Bailout shouldn’t be a quick fix
THE US sub-prime contagion continues and it is still impossible to predict its course or its longevity. The latest move is the US$700 billion Wall Street rescue plan proposed by US Treasury Secretary Henry Paulson. This hastily drawn-up plan is predictably facing resistance from lawmakers, who argue that the bailout does more for Wall Street than for Main Street.
Mr Paulson himself admits the bailout is ’sad’ and ‘embarrassing’ but adds that his priority is to restore confidence in markets. The Treasury secretary has Federal Reserve chief Ben Bernanke on his side - they both argue essentially that if the credit markets don’t function, jobs will be lost, interest rates will rise, more houses will be foreclosed upon, gross domestic product (GDP) will contract and that the US economy will not be able to recover in a normal, healthy way. And that, they say, would be much worse for taxpayers than a bailout.
However, the issue is not whether to have a bailout, but what kind of bailout it should be. What Mr Paulson is proposing appears to be modelled roughly along the lines of Sweden’s financial system rescue in the 1990s. There, the mess was cleared at the cost of a three-year recession. Analysts put that final tab at about 2.1 per cent of Sweden’s GDP. Bank shareholders lost almost all their money, but tough government intervention and nationalisation ensured an orderly return to surpluses and real growth. However, the crisis in America is different in size, scale and character. It is not just about the mortgage market, but also about a multitude of other toxic assets, which are hard to value at the best of times. Moreover, ’socialism’ is far less politically acceptable in the US than in Sweden, which means that the follow-up actions which Sweden undertook, including fiscal stringency, cannot be guaranteed after the immediate rescue. The US bailout, potentially the biggest ever, would cost every American US$2,300 per head at a minimum. Nor is it certain that US$700 billion would be enough, as the crisis is far from over and estimates of its cost are, at this stage, just guesses.
The feeling among Americans that the Bush administration is bailing out Wall Street at the expense of Main Street is also a major point of contention. There is enormous political pressure to do more to help distressed homeowners as well, not just financial institutions. There is also concern that banks burned by the crisis may not quickly return to lending liberally to the real economy, even after their balance sheets turn black.
Thus it would seem that for any plan to be politically acceptable and workable, it would need to place greater emphasis on helping the real economy and be more discriminating in bailing out Wall Street.
Thus, rushing through legislation without proper debate and a greater measure of consensus would be dangerous. No doubt, it is important to do the job quickly. But it is just as important to do it right.
Source : Business Times - 25 Sept 2008
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