THIS small part of the global capitalist economy we call Scotland suddenly feels terribly exposed and vulnerable. There is a dreadful sense that the financial maelstrom in America, out of which President Bush and his would-be successors Senators John McCain and Barack Obama are desperately trying to thrash an escape route, is sending up a tsunami of economic woe that will engulf us all.
Indeed, there is a growing feeling that once this wave of dismal wealth-destroying events has passed, and we have counted the jobs lost, the houses repossessed, the companies gone under, it may not be a simple matter of picking ourselves up and going
back to business as usual. This has the feeling of potentially a world order-changing event, whose tidal waves will not just batter the coast but will reach far inland to irrevocably change the global landscape.
It is no exaggeration to say that this weekend, as senators and representatives negotiate, bicker, and fall out with each other over the $700bn (£380bn) bank bail-out package proposed by US Treasury secretary Hank Paulson, the rest of the world stands on the edge of disaster. We are all on the beach, we have seen the tide sucked out far beyond usual low water marks, and we are now looking at a tidal wave rearing up on the horizon and roaring towards land at frightening speed. Failure to agree on a plan, any plan, by Monday morning when the financial markets reopen, will send them, and us, deep under water.
The Paulson plan is relatively simple in concept. It is that the government, ie the American taxpayer, should buy all the dodgy mortgage assets from the banks. That would take away the uncertainty which is causing their share prices to plummet and stopping them from lending money to each other and to the wider economy.
The duff mortgage securities are the cholesterol clogging the economic arteries and if action is not taken now to clear the system, congressmen were told in a private meeting by Ben Bernanke, chairman of the Federal Reserve Bank, "the patient will surely suffer a heart attack, maybe next week, maybe in six months, but it will happen".
But the cure is fiendishly complex in its detail and bestrewn with career-ending political man-traps. The tumult in Washington has sent American politicians into a flat spin, running in all directions.The Paulson plan has divided American politicians more sharply than did the Iraq War and thrown them back into left-right trenches that, in times of "third ways" and "triangulation politics", had seemed long gone.
Paulson's package, thundered Senator Jim Bunning, a Republican from Kansas, was "financial socialism and un-American". Democrat Senator Sherrod Brown, Ohio, raged: "Why are we bailing out companies whose leaders got rich while gambling with our economy?"
Remember that America is a country which prides itself on being the home of capitalism and free enterprise, where socialism is a synonym for communism, where there is no shame in honest business failure, and where entrepreneurs are the true heroes of the American dream.
That is now shattered. Look at the lengthening list of Wall Street titans found to have clay feet: Bear Stearns, bought from the brink of bankruptcy by JP Morgan; Lehman Brothers, America's fourth largest investment bank, gone bankrupt; Merril Lynch, fearing the same fate as Lehman, sold to Bank of America; Goldman Sachs and Morgan Stanley, the two biggest investment banks, converted to retail banks to gain the protection of the American government; AIG, the world's biggest insurer, begging for government loans to avert collapse; and Washington Mutual, America's biggest bank collapse yet, seized by regulators on Thursday night and sold by them to JP Morgan.
Add to that the two big mortgage institutions of Freddie Mac and Fannie Mae, nationalised by a Republican government and guaranteeing £2.7 trillion of mortgages, twice the amount of wealth annually created by the British economy.
Beyond Wall Street, the Federal Deposit Insurance Corporation, which insures savers from losing their money if their bank collapses, has placed 117 of America's 8,500 banks on a watch list. Already nine banks with assets of £42bn have collapsed. Much bigger ones could tumble this coming week: Wachovia, America's fourth largest bank with assets of £441bn, saw its shares crash by 27% on Friday and is said to be talking to three buyers; the shares of National City Bank, operating in nine Midwestern states, and with assets of £83bn, slid by 25%; and stock in Downey Financial Corporation, a small Californian bank, nosedived by 48%.
Make no mistake: to Americans, this is as big a shock to the national psyche as was the 9/11 destruction of the World Trade Center. They believed they lived in the world's strongest and smartest economy. Now it looks as robust as a skyscraper of playing cards; Wall Street's cleverness has turned to criminality (the FBI is investigating corporate fraud at Fannie Mae, Freddie Mac, AIG and Lehman Brothers) and fear of losing homes, jobs, savings and pensions grips the land.
No wonder then, that Obama homed in on those fears in Friday night's presidential campaign debate, setting out his four conditions for approving the Paulson plan. He would make sure, he said, that there is congressional oversight of how the $700bn (more than the $600bn America has spent on the Iraq war) is spent; that taxpayers, where possible, get their money back; that there are no big payouts to the bosses of rescued financial firms; and that people get help to hang on to their homes.
McCain was vaguer on the bail-out details, perhaps handicapped by the Republican party's right-wingers' hostility to shelling out taxpayer dollars, and played to that lobby by promising to freeze all spending except on defence and military veterans. But he had no hesitation in joining the populist anger against Wall Street executives' "… greed … excess … corruption …" which, Obama promptly pointed out, had happened on the watch of a regulation-shredding Republican president.
Obama looked to be ahead on points on this part of the debate (McCain outscored him on foreign policy) but because neither of them will be in office until January, their debate seemed a little abstracted from the reality that the key decision has to be taken this weekend.
For, make no mistake either, we in Scotland need this American bail-out package to be agreed by Monday morning, ideally before the Asian markets open, and to work. We have felt the ripples of falling American house prices and sub-prime mortgages reaching our shores and paralysing our banks because what they thought were reliable money-earning assets were loss-making liabilities.
The money-flow for new mortgages suddenly dried up as fear stopped our banks from lending money to each other. Our house prices started to fall, kicking off a chain reaction of less spending in the shops, stores buying less to sell, factories making less to send to the shops, all ending with the dark spectre of recession.
And as Wall Street has crumbled, our banks have begun to totter. First it was Northern Rock, then, dreadfully, it was our own Halifax Bank of Scotland, forced to beach its battered bones in the arms of Lloyds TSB. Now civil servants, even, I suspect, as you read this, are nationalising Bradford & Bingley, or breaking it up to sell to white-knight companies
The storm waves are reaching out into Europe: Fortis, Belgium's biggest bank and the Royal Bank's partner in the singularly ill-timed takeover of ABN Amro, saw its shares fall 20% on Friday amid rumours that its Dutch customers were deserting it. And they are spreading into the wider British economy: as banks try to hoard cash to buffer themselves against the crisis, big companies needing loans to carry on their business are finding them harder and more expensive to get. It means costs, already rising because of inflating commodity prices, are going up yet further, threatening output and jobs.
Scotland saw the first harbinger of this downturn last week with the publication of the Lloyds TSB Scotland's quarterly business monitor showing "growth in the Scottish economy grinding to a halt in the summer of 2008". It showed that more firms are experiencing a decline in their business than are enjoying growth, a reversal of the picture in May when there were more growing than contracting firms. The bank's chief economist, Donald MacRae, said it was "the most negative result in almost 11 years of the business monitor".
Such dismal portents of worse yet to come pose an urgent question to Gordon Brown and his Chancellor Alistair Darling: does the British banking system need a Paulson plan? Should the British taxpayer buy all the dubious mortgage-based securities in the financial system and prevent the British economy from suffering cardiac arrest? Or should they, as the Bank of England seems to be counselling, pick up the banking casualties as they go and hope there are not too many of them?
In my view, Brown and Darling should go for the big solution now because the problem is being magnified by the total lack of credibility seizing the financial system. Piecemeal patch-and-mend won't work, as it didn't with Northern Rock where they should have gone for the nationalisation solution straight away instead of being forced into it a month late.
There will be a political price to pay for that, but not half as much to pay if the economy falls, not into recession, but depression. And it gives a believable excuse for something that was going to happen anyway – that the Government's golden rules for keeping borrowing to prudent levels have been consigned to history.
If this, and the Paulson plan, works, it will lead to a terrible retribution being demanded by people, and being served up to them by their political leaders, on the fat cat bankers and traders and their bloated bonuses. There will also be a raft of regulation thrown round finance firms in what will be proclaimed as "never again" excess-and greed-curbing legislation.
But these are perhaps the least important of the changes to the world financial system that will result from the present chaos. Intriguingly, in Scotland, we have been given an advance preview of what may be coming.
We have seen the chat about some pretty significant people in the finance world perhaps getting together and launching a counter bid to Lloyds TSB for HBOS, or at least the Bank of Scotland bit of it. The talk has been that these people have access to even more significant people in the Middle and Far East.
What they are talking about are sovereign wealth funds – huge stores of money built up by governments and state-owned companies earning vast amounts from, in Asia, rapidly growing economies, and, in the Middle East and Russia, increasingly expensive oil.
According to research by the McKinsey Global Institute, the oil-based funds now stand at £2.5 trillion and could reach between £7.7 trillion and £12.2 trillion by 2013, while the Asia funds now total £2.5 trillion and could amount to between £5.4 trillion and £6.5 trillion by 2013. Combined, sovereign wealth funds now have the equivalent of two-thirds of the annual wealth produced by America and by 2013 could have one and a half times America's GDP.
They have already started buying America. Last year, the China Investment Corporation invested £1.6bn in Blackstone, a private equity group, and the Abu Dhabi Investment Authority pumped £4bn into Citigroup, America's biggest bank.
Now American assets are getting even cheaper and, since all the countries with wealth funds need the American economy to keep motoring along to help their own economies grow, there is good reason for them to buy more.
Some see disaster at the hands of barbarians written into this. I don't. I believe it will bridge world divides and reduce the chances of conflict. But what Americans will make of it, when they get through the present nightmare and find out they are no longer masters of the financial universe, I shudder to think. It will be a problem for President McCain or President Obama.
But right now, we are on the beach with President Bush and Prime Minister Brown. The sky is darkening as the tsunami rears itself up. And if it hits, there is nowhere to run.
Dilemma
Should the US pump $700bn into failing banks?FOR
• The US Treasury could eventually make a profit from paying out more than $5,000 for every US citizen. This happened when it helped the savings industry in the 1980s.
• Once the market regains liquidity, it will solve its own problems. Because banks have hoarded their cash and refused to lend money the market has paralysed itself. With an injection of cash, confidence will rise around the world.
• A timely bailout would avoid more casualties on the list of firms collapsing under the financial pressure, following Lehman Brothers, Fannie May, Freddie Mac, Merril Lynch and AIG. The bailout would remove "toxic assets" from banks' balance sheets and save tens of thousands of jobs.
• If the Treasury swallows up the banks' bad debts it will allow a fresh start. Better regulation could follow – such as encouraging lending models based on assets held rather than third party borrowing.
AGAINST
• There is no guarantee that even $700bn will cure the crisis. The US Treasury secretary has not said which toxic assets it will buy or how, as nothing has been done before on such a scale.
• It is an expensive solution. $700bn is 5% of the US gross domestic product and the taxpayer could end up paying the price for years through taxes or higher inflation.
• The Treasury intends to raise the money by writing US bills, and the main buyer for these is likely to be China, the world's largest communist state.
• The effective nationalisation of huge chunks of American capitalism could stifle the free market.
The full article contains 2367 words and appears in Scotland On Sunday newspaper.
