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The finance crisis: How can the US Congress do nothing? September 30, 2008

Posted by Sverre in : Political economy, World politics , trackback

The finance crisis certainly took a turn for the unexpected today when the US House of Representatives turned down the $700 billion rescue package proposed by president Bush. Of course it was controversial for USA to consider this in the first place, given that they have been the largest driving force in pushing the International Monetary Fund to try and discourage other governments from doing the same in times of crisis. Wall Street seems to have expected them to go through with it this time though, as the news brought the biggest plummet in stock prices in American history. So how could they possibly risk the crisis getting even worse?

There are a lot of different reasons, possibly as many as the 227 congressmen that voted against. Here are a few. Off the top of my head I’ll try to point to a few.

USA would certainly lose some support for their great crusade for economic liberalization throughout the world if they had gone through with it. One of the demands the US has made through the IMF in former finance crises have been that they don’t bail out companies in trouble. The market is supposed to be allowed to weed out companies which have taken too great risks.

One blogger who took this view is former Malaysian Prime Minister, Tun Mahathir Mohamad. On his blog chedet.com, he’s pondering the current finance cisis, as do most of us who take an interest in what goes on in the world. And he’s got some quite understandable grievances. During the Asian finance crisis in the late 90s, he was among those exposed to great pressure to let failing banks go bankrupt, to restrain government spending and generally run a tight ship economically speaking. It’s not hard to feel cheated when USA faces a crise of similar proportions and congress seemed about to deal out an amazingly huge number of dollars to bail out companies on the verge of bankruptcy. And I suspect Tun Mahathir isn’t the only one to feel this way. A lot of world leaders dependent on the IMF in times of crisis would have legitimate reasons to refuse to be forced to take the same measures.

Another important reason could be that the American government doesn’t really have this money. According to IMF, the US government for example only has 72 billion USD in foreign currency reserves. That’s only one tenth of the money they proposed to spend on the rescue package. USA already owes a daunting 13 trillion dollars(!!) (according to the US Treasury) to other countries as a result of buying more from other countries than they sell each year. This certainly isn’t going to help…

Other than this, a lot of congressmen are ideologically opposed to the bailout to begin with. They believe very strongly in the market, and consider it completely wrong to stop the market from punishing the companies that have taken too big risks. Consequences be damned.

A more compelling reason to the man in the street would probably be that a lot of people have gotten extremely rich from managing the economy poorly. Banking exectuives and shareholders have reaped enormous profits from the buying and selling of debts people should never have been allowed to take out to begin with. And of course it’s unfair if the companies that have allowed them to do this are bailed out when their bluff is called.

Whatever the reason – not introducing any measures at all sounds really risky to me as well. As much as I’d like to see the greedy bastards who brought this crisis upon the world punished, it’s hard to see that happening without the rest of us getting punished too.

I’m lucky enough to be living in a country so rich our government will be able to cushion any blow to the world economy enough that nobody will starve. I fear for all those who live in countries who don’t. And the only ones who get a say are the Americans…

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