The financial crisis and wealthy countries

The financial crisis and wealthy countries

Many blame the greed of Wall Street for causing the problem in the first place because it is in the US that the most influential banks, institutions and ideologues that pushed for the policies that caused the problems are found.

The crisis became so severe that after the failure and buyouts of major institutions, the Bush Administration offered a $700 billion bailout plan for the US financial system.



Joseph Stiglitz, Nobel Laureate Joseph Stiglitz: Bail Out Wall Street Now, Change Terms Later, Democracy Now!, October 2, 2008
This bailout package was controversial because it was unpopular with the public, seen as a bailout for the culprits while the ordinary person would be left to pay for their folly. The US House of Representatives initial rejected the package as a result, sending shock waves around the world.

It took a second attempt to pass the plan, but with add-ons to the bill to get the additional congressmen and women to accept the plan.

However, as former Nobel prize winner for Economics, former Chief Economist of the World Bank and university professor at Columbia University, Joseph Stiglitz, argued, the plan “remains a very bad bill:”

I think it remains a very bad bill. It is a disappointment, but not a surprise, that the administration came up with a bill that is again based on trickle-down economics. You throw enough money at Wall Street, and some of it will trickle down to the rest of the economy. It’s like a patient suffering from giving a massive blood transfusion while there’s internal bleeding; it doesn’t do anything about the basic source of the hemorrhaging, the foreclosure problem. But that having been said, it is better than doing nothing, and hopefully after the election, we can repair the very many mistakes in it.

— Joseph Stiglitz, Nobel Laureate Joseph Stiglitz: Bail Out Wall Street Now, Change Terms Later, Democracy Now!, October 2, 2008

Writing in The Guardian, Stiglitz also added that,

Americans have lost faith not only in the [Bush] administration, but in its economic philosophy: a new corporate welfarism masquerading behind free-market ideology; another version of trickle-down economics, where the hundreds of billions to Wall Street that caused the problem were supposed to somehow trickle down to help ordinary Americans. Trickle-down hasn’t been working well in America over the past eight years.

The very assumption that the rescue plan has to help is suspect. After all, the IMF and US treasury bail-outs for Wall Street 10 years ago in Korea, Thailand, Indonesia, Brazil, Russia and Argentina didn't work for those countries, although it did enable Wall Street to get back most of its money. The taxpayers in these other poor countries picked up the tab for the financial markets’ mistakes. This time, it is American taxpayers who are being asked to pick up the tab. And that’s the difference. For all the rhetoric about democracy and good governance, the citizens in those countries didn’t really get a chance to vote on the bail-outs.

…In environmental economics, there is a basic concept called the polluter pays principle. It is a matter of fairness, but also of efficiency. Wall Street has polluted our economy with toxic mortgages. It should now pay for the cleanup.

— Joseph Stiglitz, Good day for democracy; Now Congress must draw up a proposal in which costs are borne by those who created the problem, The Guardian, October 1, 2008

In Europe, starting with Britain, a number of nations decided to nationalize, or part-nationalize, some failing banks to try and restore confidence. The US resisted this approach at first, as it goes against the rigid free market view the US has taken for a few decades now.

Eventually, the US capitulated and the Bush Administration announced that the US government would buy shares in troubled banks.

This illustrates how serious this problem is for such an ardent follower of free market ideology to do this (although free market theories were not originally intended to be applied to finance, which could be part of a deeper root cause of the problem).

Perhaps fearing an ideological backlash, Bush was quick to say that buying stakes in banks “is not intended to take over the free market, but to preserve it.” Professor Ha-Joon Chang of Cambridge University suggests that historically America has been more pragmatic about free markets than their recent ideological rhetoric suggests, a charge by many in developing countries that rich countries are often quite protectionist themselves but demand free markets from others at all times.

While the US move was eventually welcomed by many, others echo Stiglitz’s concern above. For example, former Assistant Secretary of the Treasury Department in the Reagan administration and a former associate editor of the Wall Street Journal, Paul Craig Roberts also argues that the bailout should have been to help people with failing mortgages, not banks: “The problem, according to the government, is the defaulting mortgages, so the money should be directed at refinancing the mortgages and paying off the foreclosed ones. And that would restore the value of the mortgage-backed securities that are threatening the financial institutions [and] the crisis would be over. So there’s no connection between the government’s explanation of the crisis and its solution to the crisis.”

(Interestingly, and perhaps the sign of the times, while Europe and US consider more socialist-like policies, such as some form of nationalization, China seems to be contemplating more capitalist ideas, such as some notion of land reform, to stimulate and develop its internal market. This, China hopes, could be one way to try and help insulate the country from some of the impacts of the global financial crisis.)

Despite the large $700 billion US plan, banks have still been reluctant to lend. This led to the US Fed announcing another $800 billion stimulus package at the end of November. About $600bn is marked to buy up mortgage-backed securities while $200bn will be aimed at unfreezing the consumer credit market. This also reflects how the crisis has spread from the financial markets to the “real economy” and consumer spending.