Article by Philip Booth in the Yorkshire Post
But, firstly, should the US government be talking about committing $700bn of taxpayer funds to bail out the US banking system? The Archbishop of York, in a speech devoid of serious analysis, suggested yesterday that if this money could be found for the bankers, then money should be found to reduce poverty in Africa.
In fact, while the US government is making a commitment of $700bn, over time considerable value will be realised from the assets they buy and any losses will be much less than the headline figure.
Nevertheless, Bush’s plan is not the way to go about solving the current crisis. After all, this chapter opened when Freddie Mac and Fannie Mae – two institutions that were far too close to the government for their own good – went under.
The US government will be creating another vehicle, which will be with us for the long term and under government control, full of poorly constructed financial instruments.
The President himself has said that we have to do whatever it takes to deal with the current crisis and then look at the underlying problems at a later date. As Ronald Reagan once said, the problem is that “government programmes, once launched, never disappear… a government bureau is the nearest thing to eternal life we will ever see on this earth”.
Sixty-five years on, we are still suffering from President Roosevelt’s misguided response to the 1929 crash – part of which was the creation of Fannie Mae.
Whenever the government wants to stamp its authority on the citizenry, it warns of extreme consequences if we do not submit to its will and accept an undermining of our freedoms. Obviously in war time, when the security of the state itself is in danger, extreme action may be justified.
As such, the language of war is used more generally to justify the state undermining our liberty: governments have launched wars on terror and on drugs (and used this to justify ID cards); they have launched wars on poverty; and they have suggested that climate change is a threat worse than global terrorism in order to justify wide-ranging regulation and taxes.
This time, Bush has warned Congress that, if they do not submit to his bailout, there will be a long and painful recession and American kids will not be able to get the finance to go to college.
The fact is that there is more than one way to approach solving the current problems. If nothing is done, Bush might be right and a deep recession might ensue. But we should not fall for the activist’s fallacy: “Something must be done, this is something and therefore this must be done.”
It is reasonable for the US government to assist in the process of an orderly winding up of insolvent institutions. Though they should make sure, unlike in the case of Fannie Mae and Freddie Mac, that shareholders and bondholders in those institutions get nothing if there is nothing left after creditors have been paid. But this is a far cry from putting a government guarantee under the US banking system.
We might hope for political debate about the options. Those with the different philosophical and economic beliefs should set out their stall and justify it. In fact, from the main players, we just have political posturing.
Senator John McCain wishes to show that he is a statesman by going to Washington to help out, thereby playing to his strengths. Barack Obama, meanwhile, wishes to carry on making vacuous speeches, thereby playing to his strengths.
On top of this we see the politics of the “pork barrel” – the great scar of US political and economic life. Democrats probably agree with the deal the President has set up – indeed, they are more comfortable with it than most Republicans.
But, in return for support, they want to provide taxpayer-funded bailouts for US homeowners. Such a measure should be treated entirely on its own merits – though it has few merits – and be dealt with in a separate Bill.
It should not be used as a bargaining chip to help the President get himself out of jail. We will start with a bad Bill, which has only minority support in Congress, and it will achieve majority support by bolting misguided measures – that themselves are only supported by a minority – on to the back of it.
Bashing the financial institutions is in season – even the clerics have joined in. There is much that can be criticised. However, if politicians are to intervene in the debate, they should first point the finger at some government-run institutions: especially at the central banks whose loose monetary policies are the underlying cause of the mispricing of credit.
It is sad, but entirely predictable, that the Archbishop of York also joined in the name calling and avoided attributing any blame to where it mainly belongs. When the politicians are not blaming the market, they turn to what they are really good at: pointing the finger at each other.
They will use extreme language to justify extreme measures. When the war on the banking system is over, perhaps politicians could turn their attention to a war on regulation, on government spending and on taxation.
In the medium term, these are the issues that will determine whether our economy will grow.
Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs