3 posts tagged “economy”
McCain needs to pull a trick out of the bag to win the election which is to be held in just less than five weeks. He is trailing in the polls again, after the resurgence of support and interest surrounding the selection of his running mate Sarah Palin and various other beneficial tactical moves fade. The Iowa Electronic Markets see the Republican’s chance of winning being approximately one third.
The crisis in the economy has not catapulted Obama into the lead, but it has insulated the Democratic candidate from the scrutiny that he might have received. It is now well and truly his election to lose. McCain is just the kind of opponent to fear in such an environment. He is unpredictable and a self-conscious maverick. McCain loves a fight and knows that Obama pretends not to fight. As a result expect to see an escalation of attacks, scare tactics and even the kitchen sink thrown in Obama’s way. Notwithstanding, this activity Obama must maintain his political stall in the way he set it out at the beginning of his campaign, for he must know that any misstep or re-alignment might jeopardize a tantalizingly close prize of the White House. In any ordinary election this would now be a closed Obama affair, but this election is proving to be slightly out of the ordinary and there is one thing that we know from experience that McCain will not do: Give up hope.
Lawmakers will pay a steep price for the rejection of the bailout package. The financial crisis will now spread throughout the economy and the world, testing even the greatest believers in the free markets. The central problem with the pure movement of the markets in the financial services sector, that economists have long known about, are the ‘externalities’ involved with the failure of a bank and other financial institutions. Failure of these institutions corrodes trust and thus exponentially affects the rest of the economy.
A bank multiplies the amount of money available in the economy by lending more than it receives. It can do this because the majority of people the majority of the time do not need their money. Although this may seem suspicious on an individual basis, without this process we would not have been able to build the society in which we live. Furthermore, even if there is a small decrease in this multiplication process the real economy will pay a big price.
There are other levers at the disposal of the Federal Reserve System as well as the Treasury. Interest rate policy, flooding of the market with treasurys and accommodation of the needs of banking institutions are just some ways of effectively doing the same thing as the bailout package. But no one should be under any illusion that the price will have to be paid one way or another for this systemic failure. This cannot be borne by the financial sector by itself unless we are to send the American economy back to the ice age. More or less it will have to be borne socially. The central bankers will have to try and mitigate the abandonment to which the politicians thought that they were entitled in tackling the problem facing the economy.
The bailout package should be called a survival package. Without it the Federal Reserve system will have limited power to contain the toxic effect of the subprime bubble. By all accounts this pile of instruments is sitting on the books of financial institutions valued at approximately $1.2 trillion. The amount that has been asked for by Hank Paulson is therefore about 58% of the total outstanding. The amount that is authorized is almost as important as the spending of the money itself, indeed, if the market believes that this money might be used it might not have to be used at all. It is, like all of the capital markets an issue of trust, confidence and a measure of risk.
Why bail out these greedy institutions? Because as if the amount outstanding of $1.2 trillion is not a large enough amount, these institutions have multiplied this figure as a normal function of their job. Leaving aside whether they multiplied this by a figure that was too large in a time of plenty, the immediate eradication of this money in the economy would have an abrupt effect on economic activity and jobs. The dual effects of falling stock markets as well as the seizing up of the capital markets will choke off investment in firms, and this will lead to job losses. There is, therefore, no tension between capital and people or between Wall Street and Main Street. The real tension here is between the politicians who try to explain this to the people and those that want to act out partisan, divisive and class theatrics to the people of America. Let us hope that the former politicians prevail over the latter.
