THE events of the weekend begin the greatest intervention in the US economy by the Federal Government since the Great Depression, with the Bear Stearns rescue but a splutter on this road we must now travel.
If you were wondering what all the flag-waving at the Republican convention has been about, it is now clear. Americans are waving goodbye to the prosperity the nation has enjoyed since the Great Depression and a final goodbye to democracy. But while preparation for the most important decision made in the nation’s post-depression financial history towered above the conventions, I don’t think the fate of Freddie and Fannie and the remaining government-sponsored enterprises (GSEs) was mentioned during either convention.
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And the politicians. President Bush has long authorised the Treasury to open its purse strings and, naturally, Treasury Secretary Henry Paulson said he did not expect the line of endless taxpayer credit to be used. This is like signing an authority to go to war and saying we don’t expect to go to war. Once the authority is given, it will happen. It was always laughable to expect otherwise. Paulson “briefed” John McCain and Barack Obama on the “plan”. The fact is that while America, and the world, wait to see who will govern, Mr Paulson has decided to take matters out of the politicians’ hands.
They willingly agreed. The ultimate political power, to spend taxpayers’ money, has been tossed away. Obviously the economy is too important to be left to the politicians. Instead it is to be put into “conservatorship”. It has come to this.
We don’t know exactly what “this” is, but all will be revealed before the Asian markets open today. Like all things Paulson has done lately, it is aired in rarefied circles during the week, decided on by Friday, announced on Saturday, the details hammered out on Sunday and a final deal revealed for the Asian markets, which will judge the matter on the Monday morning.
But the politicians can’t entirely escape. While the future of US institutions “too big to fail” dominated all on Friday night, the Federal Deposits Insurance Commission quietly announced yet another bank was too small to save. The Silver State Bank of Nevada is actually a good-sized bank. I wonder if any attention will be attracted to John McCain, whose son Andrew retired from a directorship of the bank a few weeks ago.
Back to the deluge. As this column, citing Brad Setser of RGE Monitor, among others, has been at pains to point out, foreign, particularly Asian, central banks are key investors in Fannie and Freddie paper and they have been losing confidence in the GSEs. The take on that by Barron’s was that “Fed data offer circumstantial evidence of, if not of a run, then of a steady walking away from Fannie and Freddie securities”.
The consequences of this are so dire, we are assured, that Paulson had to act. The moral hazard no longer underpins US or global banking. Instead one is reminded of Doolittle when asked by Pickering: “Have you no morals man?” “Na, nah. Can’t afford ’em, Governor.”
The refrain is that we must urgently use this power to protect the taxpayer. But the taxpayer didn’t dig this hole; it was the banks.
Today we are seeing panic at the top while Joe Sixpack is behaving with the sort of calm we should be seeing at the top.
David Hirst is a journalist, documentary maker, financial consultant and investor. His column, Planet Wall Street, is syndicated by News Bites, a Melbourne-based sharemarket and business news publisher.
September 8, 2008
Source: The Age