The Hindu Business Line : The bailout needs a bailout

The revised bailout package, which will emerge from the Senate after modification, will have to include incentives for the common man. The package cannot be confined to fixing the problem of Wall Street firms only — their employees and their shareholders, says S. VENKITARAMANAN.

The good news had come last week that Hank Paulson and Ben Bernanke had tied up the politics of the bail-out package with the energetic assistance of President Bush.

There was also news that it had a good chance of bi-partisan support. Unfortunately, the end result was that the proposal was rejected by the House of Representatives. Partly, the reason was political.

Hank Paulson is a good Wall Street man and Ben Bernanke is a good intellectual. Both of them apparently lacked the political savvy to tie up the various divergent partisan interests in the two major parties.

It was also unfortunate for them that President Bush’s term is coming to an end and the main Presidential candidates have made a campaign issue out of the financial collapse that the US faces.

This made the task of fashioning a bipartisan compromise difficult. There were also discordant voices even among the community of economists, who pointed out various problems in the design and implementation of the bail-out package as presented to the Congress.

Reservations over plan

There has been a line of criticism advanced by many economists and observers against the Paulson-Bernanke bailout plan. They view the plan as rewarding the perpetrators of the mess, who had, in fact, committed the excesses in the first instance. They also feel that the mechanics of discovery of prices of assets, which are distressed and which are to be taken over and later sold, should be carefully considered.

It should not be the case that the Government of the US lands up ultimately with fragile assets at a high price just because the plan allots $700 billion into the market place. This criticism seems to have found a favourable response among politicians of trade side and that is why the package was not accepted in the first instance.

A section of the world leaders at large seems to be pleading with him to get the bailout package passed as early as possible. The failure of the bailout package to get the Congress approval in the first instance has had disastrous ripple effects in the UK and Europe, besides the US. Leading banks in the US and Europe have failed, forcing the Governments to take them over or to arrange for the buy-out of their bidders.

This is a continuous reminder that we are all living in a globalised world. The failure of the bailout package to get acceptance of the US Legislature has had serious repercussions not only in the US but also in the markets and the economies of many countries, the Europe as well as Asia.

Implementing pay limits

One of the problems pointed out by objectors to the bailout package as presented was that the professionals in the financial firms were over-paying themselves for their services and related to the mega-profits of the sector.

The US Administration in its effort to salvage the package seems to have conceded the point and agreed on pay limits to professionals in the finance business.

Experts familiar with the field point out that such pay limits are difficult to implement and enforce, especially in the finance business, which brings huge profits to the institutions which the professionals serve. They have to be motivated to keep profits high. Any way, the proposed attempt at fixing pay limits for so-called masters of the financial universe, would seem to contradict the very principles, which govern the Wall Street system of incentives and bonuses. How the market capitalism will work with such a regimented system of remuneration remains to be seen. Bureaucrats fixing bonuses of finance sector professionals seems to be a glorious contradiction.

It is inevitable that some of the critics of the discordant — in their view — failures of the bailout package will have their way. It is to be admitted that the bailout concentrated too much on restoring Wall Street firms to health and their professionals to their jobs.

The proposals did not have anything significant to offer directly for the ordinary man, the home owner, who owes his monthly instalment on his mortgages. This was to work out through restoration of business confidence following the implementation of the bailout.

Incentives for common man

I think the shining grace of similar rescue packages adopted in the period of Great Depression in the US differed, in that they involved direct assistance for the common man.

To be sure, the revised bailout package, which will emerge from the Senate after modification, will have to include such incentives for taking care of the common man, be he or she a home owner or a borrower from the banks. The package cannot be confined to fixing the problem of Wall Street firms only — their employees and their shareholders.

Incidentally, the Prime Minister of India has mentioned in a press interview that it is not possible to insulate the Indian economy or the stock markets from what is happening in the US. This is a realistic assessment. Brave statements have, however, been made by the Finance Minister and the regulators of the Indian monetary system that our banks and markets are in relatively good shape and we have nothing much to fear. While this is true generally, celebration of a temporary respite from the spreading chaos is premature.

The ripple effects of the American collapse are there already being felt. Already, FIIs are shying away from a declining Indian market. Whether and when they will return to the market to buy equities remains to be seen.

As at present, the US is under threat of going into recession. As a result of this, India will find itself in difficulty on the whole issue of exports of services, as well as textile sector.

This will also hit the IT sector. It will also be difficult for Indian corporates to access the American financial system for easy money as they have been used to in recent years. We cannot insulate India’s economy completely from the US.

Look to the East

The failure of the US bailout plan at its first passage through Congress means that care will have to be taken to ensure that the final plan will work effectively for the good of the US and the world. May be we in India may also have to look to East for alternative solutions to the continuing problem. We may have to forge better ties with China and Japan and South-East Asia.

These countries are, after all, the sources of capital that nurtures the rich American financial markets. If we can tap these resources at their origination, instead of aiming at getting them through the American financial system, we may be better placed in future to tackle a future US systemic collapses.

We may have to encourage Chinese FDI, Chinese FII investment and Japanese FDI and FII investment and similarly the South-East Asian foreign investment in addition to declining prospects from the US and the West. A totally insular alternative of depending on Indian savings exclusively may be out of question.

Finally, the bailout plan of the US is something on which markets and economies of the world depend on earnestly.

It is to be hoped that President Bush, Bernanke and Paulson pull it off. Much depends on its success. Otherwise, it is Bush’s successor who has to clear up the mess — not a legacy Bush will be proud of.

( blfeedback@thehindu.co.in)