Still no deal

September 21, 2008

Why I think both candidates need to come up with a better response on the bailout

Although I’m generally left-of-centre when it comes to the distribution of a nation’s income, favouring more progressive taxation and government spending on health and education, I am a strong believer in the power of markets to create wealth. Individual responsibility on a personal and corporate level and the primacy of sound money is also vital. Government bailouts should only occur when they are really necessary, taxpayer exposure should be limited (and be able to capture any upside) and any schemes should be temporary, not permanent. It is also imperative that such schemes are scrutinised properly, and that unelected officials are not able to use bipartisanship to ram through legislation that will have far reaching consequences.

Despite what Bernanke and Paulson say, the financial system is going through an uncomfortable, as opposed to a potentially catastrophic, period. Even at the height of the crisis last week, the spread between US inter-bank lending rates and treasuries was comparable to the conditions that existed in the late 1970s and early 1980s. Even the stock market was only barely into ‘bear’ territory. Of course, the fact that Morgan Stanley and even Goldman Sachs are seeking partners might be psychologically disturbing, but the owners (and workers) in these firms are more than adequately compensated for such risk. I am also worried that if this bailout passes in the US there will be a tremendous pressure for a similar programme across in the United Kingdom.

Both McCain and Obama have some good ideas in their responses to the crisis. I greatly admired McCain’s initial opposition to the AIG bailout and Obama’s insistence that any scheme be limited. Neither candidate has indicated that they will be unconditionally supporting the plan. However, Obama’s insistence that this must be a global response is an infringement of everyone’s sovereignty and will turn this into an international boondoggle. At the same time, McCain’s advisors will probably force him to fall into line, just as they did on taxes, immigration and Lieberman. In any case his idea of a new agency will make things even worse. So, I still have to quote Shakespeare and say (again): “A plague on both your houses”.


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