01 October 2008

The darkest hours

We wait on feckless populists & reckless opportunists in Congress

Now that the Democrat controlled US House of Representatives has voted down Treasury Secretary Hank Paulson's "$700 billion bailout package", there is a palpable sense of fear in world securities and credit markets. The US Senate reconvenes on Wednesday to try to pass an amended package, which is to be resubmitted to the House on Thursday in the US.

In the meantime the world just watches and waits, paralysed.


If the new package is voted down again, then the market could crap out again and, worse, credit could dry up to business. This is as bleak as it gets. If the axe falls then we know we are in the abyss and can adjust our expectations. If we get a reprieve then, we muddle through as before. But at present there is only the powerlessness of waiting on others to determine our fate.

Some plan Bs and plan Cs are emerging as the world faces the unthinkable, financial meltdown. The US Federal Deposits Insurance Commission can apparently be empowered by the Administration to inject comparable levels of liquidity into the US banking sector without Congressional approval. The SEC can and has eased the requirement that corporations mark their securities to market where there is no real market for those securities. This might allow some vulnerable institutions to keep compromised debt portfolios on their books at higher levels than would otherwise be the case.

So there still seems to be the semblance of a muddle through available, even if Paulson's package is rejected, but it still looks bleak. The erosion of confidence and trust in credit markets does not seem likely to heal quickly.

There are many curious and interesting features of this crisis. Not the least of which is the attitude of the media. Because it is occurring in the white heat of a US Presidential election campaign, the morons in the media don't seem to be able to segregate the substantive issues at stake here from the political appearances. The posturing of the candidates and the congressional leadership has been fascinatingly shallow and reckless.

Another feature has been the clear disjunction between the populist view and the political leadership view of this "bailout". It has highlighted a real dilemma and potential weakness in open democratic societies. It seems that a significant proportion of the Representatives of both parties who voted down this legislation, were those who anticipate close congressional races to get re-elected in November. This suggests that where a legislator has real cause to be sensitive to and feels answerable to their electorate, then they do not want to be seen by voters to endorse legislation granting vast sums of taxpayer funds to prop up insolvent financial institutions. On the other hand, legislators with a safe margin who feel comfortable about re-election, seem to feel free to substitute their personal "leadership" judgement over the objections of their electorate. Democracy in action can be a cruel, fascinating and irrational thing at times. Just who is leading whom here?

I also harbour a deep fear that command economy control freaks, who neither understand nor trust markets, will further exacerbate and perpetuate this unholy mess. The cry has already gone up from Sarkosy, Pelosi, Obama, Biden and McCain and the Moron Surfing Media (MSM), that this crisis is a creature of market failure. They cannot see it for what it is: the market's delayed, but inevitable, judgement on a profound failure of earlier passionate government intervention in disspassionate process. These reflexive control freaks who can't bear a situation that they do not have command over, will not recognise that government intervention was the cause of this problem. It was Government who pushed Freddie and Fannie to lend to poor credit risk home buyers, who the market would never have lent to. The lesson that should be learned here is that when government tells business who to do business with, there will eventually be hell to pay. We are paying for decisons made in the 1990s now. But I fear that the easy, superficial, and partisan response: that we need more control over markets, will prevail. We are therefore likely to have to pay a lot more for a long time to come.

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