The visible hand comes to the rescue

Interestingly, the massive $85 billion bailout to AIG is at variance with the advice given to S Korea during the 1997 crisis when the latter’s ailing banks were allowed to go bust rather than being bailed out.

With the American Federal Reserve’s response to the spread, depth and intensity of the global financial crisis, one could be forgiven for smelling a Hugo Chavez in George W. Bush’s backyard. A $700 billion bailout plan is being readied to rescue America’s financial system from the worst crisis since the Great Depression of the 1930s. This could go up to as high as $1-2 trillion by the time the hurly-burly is done. From an era of laissez faire policies of allowing market forces a freer rein in economic activity, there is now a clear shift towards greater regulation and oversight by the State in the citadel of global capitalism. Three of the largest American corporations have also been taken over by the US government, notably mortgage lenders Freddie Mac and Fannie May and insurance giant AIG. This is, on the face of it, a nationalisation spree that the Soviets would have approved of.

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Financial instability is, of course, integral to capitalism. Crises have been recurring periodically. Asia’s financial woes of 1997 that spread to Russia and Latin America; the bursting of the technology bubble in 2000; the post-Enron deflationary scare in credit markets in 2002, to name just a few instances. But none of these has occasioned the current scale of dirigiste responses by the US State. Interestingly, the massive $85 billion bailout to AIG is at variance with the advice given to South Korea during the 1997 crisis when the latter’s ailing banks were allowed to go bust rather than being bailed out. Given the fact that the systemic foundations are being shaken, the US is only doing what it takes to survive.