Here we go again, Hank

Growing doubts over the proposed $700bn US bank bail out have sent shares around the world tumbling once more.

by
Last Updated: 31 Aug 2010

Hank Paulson’s ‘bad bank’ rescue plan proposed last Friday is coming under heavy criticism from both sides of the US political spectrum, leading to exactly what the Treasury Secretary must have been fervently hoping to avoid after staring into the abyss last week – delays and uncertainty. The FTSE is off over 134 points this morning and the Dow closed down over 370 points yesterday. Market jitters were not helped by a huge $25 spike in the oil price yesterday - caused largely by a futures contract deadline - nor the news that having only yesterday turned itself into a regulated bank, Morgan Stanley was now about to sell a 20% stake to the Japanese bank Mitsubishi UFG. Oh, and the dollar took a nose dive, too.

So what’s the hold up in the rescue plan? Well, the Democrats seem to think that simply handing over the biggest blank cheque in US financial history and letting the industry get on with it isn’t a good deal for the tax payer. They want to see the government take equity stakes in bailed-out institutions in the hope that government coffers might eventually see a return on their vast investments. Republicans meanwhile seem less bothered about the implications for taxpayers (that an apparently tax-cutting US regime should even be considering such a vast addition to the tax burden is just one of many ironies of these topsy-turvy times) but rather more concerned about whether the scheme will actually work, and whether the potential damage to the US’s credit rating will be too much to bear.

Both these concerns are of course entirely legitimate, as are more general political grumblings that Wall Street’s big cheeses seem to expect the normal checks and balances of government scrutiny to be waived in their case. They may not be Masters of the Universe anymore, goes the reasoning, but the assumption of privilege remains.

But despite all these truths, politics and the market move at very different speeds as the events of the past 10 days demonstrate. There is simply not time for the wheels of government to grind through their normal stately revolutions.

No-one knows if the Fed rescue plan will work or not, but one thing is clear - to stand its best chance of doing so it needs to be implemented rapidly and with utter commitment. Confidence in both the scheme and its authors leaks away with every hour of delay and prevarication – and these days what happens on Wall Street in the morning hits the UK in the afternoon. It is time, as Churchill was fond of scribbling on his most pressing correspondence, for ‘Action this day.’


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