14 October 2008

The New, New Bailout

If you remember a couple days ago I talked about leadership, and how the Financial Crisis of 2008 desperately needed some. Well, it finally got it, from a place nobody expected...and yet, we should have.

The leader of the current movement is the Right Honourable Mr Gordon Brown, First Lord of the Treasury and Prime Minister of the United Kingdom. Mr Brown hasn't really been getting a lot of respect lately. His predecessor, Tony Blair, was a charismatic politician of the Clinton model, a showman as well as a policy wonk,. Brown, by contrast, is a dour Scots technocrat. As finance minister under Blair, the two frequently clashed over fiscal policy, and were generally seen as rivals. Brown's succession to the prime ministry was seen as something of a caretaker role, because, like John Adams, Brown seemed to be the only man who was unaware of how obnoxious and disliked he was.

And yet, we come back to what Brown's previous job was: finance minister. If anyone was going to have a handle on how to handle a financial crisis, Brown was a likely candidate. But we all got so used to thinking of him as a lame duck that it never seemed to occur to anyone that he'd be the one to lead the way.

So Mr Brown and his government came up with a plan that was much more direct, if much more socialist, than the Paulson Plan: invest directly in key banks, in exchange for equity shares; and guarantee inter-bank lending with national funds, the same way individual depositor accounts are guaranteed. Except they're talking about guarantees without limits.

The European Central Bank followed suit not long after. This is not just a case of follow-my-leader; it's a matter of survival. In a world where money can flow freely across borders, if Country A is doing something confidence-building and Countries B, C, and D don't, where are you going to send your money?


So now, the US is following suit, despite the fact that it's got to be tearing up the ideologue NeoCons in the government apart. Two weeks ago saw our leaders playing political games with a flawed, much bally-hooed $700bn bailout plan that now may never actually be implemented, because they were desperate to avoid this very gambit. But the less socialism-averse Europeans left the US with no real choice.

All told, there are four new measures being implemented in this new, new bailout:

  1. Treasury will invest directly in banks, with half the investment going to the eight largest players and half going to smaller fry. In exchange, Treasury will receive non-voting stock in those companies, and a 5% dividend at first, increasing to 9% later, for its pains. In short, unless the banks actually collapse, Treasury will make money off this deal.
  2. The FDIC will now guarantee bank-to-bank loans. In short, the government will now be co-signing the loans, like a parent helping a child get a car loan or a credit card. This is aimed directly at unfreezing the interbank credit market.
  3. The FDIC will offer, for the next three years, unlimited insurance on non-interest-bearing accounts of the sorts used by companies for their expenses. This is aimed at preventing a run on the banks, and mirrors moves in Europe.
  4. Lastly, in a pinch, the Federal Reserve itself will start buying commercial paper in an effort to unfreeze short-term lending between companies.

The President was at pains this morning to insist that these were temporary measures, that everything was being done to ensure that the free market would eventually reign supreme, once it actually, you know, functioned again.

Yesterday's market surged on just the possibility that this might happen, and today started out pretty peachy as well, not just at home, but around the world. As Tuesday wore on, however, it started to slump again. Once the initial, "Yay! They did something!" euphoria wore off, hard questions remained.

One such question was: will this actually work? Paulson has reportedly told banks that they need not just to take this deal to save America's ass (because, you know, they don't have to sell him an equity stake in their corporations if they don't want to), but to actually deploy the capital to unfreeze the credit market.

Problem is, they don't have to do that, either. The government won't be buying a large enough stake in any of the major players to actually control them, which means that once they have the money, they can do anything they want with it, including hoard it and wait for better days.

Another such question was, what about the rest of the economy? A lot of damage has already done. Consumer confidence is rattled, jobs are being shed, major industrial powerhouses have seen their stock plummet. GM and Chrysler, already struggling before this mess, are looking at merging, which would reduce the Big Three automakers to two. The commodities market has crashed hard--the sole obvious benefit of which is that the price of gasoline at the pump has come down to saner values.

Nobody's got good answers to this, yet. It will be several days before we do.

Meanwhile, once again, we come back to a crisis of leadership. Paulson comes across like an ineffective substitute teacher begging the class to behave and heaving powerless sighs as he continues to get hit with spitballs. America, which should have been leading the charge to solving this crisis, instead is trailing along behind the a lame-duck Scotsman who two weeks ago was having trouble holding on to his own party's discipline and everyone was sure was going to get trounced at the polls.

So: Memo to the So-Called Leader of the Free World. Where's the leadership, bozo?

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