x Abu Dhabi, UAEThursday 27 July 2017

The surrender of free-market capitalism

The de facto nationalisation of a huge swath of the American financial sector this past week has left many commentators marvelling at the failure of free-market capitalism in the US. Congressional Democrats called for more oversight of the $700 billion bailout plan announced by the Bush administration at the weekend, while foreign banks with significant exposure to US debt will also be included in the rescue plan.

The de facto nationalisation of a huge swath of the American financial sector this past week has left many commentators marvelling at the failure of free-market capitalism in the US. The New York Times reported on Monday that the investment banks Goldman Sachs and Morgan Stanley are being allowed by the Federal Reserve to turn themselves into bank holding companies following the collapse of Lehman Brothers and the Fed's bailout of the insurance giant AIG last week. "The firms requested the change themselves, even as Congress and the Bush administration rushed to pass a $700bn rescue of financial firms. It was a blunt acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits that had kept big commercial banks like Bank of America and JPMorgan Chase relatively safe amid the recent turmoil," the paper reported. "It also is a turning point for the high-rolling culture of Wall Street, with its seven-figure bonuses and lavish perks for even mid-level executives. It effectively returns Wall Street to the way it was structured before Congress passed a law during the Great Depression separating investment banking from commercial banking, known as the Glass-Steagall Act. "By becoming bank holding companies, the firms are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission. Now, the firms will look more like commercial banks, with more disclosure, higher capital reserves and less risk-taking." The rescue package agreed by the treasury secretary Hank Paulson and the Federal Reserve chairman Ben Bernanke was examined closely by Democrats in Congress, who want to make sure that none of the taxpayers' money ends up in the pockets of rich Wall Street bankers. The International Herald Tribune reported that congressional Democrats are demanding greater oversight of the rescue package, and with Bush administration officials eager to get a bill passed authorising the package, it seems likely that they will. "'Congress will respond to the financial markets crisis by taking action this week in a bipartisan manner that will protect the taxpayers' interests,' the house speaker Nancy Pelosi said," according to the Tribune. "She added that the administration's proposal did 'not include the necessary safeguards. Democrats believe a responsible solution should include independent oversight, protections for homeowners and constraints on excessive executive compensation.' "'We will not simply hand over a $700bn blank cheque to Wall Street and hope for a better outcome,' she said. "Congressional Republicans, too, put the Bush administration on notice that they would not simply rubber-stamp the bailout proposal but would insist on a number of changes, including specific protections for taxpayers. Those would include a requirement that any profits from the programme be returned to the Treasury and not be used for any other purpose. "Aides to senior House Republicans said that lawmakers would also insist on greater oversight of the programme and were proposing a joint select committee, consisting of lawmakers of both parties and from both chambers of Congress." The Tribune warned in an editorial that the US government had to be careful to balance the interests of Wall Street with those of beleaguered American homeowners who are struggling to keep up with their mortgage payments. "How will Congress balance the bailout of Wall Street and the needs on Main Street? Congress must do more to provide direct help to struggling families. Lawmakers should use the bailout legislation to extend unemployment benefits, bolster food stamps and provide aid to state and local governments to provide other services," the paper reported. The article ended with a warning that Americans needed to be told that the current economic crisis was due to the failure of the Bush administration to regulate the marketplace: "Finally, Americans need to be told a more fundamental truth: This crisis is the result of a systematic failure by the government to regulate the activities of bankers, lenders and other market players. "The regulatory failure was grounded in the Bush administration's belief that the market, with its invisible hand, works best when it is left alone to self regulate and self correct. The country is paying the price for that delusion."

The Bush administration's plan to save Wall Street firms and banks is now being extended to include foreign banks with significant US debt exposure. "Foreign banks, which were initially excluded from the plan, lobbied successfully over the weekend to be able to sell the toxic US mortgage debt owned by their American units to the Treasury, getting the same treatment as United States banks," reported the International Herald Tribune. "On Sunday, the treasury secretary, Henry Paulson, indicated in a series of appearances on morning talk shows that an original proposal introduced on Saturday had been widened. 'It's a distinction without a difference whether it's a foreign or a US one,' he said in an interview with Fox News. "The prospect of being locked out of the bailout set off alarm bells among chief executives of overseas banks whose American affiliates also hold distressed mortgage-related assets, like Barclays and UBS. The original text provided access to the $700 billion bailout for any financial institution based in the United States. "As the day wore on, some raised their concerns with the Treasury Department, arguing that foreign institutions were both big employers and major players in the American capital markets. By Saturday evening, the language had been changed to allow any financial institution 'having significant operations' in the United States." But several US politicians and bankers told the Tribune that the US government should not be bailing out foreign banks. "'I'm sceptical of the bailout, the whole bill is only a couple of pages long,' said Representative Scott Garrett, a republican from New Jersey, who is a member of the House Financial Services Committee. As for the participation of foreign banks, Garrett said: 'I have a concern with it, they probably should be treated differently, but Congress is really not getting any say.' "Christopher Whalen, a managing partner at Institutional Risk Analytics, said that Paulson needed to justify why a wider bailout was in the national interest. "'Can you imagine the Congress floating a bailout for Deutsche Bank or UBS? It is the responsibility of the German or Swiss government,' he said. 'We shouldn't be bailing them out.'"

Several American commentators were amazed and surprised by the scale of the bailout of Wall Street by the US government, calling it the end of free-wheeling capitalism and the defacto socialisation of America. "When Hank Paulson, a successful investment banker turned Republican treasury secretary, caps his career by nationalising two financial institutions so large that even Norman Thomas in his socialist heyday would have paused before taking them onto the government's balance sheet, and a conservative central banker agrees to bail out an insurance company to the tune of $85 billion, you know that a fundamental change is underway," wrote Irwin Stelzer in The New Republic. "The day when that engine of capitalism, the financial market, was allowed to operate more or less unimpeded by government has passed. We are entering an era in which a high tolerance for risk is being replaced by the eager embrace of regulation, and where the overriding imperative, efficiency, has been replaced by an increasing desire for equity." Bill Saporito writing in Time magazine likened the bailout to French socialist policies: "I never thought of the stocks and junk securities sold by Goldman Sachs and Morgan Stanley as unique, but clearly Washington does. Morgan's John Mack calls SEC boss Chris Cox to whine about short sellers and bingo, the government obliges. The elite serve the elite. How French is that?"

The New York Time's Cairo bureau chief Michael Slackman in an article on Monday highlights the doubts and challenges that young Arabs face living in Dubai. The openness in Dubai poses a challenge to young Arab men who, when they move there, have the choice of being religious and going to mosque regularly or living a more secular lifestyle. "In his old life in Cairo, Rami Galal knew his place and his fate: to become a maintenance man in a hotel, just like his father. But here, in glittering, manic Dubai, he is confronting the unsettling freedom to make his own choices," writes Slackman. "Here Galal, 24, drinks beer almost every night and considers a young Russian prostitute his girlfriend. But he also makes it to work every morning, not something he could say when he lived back in Egypt. Everything is up to him, everything: what meals he eats, whether he goes to the mosque or a bar, who his friends are."