“Friendship Ends When It Comes To Money”

The big news today is the Bush administration’s proposed $750 billion+ plan to address current turmoil in the US financial markets by giving the Treasury Department authority to purchase bank assets. Even as this is being written, hearings are taking place before the US Senate’s Banking Committee featuring the two main agents of the American government’s rescue plan, namely Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke.

As befits this blog’s name, though, we like to take a Euro or at least international perspective on things whenever we can, and there are certainly such angles to this story. In fact, the two I can detect are attractively symmetrical. On the one hand, Treasury Secretary Paulson announced that foreign-owned banks active in the US capital markets will also be eligible to exchange faltering financial assets for American cash via the proposed “bail-out” facility. On the other, administration officials are starting to look to foreign treasuries to contribute funds towards this bail-out.

As the New York Times reports today, that effort does not seem to be doing well in its early going.

Reporters Mark Landler and Carter Dougherty quote an anonymous US administration official that “We’re certainly not prepared to put ourselves in a position where there’s a free-rider problem,” but that attitude is likely to be sheer bravado: what, either the German government (for example) contributes some funds to the cause or the US government will refuse to do anything to prevent the American financial sector from suffering a melt-down, out of spite? And yes, I chose explicitly to mention the German government there, because we already have a good picture of attitudes there, as touched upon in the NYT report and also in the Economist’s Certain Ideas of Europe blog. There we read about rather acerbic comments from over the weekend by Bundeskanzlerin Angela Merkel, blasting both the Americans and the British for their previous confidence in financial market self-regulation.

We can get a bit more insight into this attitude from Markus Sievers’ article in today’s Frankfurter Rundschau (Friendship Ends When It Comes To Money). “By return receipt the Europeans send back across the Atlantic the request [for contributions to the American bail-out fund] with the barely-softened message: You were so stupid to trigger this financial crisis. Now you need to see about ending it.” It’s an understandable sentiment, one we could expect to see displayed by the American authorities in the face of a similar financial crisis in Europe – “Why should our taxpayers contribute their money to solve some other countries problem?” Still, Sievers also goes on to make the obvious but still-valid point that the worst of this financial crisis is surely yet to come – could he be cautioning European officials that some day, soon, they might stand in dire need of financial help from the American government themselves?

(Sievers also expects heated international arguments over sharing the financial pain to break out in earnest after the US elections, a view which I myself do not understand: What is holding the presidential candidates back now from tearing into foreign countries for allegedly acting as “free-riders”? It’s attacking foreigners, not being diplomatic, that wins you points in front of the American electorate. If Obama and McCain are not taking this rhetorical tack now, it’s probably only because this is a secondary consideration at this time as both campaigns struggle to grasp what is going on in the financial markets and issue appropriate pronouncements.)

Finance Not The Only Thing That’s Broken

On the topic of the financial crisis, let me also briefly mention here an analysis in the Danish newspaper Information by long-time US correspondent Martin Burcharth (USA’s capitalism faces a hard test). Burcharth describes what is going on as “a total collapse in investors’ confidence in the international financial system,” and notes that blame should not only laid at the feet of the Bush administration. In his view, the Democrats under Clinton also deserve some share of that blame, as they were also friendly towards the concept of financial market deregulation. (For example, the Glass-Steagle Act that had separated commercial and investment banking operations since the 1930s was repealed by an act of Congress in 1999.)

But Burcharth makes a profounder point: “The root of this rot [råddenskab] is not limited to those politically responsible. The entire democratic system in the USA is in desperate need of renewal.” What he’s talking about here, of course, is the sway Wall Street has held over Washington for quite some time with its enormous contributions to political campaigns (including, it must be said, to the Obama campaign), and the swarms of lobbyists it sends to throng the national corridors of power. Naturally, then, he does not recommend that the administration’s huge bail-out plan be passed by Congress without many added provisions to protect the taxpayer and, basically, not make it such a capitulation to the demands of Wall Street.

Initial indications from the reaction of Congress to the Treasury proposal suggest that such provisions are indeed likely to be added. But as for the renewal of the USA’s entire “democratic system” – well, good luck with that: the country is presently not only at the cusp of an electoral campaign, but also facing these terrible financial problems.

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