Congress snub pushes world economy to disaster brink
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IN THE 1930s, the US Congress did more than its part in helping to turn a financial crisis into a global depression. Yesterday it looked as though it was auditioning to assume that role again.
Back then, Congress's vote for protectionist legislation, the infamous Smoot-Hawley Tariff Act, which erected trade walls around America, almost brought to a halt the free movement of goods and services vital to the efficient functioning of the global economy.
Yesterday, in rejecting a plan to help to rescue the US financial system that had been constructed and reconstructed by the Bush Administration in collaboration with the Democratic and Republican leaderships, the House of Representatives dealt a hammer-blow to an already almost immobilised global financial system.
In the immediate aftermath of the vote, Washington and Wall Street were plunged into chaos.
The initial House vote to reject the so-called Paulson plan was by 226 votes to 206, though the Democratic leadership scrambled to try to pull more opponents of the vote across to pass it.
But as time appeared to be running out, financial markets went into a state of shock, with the Dow Jones Industrial Average down at one point by more than 705 points, its largest points fall since trading began after the interruption caused by the terrorist attacks of September 11, 2001.
Even worse hit were the credit markets. For weeks now, banks have been so concerned about the creditworthiness of their counterparties that they have been unwilling to lend for anything other than very short periods. That has sent interest rates on loans to companies and other private sector institutions skyrocketing, and that trend intensified last night.
Beleaguered
The fear stalking the markets is that Congress might in effect have been saying that there was no more money coming to the aid of beleaguered banks and that they would have to deal with the consequences.
Late in the day in Washington, as they digested both the shock of the vote and the repercussions in markets, officials from the administration and congress were again at work trying to find a way to make the Bill more palatable to its opponents. The problem was that opposition came from both sides of the political divide.
A sizeable number of Democrats opposed the plan because they objected to what they saw as a bailout of the comfortable and well-upholstered banks of Wall Street; a larger number of Republicans were against because they opposed substantial government support for just about anybody.
The implications for the global economy could be profound. Administration officials have argued that if there is no bailout, more financial institutions are at risk of collapse.
Yesterday the global crisis had already entered a new phase, as governments moved to take control of vast swaths of the financial system. In Britain, Bradford and Bingley joined Northern Rock as a ward of the Government. In Europe, the banking operations of the insurance company Fortis were taken over by the Dutch and Belgian governments. Iceland moved to nationalise the bulk of Glitnir, one of the country's largest banks.
If the US financial system, the focus of most of the underlying problems in the economy, cannot get rid of the trillion dollars or more of bad assets on its books, the chances are that there will be much more intervention by the Federal Reserve, the Bank of England and European authorities.
The biggest danger is that the higher interest rates now shooting through markets will squeeze consumers and companies harder everywhere. In fairness to the opponents of the bailout, the plan was certainly flawed, even after it had been recast in the past week. Critics say that the financial markets would not have been improved significantly by the Bill even if it had been passed by Congress.
They insisted that the failure of the Bill presented an opportunity to start again and construct a less flawed version of an economic support plan that might represent less of a blank cheque for financial institutions that got themselves into this mess.
Others were suggesting that the United States should simply steer away from signalling that it would bail out its financial system at all. There is even a view among some conservative economists that, in the end, faith in markets will be justified and that Wall Street, for all its howls of anguish yesterday, will find a way to resolve this crisis more efficiently than through intervention by the Government.
The underlying conditions in financial markets certainly do not suggest that calm is about to resume any time soon. Things look decidedly perilous.The plan dramatically rejected by Congress may not have been a perfect measure, by a long shot, but something needs to be done. It is still not too late for a measure to save the system.
Yesterday, however, not for the first time, the US Congress took a fateful step towards driving the world over the cliff. (© The Times, London)
- Gerard Baker
