State Capitalism, Day Three
it's now clear that the Fed's intervention into AIG is a state takeover of unprecedented scale: an 80% stake, the management ousted and Hank Paulson said to be mulling further "systemic moves". Meanwhile in the UK a government-brokered takeover of HBOS by LloydsTSB is under way.
On top of Northern Rock, Fannie & Freddie and 11 US deposit-taking banks now in public ownership (or "conservatorship") this is turning into a modern version of state capitalism: of NYU told me yesterday that the 500bn losses declared to date would amount to 2 trillion, and that whole swathes of the finance system will end up publicly owned. I am beginning to believe him. (He is calling the USA the and is scathing of Paulson's intervention.)
On US TV they are calling it "the end of the age of greed" - and both parties are vying with each other to slag off Wall Street, with McCain's rhetoric hinting at criminality on the part of some of the recently failed companies. One network signalled this with a rolling tickertape caption that simply said: "The candidates get real".
With hindsight we spent yesterday with the greatest systemic risk hanging over the financial sector since the 1930s - it was hard to report this because nothing was happening; which shows you that the gobbledygook talked on financial channels is no longer a guide to reality: only the sudden, sporadic and unpredictable action of the lawmakers is what matters right now.
The biggest "correction" is ideological - as my lengthy ramble on the subject of Atlas Shrugged below explores. But it is happening in America fastest because there's an election: McCain and Obama can break free from the entire market philosophy of the Bush years with impunity and Paulson does not have to stand for election; he just has to prove his mettle (which I think he is proving massively) as a creative pragmatist.
But in Britain there is still political stasis: the Labour Party can't exactly say "light touch regulation was a disaster" because the man who championed it is in charge and fighting for his political survivial; and the Conservatives certainly have no political imperative to change their generally laissez faire outlook, because there is no popular revulsion at Wall Street-style capitalism in the UK. It is rawer in the USA because there is no welfare state; people are exposed indirectly to dealings with companies like AIG over their health care and retirement income.
So, once again, there are parallels with the early 1930s: the Brits stick to the old ideology longest because they invented it, meanwhile the Americans rapidly improvise a new regulatory stance, flying in the face of tenets they have believed their entire careers.
I think this will inject a new dynamic to the US election: because McCain's rhetoric, though sharply anti-corporate now, contradicts his policy statements. He was against the state takeover of AIG; he wants to abolish Fannie & Freddie not keep them afloat as state-backed institutions. His economic adviser is Phil Gramm is the man who deregulated investment banking. His big backers include Stan O'Neal, Merrill Lynch boss who presided over the first phase of the bank's demise.
But Obama, after initially seeming to refuse the chance to go in hard on the corporate greed line, is now going for the jugular. It's a measure of his triangulating instincts (and what is an emerging pattern, his non-killer instincts) that only on Day Three is he beginning to land punches on McCain over the collapse of neo-conservative financial ideology (which, believe me, is the main theme of the TV coverage now - much as, 1984 style, having been at war with Eastasia they are now at war with Eurasia). However, Obama too is vulnerable to the charges of over-friendliness with a failed financial institution - namely Fannie and Freddie.
It remains to be seen which the American public cares about most: the collapse of Wall Street or the hubris of two part-privatised institutions that are the only remaining source of cheap mortgages. There's useful summary on why the Federal bailout action effectively blows away the campaign promises of both parties.
Going forward Paulson is said to be eyeing further system-shoring measures - keep your eye on Washington Mutual (looking at takeover) and the Detroit car makers. The pressure is on now to bail out Motown to the tune of 50 billion dollars plus. And Michigan is a swing state.
Comment number 1.
At 17th Sep 2008, lordBeddGelert wrote:What price now 'greater private sector involvement in the NHS' and pension provision ?
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Comment number 2.
At 17th Sep 2008, lordBeddGelert wrote:Ooh, Sorry, and for the 'PFI' off-balance sheet debt ?
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Comment number 3.
At 17th Sep 2008, barriesingleton wrote:'CREATIVE PRAGMATISM' (calling all phrase-conjurers).
Has Paul squared the circle with that phrase?
I constantly decry the espousal of cleverness (creativity?) at the expense of wisdom (pragmatism?) in politics, especially, and life generally. But a balanced yin/yang fusion might just be what we need?
Does the Archangel Nick, floating on high in a blaze of white light, replete with ephemeral stand, glass and water (to avoid distraction from this manifestation of the Glegghead) propounding all things new, have any idea of how deep he has to dig to root out the British Knotweed of corruption?
Let the cry ring out: "Go back to your roots, all you Westminster weeds, and prepare for CREATIVE PRAGMATISM!"
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Comment number 4.
At 17th Sep 2008, angelfireNM wrote:While you are over there, Paul, perhaps you could find time for a swift report on recent efforts to tighten-up regulation of Fannie Mae/Freddie Mac attempted in 2003 by the Bush administration and in 2005 by Senator John McCain - both initiatives squashed by congressional Democrats.
And maybe you could look into how the amendment of the CRA in 1995, the practice of corporate shakedowns by ethnic minority activist groups, and the reckless pursuit of "affordable housing" by the Left contributed rather more to this present debacle than capitalism did.
That would be nice.
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Comment number 5.
At 17th Sep 2008, bookhimdano wrote:if you understand charts the only financial channel worth watching [except for the astrology bloke] is yorba tv. All this was mapped out a few months ago. It has a proven predictive analysis. So if anyone wants to stay ahead of the curve its worth the time.
the basic maths is if there is no longer 'non deposit based lending' then one huge section of financial business has just disappeared. Work out how much that was as a percentage of total finance and you can work out the contraction necessary. Its over 50%.
So we need new industries. A two way grid has proven to create 100,000's of jobs and generate billions in new income. Its an open goal of success and perhaps the saviour of political careers. Sometimes open goals are the most terrifying?
as for what to do in the markets? Temporary ban for short selling in financials stocks only. Because their capitalisation regulations are linked to the stock price [unlike other industries] aggressive short selling is bound to lead to them having to look for more funds which is self fulfilling.
other than that i'd leave it.
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Comment number 6.
At 19th Sep 2008, mademoiselle_h wrote:As I鈥檓 reading the book 鈥淔iasco鈥 written by a former derivatives salesman at Morgan Stanley in the 90鈥檚, I couldn鈥檛 help noticing how the financial crisis caused by funky derivatives then resembles the situation we are in now. By using financial engineering, an offshore trust company and a dozen top lawyers in the city, investment banks were able to get around the regulations and convince rating agencies to give AAA ratings to government bonds issued by countries with poor credit history. This time, instead of government, we have borrowers with sub-prime credit ratings. Banks happily lent money to them and repackaged their loans into securities like CDO and MBS and obtained high ratings from rating agencies in a similar way.
I wonder why there has never been much criticism of rating agencies, like there were accounting firms after the Enron and WorldCom scandals, and an overhaul of the accounting industry that followed. In my personal view, rating agencies require more scrutiny from the media and probably need to go through similar process with regard to changes in regulation and better policyholder protections. Maybe Newsnight can run a story on this?
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