When the US House of Representatives (HoR) rejected the $700-billion bailout plan of President George Bush, it took markets and leaders by surprise. It was said to be a done deal that, its proponents said, would have brought the much-needed stability to the financial markets and helped prevent the crisis from spreading further. Still, the plan failed because it was flawed on various counts that many of the lawmakers found difficult to ignore, despite a lot of coaxing and cajoling.
The obvious gap in the plan is that it does little to punish the guilty. Leaders on both sides of the US political spectrum would rather highlight how it helps protect those who had no role in the crisis, but are being hurt as the turmoil gets from bad to worse. That argument appears to have some buyers, at least among the political class.
But what hasn’t gone down well with many lawmakers is that the plan doesn’t do enough to put a lid on all such practices that led to the crisis. For instance, it proposes restrictions on pay and perks of top five officers of the banks and securities companies that are being bailed out. Also, restrictions on compensation would come into play only when a bank goes bust. In other words, banks will be free to continue to pay executives hefty bonuses that, some say, have been at the root of reckless decisions and the consequent trouble that we are seeing now.
Even as calls for increased regulation are getting louder by the day, the Bush administration and a significant constituency among the Democrats continue to sing virtues of a free-market economy.
Moreover, why should American taxpayers pay for the bailout? The rationale was that, through the government, they would own a stake in the companies that are being bailed out. But the provisions in this respect are somewhat vague. For example, if the US government buys $100 billion in bad assets of Bank of America, it will not necessarily get a stake in the bank, unless the latter goes bust. So the equity participation logic applies only to companies such as American International Group, where the government has already taken a 78 per cent stake through an earlier bailout. Republican presidential candidate John McCain insisted he had worked hard to ensure that the taxpayers were not left footing the bill for the mistakes of Wall Street. But not many within his party were convinced; two-thirds of Republican Representatives voted ‘nay’.
When asked who would he blame, McCain said, “Now is not the time to fix the blame, it’s time to fix the problem.” The truth is it would be easier to fix the blame than fix the problem. Those who track US politics say they hope the HoR would be asked to reconsider its decision and that the plan would eventually get a majority vote. Even then, not many are convinced that it would mark the end of the crisis.
There were always some takeaways from crises in the past. The post-World War crisis gave the US a national railway system, while the dotcom bubble in the late 1990s left behind a robust internet highway. This time around, there appears to be none, except scores of empty condominiums and dead derivatives.