This posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.
Well, they’ve finally succumbed to the inevitable. No less a devout free marketer than President Bush announced this morning that the US government will buy stakes amounting to $250 billion in the largest US banks. This followed similar nationalizations carried out in Europe, of the sort the US had initially resisted for itself: but the fear that foreign banks would attain a competitive advantage over their US rivals essentially forced the administration’s hand. So a process that started as a beggar-thy-neighbor policy in Ireland (when it guaranteed bank deposits some two weeks ago) has ended with the reluctant signing-on of the sole superpower, a call for a “New Bretton Woods” by the strangely ascendant UK government (it had initially protested vehemently against the Irish move, once again fearing the advantage the deposit guarantee would give Ireland’s banks in an atmosphere characterized by bank failures of gargantuan proportions), and only with the help of tiny Iceland’s near-death experience.
But the expected surge on Wall Street has, as of one-thirty EST, failed to materialize. It seems investors are now switching their concern to the profit outlook of US corporations (third-quarter reports will be coming in fast and furious for the next few weeks), and the picture there is dire. Consumer activity is dormant, debt levels remain stressed, and employment will probably take a big hit. In addition, corporate bankruptcies are expected to jump, a situation exacerbated by the gumming-up of short-term credit markets, which are still, despite the nationalizations, in an extremely sensitive state. And if that weren’t enough, states (especially the one with the biggest economy, California) and municipalities are finding their sources of borrowing dry up, and their costs skyrocketing.
One thing I’d point out as I close this very short post. Inflation figures in the UK chalked up a stunning 5.2% in September, and that while home sales plummeted 55% in August. This alone, for a country with large current account and budget deficits, and a faltering currency, could encourage comparisons with some developing country enmeshed in crisis, and at the mercy of the world. But the UK is now in the forefront of the semi-nationalized recapitalization movement, putting huge sums of public money on the line to save its banks. And it won’t have the luxury, as the US does, of borrowing from foreigners in its own currency. Prime Minister Brown’s day in the sun may be a short one.