It is important to recognise that yesterday gave the lie to the idea that the financial collapse is just a US problem, or a global problem made only in the USA. The European Stock markets fell by around 5% again, revealing serious problems in European banks. These banks, like their American counterparts, have extended too many loans to people and companies who may not be able to meet the payments. They did so under European regulation, not US, and did so in response to low interest rates set by European Central Banks. All this happened before we learned of the vote in Congress.
The defeat of the Bush plan will force the US authorities to think up a better package. The next one should avoid the suggestion to American voters that Main Street is baling out Wall Street. The weakness of the world banking system and the freezing of the credit markets means we are in for a very serious economic downturn, which will make the position of the banks even weaker, as more people and companies find they cannot pay the bill for the interest on what they have borrowed. If the authorities allow too steep a downturn we will have a company borrowing crisis on top of the mortgage crisis.
There are many options that can be considered. There is the old Brady plan which entailed an element of federal insurance and the swap of assets to get banks through a collapse of confidence to buy them time. There is the possibility of changing temporarily from mark to market for banks assets – as there is no proper market in most of these assets – to an agreed way of calculating longer term value whilst we await a return of confidence in markets. There is a need for Regulators behind the scenes to work with many banks to get them to raise new capital urgently to reassure people banks will have enough cash and capital to do the job. The Central banks have to keep on supplying cash as lenders of last resort. The Bank of England and the European Bank need to cut interest rates to start to combat recession, rather late in the day. The Europeans need to stop thinking of this as a US problem and realise this is also a serious EU and UK problem that needs treatment here as well as in Congress.
I called for Parliament to meet in early September to discuss this and to seek some remedies from the government. The longer we leave it, the worse the problem becomes and the more difficult it is to find solutions big enough to work. The scrappy and late responses of the authorities to a big banking crisis means more lost jobs and bankrupt businesses. There is a price to be paid in lower pensions, damaged savings and lower earnings. The sooner the authorities on both sides of the Atlantic take more action that might restore confidence the better.
More political bickering about bail out just makes it worse. The deterioration has been fast and huge. Remedies that might have worked in early September are probably no longer sufficient. It now requires something dramatic to bring back confidence. That is what Paulson wanted to achieve, but he mishandled the politics, undermining confidence further. He also made both the US Presidential candidates look weak. They backed a plan which significant numbers of Congressmen and women voted against from their own parties. Their authority too was badly damaged by the vote on the Hill, and showed the growing gap between what the political establishment thinks and what the public thinks.