What comes next?
Clive Crook of the Financial Times captures the essence of the government rescue plan at home and abroad.
Sorting out the details of the response will be messy but the principles are now clear and policy is forming around them. First, address illiquidity in the market for mortgage-backed securities. Second, inject public capital on a huge scale, drawing in new private capital at the same time. Third, revive the inter-bank market with temporary guarantees. Fourth, especially in the US, step up efforts to slow mortgage foreclosures, to relieve the distress and stop house prices undershooting.
Britain was first to put most of these elements in place. It helps to have an impotent legislature. The US administration has to ask Congress first, so these things take a little longer. Washington will argue about whether the rescue package, together with the Federal Reserve’s existing powers, leave enough wiggle room for all of the above. But Hank Paulson, reeling from this week’s turmoil on Wall Street, is on board. Those four complementary parts, backed before this is over with a trillion or two of taxpayers’ money in the US alone, have every chance of limiting the damage to the real economy to a bad recession, as opposed to a new Depression.
He also has some intriguing thoughts on how big the regulatory response will be after the bailout succeeds. He’s skeptical that much will change. He also asks the right question: What is the future of financial innovation?
There is a broader point. The financial crisis was indeed a failure of regulation. The system was overwhelmed by innovation. Regulators are going to have to catch up and, you could say, try to hold innovation back. But finance is not a normal industry. The question to ponder is this: in which other industries will curbing innovation – also known as market forces – strike governments or voters, in the US or anywhere else, as a good idea?
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