So stock markets around the world are bouncing back this morning, mainly because Europe and the US are combining in a united effort to solve the liquidity crisis by buying equity in the banking system.
Unlike the US Treasury’s original bailout plan (which merely involved purchasing the toxic debt) this is a part emergency nationalisation of the banks. There are upsides and downsides. The main upside so far? The markets seem to believe it will work...
Credit where credit is due (pun intended) and some of it must go to the beleaguered UK Prime Minister Gordon Brown. I’ve worked on speeches for Gordon, and though there are elements of politics he never quite gets, and he can micromanage horribly, he is brilliant at understanding ‘systems’. The credit crunch was a systemic problem, and as Nobel Laureate Paul Krugman wrote yesterday, Gordon Does Good.
The Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn’t been matched by any other Western government, least of all our own.
Two things here (apart from a little patriotic glow which will soon fade). Part of the problem with this market failure was decisiveness, and Bush, McCain and the Republicans deserve one huge massive FAIL on that score. They are so bound up with political correctness and ideological knots, they can’t even do anything practical.
More importantly, buying equity is a better deal for tax payers and is actually fairer in the long run. As history has shown, and Obama has consistently stated, the government can sell off this stock in better times, and thus provide a profit to the tax payer and reduce its own debt.
The biggest potential downside is the question of Big Government which David Brooks raises today.
What we’re going to see, in short, is the Gingrich revolution in reverse and on steroids. There will be a big increase in spending and deficits. In normal times, moderates could have restrained the zeal on the left. In an economic crisis, not a chance. The over-reach is coming. The backlash is next.
We can expect this to be one of the main themes of the coming weeks.
From a European perspective, we are used to much more government intervention in our markets, and this dismays me in many ways because it tends to pick winners in advance and lead to lack of mobility and innovation. (I work regularly for the BBC so I know). But this crisis is of systemic proportions, and given a massive market failure like this, governments across the world have to intervene to stop the whole system seizing up. It’s not an ideological choice – are you for free markets or against them? It’s an urgent practical issue: how do you get the market working again.
There are some analogies with FDR and the thirties. There is little doubt we will go through a Keynesian phase where government spending will provide the stimulus to growth, especially in energy and healthcare. But many will argue, as Brooks does, that this is a lurch towards socialism and state control.
Let’s remember that, in a democracy, the state is esssentially the expression of a collective will. (Those who complain most about Big Government have no problem with collective defence in times of war and big government when it comes to the the military).
According to today’s Gallup poll Obama is leading on who will better manage the economy
But there is a danger that – as fears of a complete crash fade – conservatives like Brooks will try to turn the election once again into a typical Reaganite referendum on Big Government.
What does the Moose think?