury is
expected to make an announcement today that it is nationalising the bank and
holding a fire sale of its assets.
Will the US rescue so far proposed work? Does Britain need a similar bail-out?
And how is the global political and economic landscape likely to change?
TO critics the original bail-out proposed by Hank Paulson, the US Treasury
secretary, was the most barefaced money-grab since Goldfinger, the James
Bond villain, tried to rob Fort Knox. In a plan that ran to only three
pages, Paulson asked for the power to spend $700 billion (£380 billion) of
taxpayers’ money buying up the dodgy assets that are dragging banks down.
The sum was almost as big as the entire economy of Australia and equivalent to
$2,300 for every person in the United States. Yet there was no mention of
help for homeowners nor room for outside scrutiny. His spending of the
billions, Paulson proposed, could “not be reviewed by any court of law or
any administrative agency”.
All that Congress and taxpayers got was a gun to their heads: agree the deal
or financial collapse will be much worse for you, Paulson warned.
Although his motives may have been well intentioned, the plan was a serious
political misjudgment. With an election looming, the Democrats were acutely
sensitive to accusations that the poor were being asked to pay for the
excesses of rich bankers on Wall Street. On the other hand, some Republicans
were appalled that the American capitalist dream appeared to be morphing
into a socialist nightmare.
One Wall Street trader, who made a small fortune betting on Goldman Sachs
shares, paid for newspaper advertisements showing President George W Bush,
Paulson and Ben Bernanke, chairman of the Federal Reserve, planting a flag,
Iwo Jima-style, in the graveyard of capitalism. Nationalising banks and bad
debt was tantamount to communism by the back door.
On the other hand, John Mikus, a homeowner from Houston, Texas, summed up the
mood of many of his fellow citizens: “Low-interest loans to homeowners and
small businesses, yes. Federal bail-outs of Wall Street banks and investment
firms, no. Americans should not be burdened with mega-bail-outs of the rich
and politically well connected.”
Bush tried to railroad the plan through by speaking in apocalyptic terms. “Our
entire economy is in danger,” he told the nation in a televised address.
“Major sectors of America’s financial system are at risk of shutting down .
. . Without immediate action by Congress, America could slip into a
financial panic.”
The public, however, balked at paying to rescue the bankers and financiers who
had largely caused the shambles in the first place. Protesters railed
against the Paulson plan outside the New York stock exchange. Thousands of
other opponents bombarded Congress with e-mails. One Democratic congressman
said calls from constituents were “running at 50% ‘no’ and 50% ‘hell, no’.
Out of 100 calls you are lucky if one of them is positive”.
Demonstrations were organised in 41 states. In Denver, Regina Jackson made her
point baldly. “I don’t want to bail out Wall Street millionaires,” she said.
“I say let them go bankrupt.”
Part of the fury — and the financial meltdown — stems from the strain that
households are under from rising debt and falling income. While incomes rose
steadily during the 1980s and 1990s, they have fallen in real terms for
lower earners since 2000.
To many Democrats it seemed as if Paulson, a former chief executive of Goldman
Sachs, the Wall Street investment bank, was looking after his own. In 2006
he had made more than $18m in bonuses at Goldman and many millions more in
the years before — during which time he had overseen trading in the sort of
“toxic assets” that now threaten financial collapse.
Speaking last week to Time magazine, Paulson defended his plan: “The average
American looks at this as being about Wall Street and they’re angry, and I’m
angry too . . . but the average American doesn’t understand the implications
this has for them: money needs to flow through the system.”
What the average American does understand, however, is that he or she has a
vote — which is going to flow through the political system on November 4.
Paulson had failed to appreciate that neither the presidential candidates
nor the members of Congress — many of whom will defend their seats on the
same day — could be seen to endorse a straight bail-out for Wall Street.
Barack Obama, the Democratic candidate, made it clear that he wanted a better
deal for taxpayers: “It is wholly unreasonable to expect that American
taxpayers would or should hand this administration or any administration a
$700 billion blank cheque . . . If taxpayers are to be asked to underwrite
hundreds of billions of dollars to solve this crisis, they must be treated
like investors.”
John McCain, the Republican candidate, although more cautious, took a similar
tack: “There must be a path for taxpayers to recover the money.”
The crisis was playing in Obama’s favour. In opinion polls 70% of voters
thought he was more concerned with protecting the interests of ordinary
people than of big corporations, while only 32% thought McCain was.
On Capitol Hill the Democrats waded into action. Chris Dodd, chairman of the
Senate banking committee, proposed numerous changes to Paulson’s plan,
including a new board to oversee the rescue programme; monthly reports to
Congress; the ability of the government to take stakes in the companies it
bails out; limits on executive pay; and a programme to manage and reduce the
debts of homeowners in trouble.
Republicans were also angry. One inveighed that he and his colleagues “were
being asked to choose between financial meltdown on the one hand and
taxpayer bankruptcy and the road to socialism on the other” — and “to do it
in 24 hours”.
AFTER Bush’s dramatic television appeal, the fate of the nation seemed to hang
on a meeting at the White House on Thursday, where the president gathered
senior lawmakers, including Obama and McCain.
The economy was on the edge of the Grand Canyon, but Bush was hopeful of
lassoing it back. “My hope is we can reach an agreement very shortly,” he
told the television cameras as the meeting began.
Once the media left the room, however, the fireworks began. It became clear
that divisions ran very deep and an agreement was a long way off.
Democrats, led by Obama, clung to proposals for more help for ordinary
citizens. John Boehner, the most senior Republican in the House of
Representatives, opposed a massive state rescue. Sticking true to the
principles of free enterprise, he wanted less government intervention.
One Republican proposal was for all banks to pay into an insurance scheme on
which those in trouble could draw. What did the presidential candidates
think? Obama asked questions but McCain sat largely quiet. Obama seized his
opportunity. “What do you think of the plan, John?” he repeatedly asked.
McCain did not answer. By one account, for 40 minutes of the meeting McCain
said absolutely nothing.
As the meeting began to break up in disarray, Paulson collared Nancy Pelosi,
the Democratic speaker of the House of Representatives, in a nearby room. He
went down on bended knee, according to a source close to the talks, as he
pleaded with her not to “blow up” his rescue plan.
“It’s not me blowing this up,” she said. “It’s the Republicans.”
Bush made an appeal in wry desperation, according to two of those present.
“Can’t we all just go out and say things are okay?” he asked.
However, the president who has fought two wars seemed impotent. There was no
bombing to be done — banks were doing enough of that by themselves. All he
could do was warn: “If money isn’t loosened up, this sucker could go down.”
Not long afterwards the credit crunch toppled another giant. Washington
Mutual, a bank once valued at more than $50 billion, was seized by
authorities for fear that it was about to collapse. Sold for just $1.8
billion into the tender embrace of JPMorgan Chase, it was the biggest single
bank failure in US history. Yet amid the political battle it was almost a
sideshow.
While opponents of Obama pointed to his inexperience, McCain seemed unable to
decide what to do. After his reticence at the White House, the next morning
he relayed a message to Republicans on Capitol Hill. According to a senior
Republican aide, McCain urged: “We need a deal, we need a deal, we need a
deal.”
He put forward no plan of his own. He struggled even to decide whether to
participate in the first presidential debate scheduled for that evening.
Having earlier said that he would not, he decided to go ahead.
As McCain flew to Mississippi for the debate, his chief of staff, Mark Salter,
revealed that McCain had made his decision only an hour before leaving Washington. Everything, including the economy, seemed to be on a knife edge.
CAN a deal be done and, if so, will it work? Last night lawmakers suggested
that a deal, with the core of the Paulson proposal intact, would be
announced this evening and passed by Congress tomorrow.
Earlier Bush had tried to assuage taxpayers’ fears, saying in a radio address:
“The rescue effort is not aimed at Wall Street; it is aimed at your street.”
He claimed the final cost would be far less than $700 billion because the
government would recoup much of the money in years to come.
Plenty of doubts remain over whether the package will be enough. The losses
piling up in the financial system are likely to be even more enormous than
the $700 billion. According to Robert Schiller, an economist at Yale, the
bursting of the “biggest property bubble in US history” has wiped out about
$5 trillion in wealth.
“And the last time we looked house prices were still falling,” he said. “It
throws off individual and corporate balance sheets. That has all kinds of
effects on confidence and our sense of wellbeing.”
According to BusinessWeek, the US magazine, defaults are spreading from
sub-prime mortgages to what are known as Alt-A loans, which were made to
people with better credit ratings. Normally only 2%-3% of such loans run
into trouble; now 15% are in difficulty.
Other experts savaged the Paulson plan for failing to address the issue of
recapitalising the banking system. Paul Krugman, professor of economics at
Princeton, suggested that a government buy-up of toxic assets might help,
but it would not solve the lack of bank capital unless taxpayers hugely
overpaid for the assets. Better to inject capital directly into failing
banks and take a share of ownership, he said.
Nouriel Roubini, professor of economics at New York University, was even
blunter about Paulson’s original proposal: “The Treasury plan is a disgrace:
a bail-out of reckless bankers, lenders and investors that provides little
direct debt relief to borrowers and financially stressed households and that
will come at a very high cost to the taxpayer.”
Even Professor Geoffrey Wood of the Cass Business School in London, who is no
doomsayer like Roubini, believed the Paulson plan was flawed. “It seems to
me the whole thing is too large,” he said. “Try something smaller to
establish a price for this debt. Fine. But then a simple, efficient way to
recapitalise the banks would be to force a debt-for-equity swap.”
Does Britain need a similar plan? It now seems likely that Bradford &
Bingley, Britain’s eighth largest mortgage lender, will cease to exist as a
high-street entitiy, and that its assets will be sold off to rivals.
Other lenders showed the strains they face by raising their mortgage rates.
HSBC, Woolwich and First Direct all raised rates on some loans by 0.25%. One
victim of the tightening credit conditions was Hardy Amies, tailor to the
Queen, which fell into administration after struggling to raise new loans.
As in the United States, property prices in Britain are still falling. John
Muellbauer, professor of economics at Nuffield college, Oxford, believes
“the magnitude of effects — high debt levels, the credit crunch and falling
real incomes — make a UK recession virtually certain”.
The problems of UK banks are less severe than those in the United States, and
our banks may benefit from the rescue deal being put together in Washington.
British banks have £95 billion in bad assets that may qualify and Brown,
having taken the country’s finances already deeply into the red, wants to
avoid a widescale state bail-out.
Last week, however, Capital Economics, a leading consultancy, warned that “it
would be unwise” to rule out the need for a bail-out in Britain as well.
AMID the American chaos, the cheese-eating schadenfreuders of Europe could not
resist a bit of self-satisfaction. Global capitalism needed retooling,
declared President Nicolas Sarkozy of France, who is considered too much of
a fan of America by some of his countrymen. “Self-regulation is finished,”
he said. “Laissez-faire is finished. The all-powerful market which is always
right is finished.”
Peer Steinbrück, the German finance minister, told his parliament: “The US
will lose its status as the superpower of the world financial system. The
world will never be the same again.”
While their barbs may reflect long-standing rivalries between US and European
economic models, even US experts recognise that the crisis will weaken
America’s place in the world. Before the meltdown the United States already
had by far the biggest debts to foreign lenders of any country and by far
the biggest trade deficit as well. It owes $13 trillion and had a trade
deficit of $712 billion in 2007. (China, by contrast, had a trade surplus of
$360 billion.)
Uncle Sam needs $2 billion a day from foreign investors just to keep going.
“For years to come, Wall Street and Washington will be unable to manage
without strong co-operation from other markets,” observed Jeffrey Garten,
professor of international trade and finance at Yale.
“Most governments and investors outside the US never shared the American
system of cowboy capitalism. Now they have good reason to demand that
fundamental changes be made in the way the US manages its financial
institutions.”
In Asia, politicians and economists remember with bitter irony their own
financial crisis of a decade ago: then the United States and other western
powers imposed tough remedies based on market forces.
Changes in financial markets are already under way. Short-selling to drive
down shares has been restricted. Last week Christopher Cox, chairman of the
Securities & Exchange Commission (SEC), the US regulator, urged
lawmakers to control the $62 billion market in insurance-based financial
derivatives known as credit default swaps (CDS) “to enhance investor
protection and ensure the operation of fair and orderly markets”.
The markets were wide open to abuse, he said, because “neither the SEC nor any
regulator has authority over the CDS market, even to require minimal
disclosure”.
Other regulation is sure to come, according to Simon Taylor, a former banker
who is now director of the master of finance programme at the Judge School
of Business in Cambridge. “It is pretty much inconceivable that you can have
such major intervention from governments with taxpayers’ money,” he said,
“and not have some kind of response — at the very least a tightening up of
regulation.”
The danger was that the pendulum might swing too far the other way, he said,
suggesting there could be “a more generalised scepticism about markets, even
in areas with nothing directly to do with finance.
“If unemployment keeps rising and ordinary families believe, probably rightly,
that the financial crisis has made their positions worse, they will have
good reasons to be angry. But politics or laws made in anger are generally
not very good ones. ”
Matthew Elliott, head of the TaxPayers’ Alliance, expressed the resistance of
many to a general bail-out when he said: “The government has a role in terms
of protecting deposits in banks, but when it comes to bailing out
shareholders the government should have no role at all.”
In the United States the backlash against unfettered capitalism is likely to
benefit Obama. He emerged the winner, by a slim margin, from the first
presidential debate with McCain. Some 40% of uncommitted voters thought he
was the better performer, compared with 22% for McCain; 38% saw it as a
draw.
In Britain the picture is more complicated. Labour is the party of regulation
but it is also the government that has presided over the financial fiasco.
By contrast, Cameron has tried to move the Tories away from being seen as
the party of the fat cats.
Ahead lies a political as well as a financial battle. As Luigi Zingales,
professor of entrepreneurship at the University of Chicago, put it: “Do we
want to live in a system where profits are private but losses are
socialised? Where taxpayer money is used to prop up failed firms? Or do we
want to live in a system where people are held responsible for their
decisions?
“For somebody like me who believes strongly in the free market system, the
most serious risk is that the interests of a few financiers will undermine
the fundamental workings of the capitalist system. The time has come to save
capitalism from the capitalists.”
What you could do with $700 billion instead
Return $5,072 to each of America’s 138m taxpayers
Set up the 17th largest economy in the world, with a gross domestic product
roughly equal to Turkey’s, or about twice that of Saudi Arabia, Greece and
Austria
Pay for about 10 years of British defence spending
Run the US Treasury and departments of defence, education, state, veterans
affairs and interior for a year - and have enough left over to fund Nasa’s
space programme
Buy gold and foreign currency worth more than 12 times Britain’s reserves
Fill America’s cars with free petrol for about a year and a half
If the rest of the so-called free world would have financially helped the U.S.and Britain with the war on terror and the oil sheiks hadn't gotten so greedy,we wouldn't be in this serious state of affairs. We won't be the only one in great distress when this plays itself out.. Share the pain with us!
Henry, Warrenton, Missouri
"Daddy darling, I'm up to the limit with all my credit cards, my bank account is overdrawn and I have bills a mile high. Daddy darling, please bail me out? Mwah, mwah!" - Same thing really, isn't it?
Nicholas Lee, Windsor, UK
Whats happened to the "Free Market"? - Interference on this scale just makes the whole thing more risky. We should let irresponsible and unprofitable businesses fail. Liquidate the bad debts and put excess resources on sale, where they flow into more stable ventures. Go through the pain its right.
Julian Eagles, Bury St Edmunds, United Kindom
If voted on by the US taxpayers, this scam would, without question, be overwhelwingly rejected. Main St. shouln't be forced bail out the Fat Cats on Wall St. Ramming this through hurriedly is a total abuse of legislative power. Who will account..or be accountable.. for the $700BIL? No one!
Garth Strong, Houston, USA
What the City needs is a charity to work for their interests. It could organise a special event -'Bank-Aid' - with pop singers, large screen videos of bankers in tattered clothing with distended stomachs and begging bowls, placards saying 'Bring back our bonuses!'. 'Blame Wall Street not us!'
john problem, Hackney Wick, UK
what is that funny sound you can hear around Highgate cemetery? Could it be Karl Marx howling in his grave?
bill torbitt, windhoek/namibia, namibia
on consolation is that the US sure doesn't have the money to attack Iran now
bill torbitt, windhoek/namibia, namibia
This is robbery by Bush and his fortune 600 buddies. The question is asked by Professor Luigi Zingales, “Do we want to live in a system where profits are private but losses are socialised?"...Never!
Gerald, Twickenham, England
What else could the money be spent on? Well, there's dealing with climate change. I think $700billion dollars would have gone a long way towards clearing up that other negative consequence of unbridled consumerism. Too bad it has to be spent on the credit crunch instead.
sheila, Leicester,
"A paranoid sytem...incompatible with the market economy" according to Pres. Sarko! Considering that the US economy is already $482 billion in hoc , US investor Warren Buffet called the prospective trillion $ debt: The Pearl Harbour of the Money Economy. Was Fukuyama's 'End of History' premature?
Nicholas Xenakis, Borough, London, England, Britain
Name and shame every lawmaker who votes for this.
They will pay dearly on November 4th.
Kate, Maryland, USA
The w/ bankers should be charged and prosecuted,including poulson ,and under the procedes of crime act there assets confiscated, you might make a lot more than $700 b
Geoff Jensen, Grimsby, uk
Not to worry, they have a plan! It is called the Amero, and the only way they can get Americans to accept it is to cause the ecomomy to fail and the value of the dollar to disappear. Then they will be greatful for any currency that will give them their lifes back. This is just a sideshow.
alan, milton, usa
This was nothing more than a kabuki show.
Anyone who actually believes there was any chance of the Paulson plan not passing. Or that House Republicans were somehow blindsided is a sucker to the nth degree.
Sufficient expressions of outrage and political cover were doled out as required.
thomas j, bangkok,
The banks need to copy EBAY - and simply auction the stuff they don't want to the highest bidder - there must be plenty of people out there prepared to take a punt on this stuff if the price is right and the best way to discover that price is to invite bids from the widest possible market.
Huw Sayer, London, England
Some of the 700 billion should go to the American Public School system to pay teachers a decent salary. They may then be qualified enough to teach the upcoming generations of Americans the difference between fascism and socialism. America is becoming, or already is, a fascist state.
Alan Baer, Whitehorse, Canada
So the banks have been stupid, let them go we don't need them. The banks do not create wealth they are just parasites living off the hard work of others. A government run mortgage society can enable people to buy their homes and build their business without giving away billions in bonuses.
Clive Stringer, Eggesford, England
It is sad that I have to read the London times to get accurate information on what is going on in this country. The Times uses the word "socialism". I'm working two jobs, living in a one room apartment and driving a clunker. If the US would let the free market correct itself, I might buy a house.
Michael Steele, Memphis, Tennessee, USA
I have been saying for some time that it looks to me like the moneybags are holding a gun to Congress's head and they were and will get away with it. American politicians are such craven worshippers at the shrine of money that they are gutless
peter c, Devizes, Wessex
It's hard, very hard to realixe tha tour "leaders" have put us in this position s. they are the worst we've ever had . and to make matters worse, in my mind I think he stole two elections, McAin't is 'bout steal anotther with Dem supported legislation.
Petey, san mateo, ca, usa
Surely if history has taught us anything, it's to do the complete reverse of what Bush and Brown believe. I say let Wall Street fall and the masses take their futures back into their own hands. These bankers can not be trusted and It's how evolution works!
Ian, Brisbane, Australia
The solution is really not that complicated. You can find it at http://FedUpUSA.ORG; have a gander.
But - if the situation is so dire as Paulson says, $700 billion isn't anywhere near enough - its only 2.16% of our private debt. If its really that bad, we're headed for a Depression.
Karl Denninger, Niceville FL, USA
Rather ironic: for the Labour Party conference in Manchester, they fenced off the entire location of the 1819 Peterloo Massacre. Where the people of the city met to protest about poor economic conditions and to demand the reform of parliamentary representation.
Robert, Manchester, UK
Banks in trouble should be forced into huge rights issues sold to the US government. So called toxic debts would then be written off in the normal way. That way control would be kept over banks and their irresponsible execs and the banks would be recapitalised thus freeing up liquidity.
Paul Owen, Birmingham, Uk
The great American Dream is now fast becoming the American Nightmare. But as always, the ever optimistic and creative A'cans will go on to find ingenious ways to solve any problem and hopefully, this one soonest with its messy repercussions for the world if left unsolved.
sd goh , pj, malaysia
The Democrats were going to go with Bush's plan but the Republicans rejected it, and then a compromise was gained by Republicans and Democrats, while the House Republicans still arn't happy. This write up is unfair to McCain who did NOT support Bush's plan but supported a better plan for taxpayers.
lawhite, Idaho, US
The US dollar must surely be on the verge of total collapse, This could be the only reason that resources of this magnitude would be utilized and it will not save it but what else can limited people do.
Peter, Vancouver BC., Canada
Why don't we just call their bluff?!
This would appear like little more than a truck load of baililffs threatening an otherwise good payer.
If the whole thing is all about whether we hand over such huge amount of cash or the system crashes, then we - not the banks - have control!
David, Cambridge, UK
No American, who loves their country should sign up 700 Billion to a bunch of CROOKS on Wall Street, under no circomstances. It is time for responsible Governance. And it is time for the American people to hold these CROOKS responsible. This is a criminal investigation, & should be treated as such.
Daphne Kenward, Cambridge, UK
Politics needs to be cleaned up for the good of the TAX paying public. They leave office with Millions of Tax payers money and leave the country in a mess. Time has come to stop it and stop now. No body should sign it the public has enough debts of their own, with no jobs to pay it.
Daphne Kenward, Cambridge, UK