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How financial shocks have shaken politics

When Hank Paulson first came up with his bail-out strategy for the US banking system, he called finance ministers around the world to explain the details. “We need to dynamite this thing,” the US Treasury secretary said of his plan to end the freeze in global credit markets.

One European minister asked what would happen if the Treasury’s $700bn programme to buy up the banks’ toxic debts failed to crack the ice. “We have nothing else,” Mr Paulson replied bluntly. The Treasury secretary seems to have assumed that Congress would do as it was told. Perhaps gilded alumni of Goldman Sachs are unaccustomed to being over-ruled by mere politicians.

We must hope that by now Mr Paulson has a plan B – and, for that matter, a plan C. Even if, as is widely expected, the US House of Representatives overturns itself and passes a version of the package, few experts believe it will be enough of itself to restore trust to the banking system and confidence to the markets.

Endorsement of a flawed plan is now a necessary but not a necessarily sufficient condition for stability. The banks need new capital. Some will probably come from sovereign wealth funds. But taxpayers, Americans and Europeans will also have to stump up further in coming weeks and months.

Whatever the future course of the crisis – and, in the words of one central banker, “no one bets more than a couple of hours ahead on this one” – it is clear that several sticks of Mr Paulson’s dynamite have already exploded under politics.

Most immediately, the maelstrom on Wall Street has transformed the US election campaign. Three weeks or so ago it looked like the contest would be fought on John McCain’s chosen territory. Russia’s invasion of Georgia had put national security up in lights.

Sarah Palin’s addition to the McCain ticket seemed to some (I stress the “some”) a masterstroke: when Mr McCain was not reminding voters he was a war hero, the campaign could be fought on the well-trodden ground of culture wars. Haunted by past defeats, Democrats feared that the election would indeed turn on Barack Obama’s “otherness”.

That was then. We are back now to the economy, stupid. This must be Democrat ground. One message from the crisis has been the complete implosion, along with credit markets, of the authority of George W. Bush’s administration. Mr Bush is jeered by the Republican lawmakers who voted down the first Paulson package.

Mr McCain, for all his efforts at bipartisan grandstanding, will find it hard to escape guilt by association with the Bush administration. The Republican candidate came out of the party conventions three or four points ahead of Mr Obama in the opinion polls. In the latest polls Mr Obama has a lead of six or seven points.

Whatever the US election outcome, the political weather has shifted everywhere. Government is back. We have reached one of those “never again” moments. Even among voters who have little faith in government, things have gone too far. Why did politicians stand idly by while “spivs and speculators” were rigging the markets?

We should be careful here about drawing straight lines between left and right. The political reaction to the crisis has thrown up strange alliances and enmities. Thus some Democrats find themselves on the same side as free-market ideologues from the Republican right in rejecting socialisation of the banks’ losses. The first of these groups wants bankers sent to jail instead; the second worries that the animal spirits of capitalism will be fettered by the state.

Another of many ironies is that the closest ally of a Republican administration in Washington in first backing an open, liberal global financial system (and now the bail-out) has been a left-of-centre government in Britain.

To be fair, Gordon Brown, the British prime minister, has long pressed for better global surveillance of the financial system. But, until recently, he has scarcely been a disciple of tighter regulation. It was on Mr Brown’s recommendation, after all, that Alan Greenspan was honoured with a knighthood; and there is a plaque paying tribute to the now discredited former Federal Reserve chairman in the lobby of the British Treasury.

Peer Steinbrück, Germany’s Social Democrat finance minister, takes the prize for schadenfreude by predicting the crisis marks the end of America’s role as the financial superpower. The SPD is nothing if not predictable. Nicolas Sarkozy, the centre-right French president, by contrast, has tempered his criticisms of the US role. But there are plenty of Christian Democrats in Europe who boast privately that the turmoil provides satisfying vindication of their disdain for “Anglo-Saxon” neo-liberalism.

For their part, many centre-left politicians in Britain initially exulted at the idea that the Bush administration was “nationalising the banks”. Until, that is, the Paulson plan was re-described as a safety net for Wall Street plutocrats.

By the same token, many of those politicians now describing a future with a lot more government and lot less market have been careless of the fiscal realities. All these bail-outs, not to speak of the economic shock that will follow the financial one, are going to push up public borrowing. Even before the crisis, the US, and for that matter the UK, faced a burgeoning budget deficit. More government cannot mean much more spending.

All these tangles and tensions aside, the political ground has shifted. You can see that in Britain. Three weeks ago, Mr Brown seemed headed either for ejection by his own party or for defeat at the hands of David Cameron, the Conservative leader. Playing the “we believe in government card” and emphasising his own experience, Mr Brown seems to have won at least a temporary reprieve.

I am not sure how much difference it will make to Mr Brown’s fortunes in the long run – the voters, after all, have yet to feel the economic cost of the financial crisis. But for the moment at least Mr Cameron is struggling to strike a balance between instinctive deference to the market economy and the voters’ desire for retribution. This week he promised a “day of reckoning” for the authors of the mess, even as he declared that it should not be seen as a reason to bury the market.

Mr Cameron’s dilemma is instructive. Striking the right balance will not be easy – for the Conservative leader or anyone else – amid the cries of the populist lynch mobs on both left and right. But that is what serious politicians must do. Governments need to find a way to restrain financial markets without shackling them.

poniedziałek, 06 października 2008, sublime86

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