The Hindu Business Line : Now, for the economy

The US Treasury Secretary, Mr Henry Paulson, is about to be given sweeping powers to buy loans and investments of $700 billion off banks, financial institutions and insurance companies.

Talk is that this need not be restricted to mortgages and mortgage-related assets, but could include auto loans, credit card receivables — just about any asset.

Paulson is asking for complete waiver of administrative and judicial review of his actions (how our politicians and bureaucrats would love the last bit!).

Congress is baulking at giving Mr Paulson unquestionable discretion in deciding what he will do with public funds, what he will buy, from whom and how much. But, clearly, there is little wiggle room and time. As Mr Paulson and the Fed Chairman, Mr Ben Bernanke told Congress and the Administration last Friday, financial markets (and, by extension, the economy) were on the verge of complete collapse unless they were rescued immediately with hundreds of billions of dollars of Government money. It was decision-making (if it could be called that) at the point of a gun.

Wall Street-focussed

The buyout package addresses and tries to solve the problems of and in the financial sector. It’s Wall Street-focused. Perceptive economists would have little doubt that it is entirely for, by and of the rich. In essence, billionaires are being bailed out of their billion-dollar mistakes.

This is the risk when industrial capitalism gives way to financial capitalism and financial markets take over economies.

Financial booms are growth stimulants — and they are far stronger than Keynesian reflation. Global growth reached new highs in the last decade, in which globalisation, in both the trade and financial sense, played the major role.

The downside is that a crash of any one asset market — be it property, credit, stock or derivatives — quickly turns contagious and infects the economy. Financial liberalisation accelerates growth but at the cost of greater risk to the economy from the ever alternating bouts of greed, fear and volatility and instability in the financial sector.

Concerns of Main St?

The Paulson deal will save Wall Street but what does it have for Main Street — specifically those unfortunate souls who are behind in their mortgage payments and whose houses are worth less than their mortgages (negative equity)? Of equal concern is if it will do anything for the economy. The answer to both is a resounding no.

The asset buyout will not unblock credit flow nor lead to stabilising house prices. Meanwhile, the odds are the US will go into a full-blown recession, necessitating fiscal actions to stimulate the economy.

The hard work is just beginning.

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