Today the house of Representatives voted by a slim margin to reject the enormous bailout proposed in D.C. The stock market responded kind of poorly, to the tune of a 700+ point drop in the Dow. Bank stocks were especially hammered. My employer had a tough day, but nearly as bad as some others. There is a lot of pain and consolidation to come I am afraid, but long term it beats the alternative. An interesting article in the Wall Street Journal today pointed out that any massive bailout of the financial system would have been largely financed by such friends as China and Middle Eastern nations...
The success of the pending rescue of the U.S. financial system probably depends as much on the central banks of China and the Middle East as on Congress and the Federal Reserve.
The U.S. is turning to foreign governments and other overseas investors to buy a good chunk of what could total $700 billion in Treasury debt expected to finance the bailout. Foreign investors also are needed to shore up the depleted capital of the nation's financial institutions, seen in the plan by Japan's Mitsubishi UFJ Financial Group to buy a large stake in Morgan Stanley, which is weighed down by bad debt and market distrust.
This is a bittersweet moment in U.S. economic history. In one sense, the growing importance of foreign cash represents the triumph of a half-century of U.S. proselytizing for a global financial system in which money flows from those who have it to those who need it. But it is also an unmistakable sign of U.S. economic decline. The global financial system the U.S. designed had anticipated that American banks and financial firms would be the world's financial lifeguards; now those institutions are like exhausted swimmers a stroke or two away from drowning.
The financial crisis makes clear how much the interests of foreign lenders have become a top concern in Washington. A big reason the Fed and Treasury stepped in to rescue mortgage giants Fannie Mae and Freddie Mac, say U.S. financial officials, was to reassure foreign leaders including China, which holds roughly $1 trillion in U.S. debt, that U.S. securities were safe. "Superpowers do not normally ask their diplomats to reassure other nations on questions of credit-worthiness," says former U.S. Treasury Secretary Lawrence Summers.
Just 10 years after the U.S. oversaw the financial rescue of Asian nations, the U.S. now risks becoming the world's largest subprime borrower. This change of fortune has been hard to swallow. In a televised address Thursday, President George W. Bush blamed the current financial crisis on the "massive amount of money [that] flowed into the United States from investors abroad," rather than on greedy decisions by U.S. mortgage lenders and borrowers. In Friday's presidential debate, both candidates railed against U.S. economic dependence on China.
Powerful nations have been humbled before by an overdependence on foreign capital. Council on Foreign Relations economist Brad Setser notes that Britain was forced to end its seizure of the Suez Canal in 1956 because of U.S. opposition. Washington's main weapon: its threat to slash financial support for Britain, whose economy had been battered by World War II.
The U.S. isn't in remotely as bad shape as postwar Britain. It still is the world's sole military superpower, and the U.S. currency is still dominant. The latter is important because even if foreign holdings of U.S. debt grow, as is likely, the U.S. alone prints the dollars needed to pay those debts.
Even so, foreign lenders have a great deal of sway. If they were to dump U.S. government debt -- or be unwilling to buy more -- the interest rates needed to attract buyers of Treasurys would soar. The already fragile U.S. economy would absorb yet another hit.
China, Saudi Arabia and other big foreign holders are unlikely to take antidollar measures precisely because they own so much U.S. debt. To the extent the dollar declines, so does the value of those nations' holdings. Mr. Summers calls this situation "the financial balance of terror."
But it is naive to assume that this so-called balance will protect U.S. interests indefinitely. Senior Chinese economists have voiced growing dismay about the outlook for the dollar, and the introduction of an additional $700 billion in debt might drive the currency's value down further, at least in the short term. "I think foreigners are being taken for a ride by the U.S. government," says Andy Xie, an independent economist in Shanghai.
Sounds less and less appealing doesn't it? Propping up the financial systems to the tune of hundreds of billions of dollars of additional debt for our grandkids, owed to Saudi Arabia and China, is not much of a legacy is it?
This whole situation has proven once and for all that President Bush is naive in many ways when it comes to trusting people around him and his idea of "compassionate conservatism" is little different from big government liberalism. President Bush is generally right on issues of life and on the war on terror, but on economics he either is unable to control the urge to spend or he has surrounded himself with poor advisers. In an attempt to "reach across the aisle", he has allowed liberals to spend and spend and spend. While he has stood strong for what is right in the War of Terror, his legacy will in large part be presiding over a ballooning federal debt and a financial crisis in his final year. What seemed like a promising, historical Presidency is rapidly degenerating into a record of mediocrity and failure. Perhaps his most stinging failure may just be setting up the atmosphere where we elect a unqualified, far left liberal as President.
Conservatism, real conservatism, would dictate that we slash spending at the Federal level as well as cutting taxes. What President Bush has allowed to happen is an unholy union of lower taxes and dramatically higher spending. There is a real danger of becoming a third world economic power with a super power military. That is a recipe for totalitarianism and war for resources (not the fake kind liberals claim the liberation of Iraq amounts to, but real conquest of other nations) Shoring up and stabilizing our financial system, without massive amounts of debt, is in many ways as much an issue of national security as a strong military, and there are far too few voices of courage and reason in the halls of power.
No comments:
Post a Comment