Uh-oh. A global summit led by Bush on the economy is just the kind of thing no one expected, is unlikely to produce meaningful results, but it very likely to yield disappointment over the inability of the big powers to do anything. † And the US media seems yet again incapable of reaching back to previous crises to anticipate what it is Treasury Secretary Henry Paulson is up to. Now it turns out that after trying to convince banks it was safe to dump toxic assets on the US government, that the government is going to buy stakes in them to make sure dumping those assets doesn't kill them. But, oops, turns out they'll be trying to make sure some of that money doesn't just go into reflating the credit bubble, but rather into consolidating the banking sector to actually make it healthier. Are they making it up as they go along? Absolutely not. This is precisely what Indonesia, Malaysia and Thailand did after their financial crisis in 1997 and 1998. Inject liquidity into the banks, take over those that can't find new investors and then encourage them to consolidate. They didn't invent the playbook; bankers in Washington and New York like Henry Paulson did. † It's interesting that Mr Paulson hasn't found it expeditious to just lay out a blueprint for the American public the way the IMF did for the Asian economies ten years ago. Back then, you could sit down with just about any banker and they would describe just what he strategy was for fixing the crisis. Where their progress varied and in some cases disappointed was to what extent they went after the people responsible for the mess. Indonesia ended up rehabilitating most of its "greedy bankers," which in its case were Suharto cronies who also turned out to be dominant in the economy. Malaysia's Mahathir waited a while and then purged his own cronies. Thailand avoided an ugly confrontation and went after no one. † Asia also failed to develop a robust bond market to reduce its reliance on bank lending. One wonders if America will now too fail to see that it needs a new system for providing housing to people who can't afford it, one that doesn't involve leveraging the entire global financial system. In the near term, at least, the US may next find itself bailing out homeowners. Asia struggled through its crisis thanks to ample public savings, which America doesn't have, and eventually pulled out of its post-crisis recession thanks to the tech boom and subsequent bubble. Will it take another asset-price bubble to revive the US?
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