2 posts tagged “economics”
The Pragmatist versus the idealist. Both are important to America’s self-perception, and both battle with each other in the American’s internal psyche. Americans like the heroism of idealism but they also cherish the security of pragmatism. More than any other candidates in recent history the two presidential candidates have come to personify each of these two traits.
In many ways these are the apex of both the liberal and the conservative traditions. The former will typically offer hope (with charges of hypocrisy and double standards) and the later will offer gentle amelioration (with charges of not being active enough or ambitious enough). In this way this election is a great deal more profound than many people think. Historically in times of trouble people are drawn to the security offered by pragmatism and in times plenty can think a new. The current environment, with the devastation on Wall Street and the bombing of the US embassy in Yemen does not bode well for Obama. On the other hand, perhaps McCain regrets publicizing his ignorance of economics. Only time will tell which recipe the American people believe will take them to a safe haven in these troubled times.
The gyrations of Wall Street are far from finished. The Federal Reserve’s insertion into the ownership structure of AIG was as much a measure to avert international market meltdown as well as a hard-nosed business deal. The Fed effectively took control of 79.9% of the company for a loan facility of 85 billion dollars. This is very different from the Bear Stearns deal that may well cost the Fed a great deal (the bank’s losses being socialized) but the Fed does not gain from any bounce back in the value of that institution (the profits being privatized).
The AIG deal results in a senior loan on the balance sheet of the company: And the cost is considerable. AIG is being charged 850 basis points on top of the three month LIBOR rate. This is a substantial amount of interest. This will be an incredible burden on the company but it is also a reflection of the fact that its underlying assets are valuable and that it simply needs the liquidity to meet its obligations while it sells these off. This was a deal that was struck at ‘one minute to midnight’ so the Fed could have dictated any terms that it had wanted.
All eyes now will be on how quickly the company can be either unwound from its global positions, recover the value of its once enormous balance sheet, liquidated or extricated from the grasp of the Fed. The truth is that no one knows which way this will go. Recovery will restore faith in the markets, failure will erode confidence in the markets. Ultimately this crisis will affect not only the primary landscape of the financial services space but also the secondary regulatory environment that politicians impose on the markets. Calls by politicians for more ‘security’ or ‘certainty’ in the market cannot be regulated for but must be continuously priced by the market on a risk adjusted basis.
The new economic landscape will take time to emerge. Investment banks seem to have had their day. They can no longer withstanding the volatility that the market can create. More regulation seems inevitable as politicians will need to be seen to be doing more ‘policing’ of the markets. But care must be made to appreciate that (although somewhat counterintuitive) it is volatility that, in the long run, creates the platform for the most stability in our socio-economic environment.
