Mark writes that the US Government has to intervene to save giant financial firms enmeshed in worsening counterparty risk “to avoid a financial panic.” Quite right on the substance, but I beg to differ on the terminology.
A panic is when people suddenly look afresh at their tulip bulbs, zero-yield dotcom shares, Indonesian bonds or whatever, realize that they paid too much for them, and try to sell at the same time. Result: the price crashes. The trading system itself may stay afloat. What we are looking at is a potential meltdown of this very system. Citibank worries that if it rolls over its loans to Goldman Sachs, will Sachs be there tomorrow to pay it back? So they prudently reduce the loans, raise the interest, and demand more collateral. Everybody is staying calm and rational, like the operators in the reactor control room in The China Syndrome. The main coolant pump is down, the core temperature is rising, and the control rods seem to be jammed.
To change the metaphor: Houston, we have a problem.
Luckily for all of us, George W. Bush’s one really good decision was to hand over the financial car keys to Henry Paulson and Ben Bernanke, grown-ups with the right kind of the Right Stuff. They are turning George Bush into the biggest accidental socialist in history: in cash terms, he will have nationalized more assets than Clem Attlee (coal, utilities, steel, hospitals), the French Fourth Republic (utilities, banks), V.I. Lenin (100% of not very much), and Fidel Castro (idem). I can’t be bothered to work up a comparison in constant prices, and anyway the others covered much bigger shares of the respective economies at the time. Still, it’s curious company for GWB to be in.
In Hollywood blockbuster terms, the little team that stands between the world and complete disaster needs filling out. If Paul Krugman borrowed a yarmulke and a smile, he’d do for the lovable Jewish sage. Sergey Brin would bring credibility to the role of the Geek. Jean-Claude Trichet can play himself as the sop to the world market, if he’s prepared to work up a horrible Maurice Chevalier accent. And for the inclusive beefcake, if you can’t get Will Smith and Vivica Fox, the junior senator from Illinois and his nice wife would be acceptable substitutes.
Which brings me to the McCain position. Has it occurred to him that for a major presidential candidate to say just now that he’s opposed to bailouts, as Paulson and Bernanke desperately try to control the crisis, might have real and nasty consequences?
I wonder how much longer the “McSame” ploy can work. McCain is obviously determined to put clear water between himself and Bush on a lot of issues. And in each case – Iran, Iraq, and now the financial crisis – it’s clear red water.
As Solomon’s heir Rehoboam said to the complaining elders of Israel:
My father hath chastised you with whips, but I will chastise you with scorpions.
(The scorpion here is probably a cat-o’-nine tails tipped with lacerating metal hooks.)