The only solution that Bush can imagine is to reward the culprits, says Anayat Durrani The US economy took a hard blow as 158-year- old brokerage firm Lehman Brothers filed for bankruptcy, suffering $613 billion in losses. Bank of America purchased financial giant Merrill Lynch and the Federal Reserve was forced to lend $85 billion to keep afloat AIG, the world's largest insurance company. Some have called it the worst financial hit since the Great Depression that began in 1929. The blame game has begun with Congress, the Federal Reserve, the home-lending industry, banks and even former president Bill Clinton being pointed to as responsible for the financial crisis. Then of course, there is the Bush administration. President George Bush cancelled his trip last week to Alabama and Florida where he was scheduled to attend closed-door fundraisers, choosing instead to remain in Washington to meet with his top economic advisors to monitor the ongoing financial crisis. "The American people can be sure we will continue to act to strengthen and stabilise our financial markets and improve investor confidence," Bush pontificated, though he surely has no idea how to even begin to do this. The remarks were the first made by Bush following the intervention by US authorities of AIG. Bush called the actions by his administration and the Fed necessary. "The American people are concerned about the situation in our financial markets and our economy, and I share their concerns," he said. Bush attempted to put investors at ease, noting the government's takeover of mortgage financing monoliths Freddie Mac and Fannie Mae "to help promote market stability and to ensure they continue to play a role in helping our housing market recover." The Group of Seven industrialised nations pledged Monday international cooperation with the United States to address continuing challenges in the global economy and world markets. "We strongly welcome the extraordinary actions taken by the United States to enhance the stability of financial markets and address credit concerns, especially through its plan to implement a program to remove illiquid assets that are destabilising financial institutions," the G7 finance ministers and central bank governors said in a statement. "We are ready to take whatever actions may be necessary, individually and collectively, to ensure the stability of the international financial system," they said. President Bush asked Congress on Saturday for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis. "It is a big package because it's a big problem," Bush told reporters at a news conference. "The risk of doing nothing far outweighs the risk of the package." A Treasury statement released Saturday said the programme is structured to "fundamentally and comprehensively address the root cause of our financial system's stresses. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to significantly damage our financial system and our economy, undermining job creation and income growth," the statement said. The Bush administration's $700 billion proposal to bail out the financial system would be the largest economic intervention by the government since the Great Depression. "In this crisis the ultimate question is whether the underlying assets would be adequate to cover the current demand for liquidity," said Thomas Saving, director of Texas A&M's Private Enterprise Research Centre. "If so, then time will resolve the problem and the current proposal to acquire some of the illiquid assets will wind up costing very little." President Bush told Congress that, "the world is watching" and that it should move quickly to open up markets. Congressional leaders endorsed the core of the plan, saying passage could occur this week. They said they wanted the proposal to aid people on Main Street as well as Wall Street. "The financial crisis can be stemmed by action taken now; certainly, the instability in the financing system can be halted," said Steven Sheffrin, professor of economics at University of California, Davis. "Long-term economic performance, however, will depend on how effectively and efficiently the current remedies work in practice and whether they maintain incentives for economic growth." Both presidential candidates, particularly the Democrats, have used President Bush, who they partly blame for the financial crisis, to their advantage. However, just how much the current financial crisis can be attributed to the Bush administration remains a subject of debate. "President Bush has very little to do with the financial crisis. It is a product of twenty years of evolution of financial markets stewarded in by both parties and innovations in the financial sector," said Sheffrin. "One other important factor is the US reliance on foreign countries to finance its current account deficit." Certainly the dangerous reliance on foreign countries to shoulder the US foreign trade deficit makes it vulnerable. But it is hardly fair to blame them for US profligacy, and this passing the buck ignores the glaring fact that the massive expenditures on the wars in Iraq and Afghanistan have been financed purely on the basis of deficit budgeting, i.e., by printing money. As the US economy is increasingly based more on nonproductive activities such as the financial giants AIG et al that are now bankrupt, it hardly seems likely that throwing $700 billion at them while continuing the deficit financing of the wars will do the trick. And just who will benefit from this $700 billion handout? The very culprits who are using the deregulated complex financial system to their advantage in the first place. The only solution, of course, is a drastic reform of the financial sector and assertion of government authority over the system of looting and leveraging, Nothing of the sort can be expected from a political process beholden to the very system it would have to tackle head on. At least presidential hopeful Barack Obama is mouthing the right words: "No matter what solution we finally decide on this week, it is absolutely imperative that we get to work immediately on reforming the broken politics and the broken government that allowed this crisis to happen in the first place." Obama blamed lobbyists and special interests for the financial crisis and referred to it as an "ethic of irresponsibility" that has dominated the government. He criticised John McCain, who has favoured deregulation, as part of the problem. McCain, who over a week ago said the economy was "fundamentally sound", now calls the financial crisis "the greatest crisis since WWII" and blames Senator Obama and the Democratic-led Congress as part of the problem. "At a time of crisis, when leadership is needed, Senator Obama has simply not provided," McCain said. "And the truth is that we don't have time to wait for Senator Obama's input to act." Perhaps his new lease on life, Sarah Palin, will have a magic solution to this latest crisis.
