Washington - In a country that prides itself on free-market
principles, US taxpayer dollars are are already on the hook for more
than 300 billion dollars in financial industry bailouts, and, by some
accounts, the government is just getting started.
The Federal Reserve's unprecedented, 85-billion-dollar loan and
effective takeover of the largest US insurer, American International
Group Inc, was only the latest in a string of emergency interventions
this year on Wall Street.
With investors fearing more failures on the horizon by banks
exposed to the credit crisis that started in the subprime mortgage
market, Treasury Secretary Henry Paulson has not ruled out further
action.
The Federal Reserve, the US central bank, has already opened up
new short-term lending to shore up the balance sheets of struggling
brokerages, adding an ocean of liquidity to the banking system - 200
billion dollars just this week - and taking on the devalued,
mortgage-related assets in return.
Just two weeks ago, the Fed took control of government-chartered
mortgage giants Fannie Mae and Freddie Mac and pledged 200 billion
dollars to keep them afloat. Earlier this year, the Federal Reserve
bankrolled JP Morgan Chase's 29-billion-dollar purchase of troubled
investment banking firm Bear Stearns.
The turmoil began with a housing downturn that fuelled a record
rate of home foreclosures, which in turn have decimated Wall Street's
market for mortgage-backed securities. More than 500 billion dollars
in asset writedowns have been posted so far.
The practices that brought the US financial sector to the brink -
bundling questionable mortgages into enticing, high-return but
deceptively risky investments - have left politicians blaming Wall
Street for a culture of 'greed' that forced the government's hand.
Legislators from both ends of the political spectrum grudgingly
accepted the bailouts as a necessary evil to stave off wider economic
fallout from the credit crisis. Lending between banks has seized up,
while opportunities for consumers to acquire new mortgages are fast
dwindling.
More government measures could be in the works. Talk in the last
few days has been of creating a separate government agency that could
take on the bad mortgage debt at the heart of the current financial
turmoil.
The idea mirrors a 1989 trust set up to absorb the losses from a
crisis in the savings and loan industry. The Resolution Trust Corp
took on and liquidated nearly 400 billion dollars in assets.
White House spokeswoman Dana Perino said the Bush administration
was keeping an 'open mind.' Christopher Dodd, chairman of the Senate
Banking Committee, told reporters that the Fed already had the
authority to do the job.
With the current crisis still smouldering, all sides have vowed to
prevent the government from having to intervene in the future. There
appears to be a consensus that more stringent oversight of Wall
Street is the only way forward.
Both presidential candidates have promised a new wave of
regulation of the financial sector. Already in March, Paulson
unveiled plans for a major overhaul of regulatory authorities that he
argued have not been properly updated since the Great Depression.
Republican presidential nominee John McCain, who had opposed a
bailout of AIG, on Wednesday said that the Fed was 'forced' to come
to the rescue and promised further action if elected on November 4.
'We should never again allow the United States to be in this
position,' McCain said. 'We need strong and effective regulation, a
return to job-creating growth and a restoration of ethics and the
social contract between businesses and America.'
Such noises mark a sharp turn from the last two decades, when Wall
Street investment firms prided themselves on market innovations that
received little government oversight.
'The watchword was deregulation,' Robert Reich, labour secretary
under former president Bill Clinton, told US broadcaster CNN. Reich
characterized some of the current solutions as 'socialized
capitalism.'
USA
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