This was a week to remember. Students a hundred years from now will be writing doctoral theses on what happened in the last seven days (and in the week to come), and scholars will still be arguing over what precisely happened. This is History with a capital “H,” a turning point in the affairs of the nation and of mankind so fundamental that not a single man, woman or child on this planet will be able to avoid its effects.
For the great industrial nations, especially the United States, the course of history has been drastically altered. Even our dreams will have to adapt to the new financial and economic realities.
By Thursday of this week it had become apparent that the U.S. Treasury bailout of American International Group had bandaged one major wound to the system of credit in this country, but a $89.2 billion run on mutual funds (long considered one of the safest investments this side of a savings account) was threatening to dry up most of the available investment capital available in the United States and the Free World.
Making matters worse, the fall of Lehman Brothers, Bear Stearns, Merrill Lynch, Freddie Mac, Fanny Mae and the inability of Washington Mutual to find any bidders for their assets had dealt confidence in the banks a seeming deathblow. People were wondering aloud by Thursday afternoon if Morgan Stanley and Goldman Sachs were next to go. The financial underpinnings of the real estate industry were crumbling.
Within days, perhaps even hours, the deluge would come. The last great investment banks would close, the stock market would crash, mutual funds (and thus the world’s investment capital) would be drained dry by panicked investors and the developed world, including all of the Americas, Europe, Russia, India and the Pacific Rim nations would be thrust into a protracted and catastrophic economic depression that made no distinction between capitalist or socialist systems. All would suffer deeply.
The United States Government, the only entity on the planet big enough and powerful enough to have a chance at avoiding this global catastrophe, has decided to effect a revolution in the relationship between Government and the private sector every bit as profound as the New Deal. The United States is becoming the real estate owner of last resort. Only instead of phasing these massive changes in over six or seven years, we intend to write the program this weekend and enact it as law next week.
The United States is undertaking to acquire the “toxic assets” of the banking system –the home loans, especially, that are in danger of foreclosure, the exotic derivatives based on real estate and so forth…to the tune of as much as one trillion dollars ($1,000bn). This will free up the resources of the banks needed to fund economic expansion.
The alternative, which was to let the banks fold, would have meant a freeze or a collapse of credit in this country, bringing the economy to a screeching halt and negatively impacting every American family.
Since the great banks of the world are so intimately interconnected, it is also likely that the misery would not have been limited to the United States –a notion appreciated by investors world wide in the past week.
Government is also coming to the rescue of the mutual funds industry. President Bush announced that the United States will extend dollar-for-dollar insurance to mutual fund investors.
So far so good. The details are being hashed out even as I write these words by Federal Reserve Bank officials, Treasury Department representatives and congressional leaders. The final product, if it is not a horn of plenty including every goodie that well connected congressmen and senators could wish for, it will be passed by Congress and signed into law in the next few days.
If it works, like the government’s Resolution Trust Corporation, it will be one of the great achievements in this history of the Republic. But it will come at a price.
Where do we get the $1,000,000,000,000? We can’t borrow that much from the Chinese. We can’t print it because the dollar has already lost too much of its value. It will have to come from taxes. And if it does, we will not have a lot of money left over for national health care, global warming, alternative energy, an expanded military, college for all, and the other items on the Democratic and Republican wish lists.
This may also mean the end of Reaganomics, which had a lovely run from 1983 to date under four presidents. One of the central props of the system, de-regulation, is doomed. Not that regulation would have prevented the bad banking and management practices that got us into this mess, but the people and the politicians will definitely re-burden the private sector with tons of paperwork after this.
The other prop of Reaganomics, affordable taxes, may also go by the boards. My math may be faulty but if we need one trillion dollars that means every man woman and child in the United States will have to kick in an additional $3,322 in taxes to obtain the money.
We may not be ready to exhale just yet, but we have more hope this evening than we have seen in months.
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