Sunday 22 Jul 2018 | 09:25 | SYDNEY
Sunday 22 Jul 2018 | 09:25 | SYDNEY

The bailout and the blame game


Mark Thirlwell

22 September 2008 13:52

By common consent, last week was the worst for global financial markets since the 1930s. It took the announcement of a plan to allow the US Treasury to issue up to US$700 billion of securities in order to finance the purchase of troubled assets, along with some moves against short-selling, to restore a degree of calm to financial markets. 

US taxpayers are now facing a growing, but still uncertain, final bill. Meanwhile, as this NY Times story points out, Fed chairman Bernanke and Treasury Secretary Paulson have ‘launched what would be the government’s largest economic rescue operation in modern times, one that rivals the Iraq war in cost and at the same time may redefine Washington’s role in the marketplace for years.’

The argument over the details of their plan has now started, with several commentators sceptical about the likely benefits of what Willem Buiter is calling a TAD, or Toxic Asset Dump.

One criticism of the package, made by Chicago Professor Luis Zingales, is that it will involve the purchase of ‘toxic assets at inflated prices thereby creating a charitable institution that provides welfare to the rich – at the taxpayers expense...and...the violation of the fundamentalist capitalist principle that she who reaps the gains also bears the losses.’ According to Brookings’ Douglas Elmendorf, the plan ‘saddles taxpayers with significant downside risk but limited potential upside gain.’

The theme that the ongoing bailouts for the financial system reward the profligate and undeserving is becoming increasingly common. Nouriel Roubini — profiled recently by the New York Times as Dr Doom, though presumably now he’s Dr Right? – has described the US government bailouts of Fannie Mae and Freddie Mac and the nationalisation of AIG as ‘socialism for the rich...transforming the US into the USSRA (United Socialist State Republic of America).’ 

Meanwhile, over at the Economist’s Free Exchange blog, Richard Baldwin is hoping for ‘Executives hounded by lawsuits for years and ultimately stripped of their personal wealth. Just the sort of step that might help assure that this mother of all bailouts is not sowing the seeds of the next crisis.’ It looks like the public image of the financial sector is going to take an awful long time to recover from this crisis. If so, that in turn is likely to have significant implications for the future regulatory environment.