By 228 votes to 205 votes the House of Representatives rejected Bush’s plan of $700 billion. As a result stock markets went into free fall, with drops not seen since 9/11.
Wachovia, fourth biggest bank in the US was bought by Citibank. In Britain Bradford and Bingley now follows Northern Rock being nationalised. On the European continent three governments bailed out Fortis. With a drought in liquidity expect more governments buying shares and taking bad debts out of the financial system. There is more of this to come.
The US Federal Reserve, European Central Bank and eight other central banks promised moves to inject $330 billion to keep the liquidity flowing. Right now the further problem is not just bad loaning decisions and business models. Lack of confidence and expectations that things will get worse is driving animal spirits. However, the game of chicken gets played in US politics.
What will it take to make a deal? Right now two thirds of the Republican Congressmen opposed the bill. No one knows when a bill will return, though both sides of the aisle promise to work together. Obama calls for calm; however the stormy waters continue until a deal is done. The question is who will blink first – the President or Congress.
The problem is that decisions to save a failing business should only happen if the taxpayer is protected in the deal. The cost to the taxpayer in the bail out should be less than the cost of a bank going under would lead to worse for the economy. Protection of savings and deposits are essential for confidence – but shareholders however must accept that on their watch bad decisions were taken. Banks should not be saved on the basis of national pride. We cannot have a situation where profits are kept by private individuals but losses are nationalised.
Meanwhile unemployment rises in the US and UK, and people on main street try to make ends meet while those on Wall Street panic. For many years the credit bubble has been warned about, yet interest rates remained low and banks freely lent beyond reasonable limits of people’s ability to pay. Here we are.