2 posts tagged “treasury”

A simple three page document, urgently requested by the Secretary of the Treasury to stem the imminent destruction of the United States financial system, turns into a four hundred and fifty one page tome.  The remit of the action required is expanded to include such diverse measures as exemption for duty on arrows designed for children.  In seeking to serve their constituents’ interests the political process has been shown up for all that is lacking in America today.

This was an appalling view of the politicians at work.  Under the cover of ‘democracy’ and ‘oversight’ they inserted elements that would dilute the aim and the meaning of this provision.  Make no mistake, the bailout was still authorized and went through. The politicians’ addenda made a mockery of legislative process, their agreement to the plan in the end made a mockery of their protestations, and the pork provisions at the end made a mockery of seeking resolution of matters in the name of the common good or the commonwealth.  This affair just reveals why it is so hard to get straight talk and straight actions from Washington lawmakers.

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.