‘The biggest bailout in US history’

Does the US Treasury read the blog? Just hours after the chart below was posted, rumours began to circulate of a major government initiative to try and stabilise financial markets.

The aim, according to Bloomberg, is to move ‘troubled assets from the balance sheets of American financial companies into a new institution’. Bloomberg adds that the ‘effort is a recognition that Paulson’s and Bernanke’s efforts have so far failed to revive financial and housing markets’. The sums being talked are huge, at $800bn for purchasing these assets, and another $400bn to insure money-market funds.

The Wall Street Journal says that the new body may be modelled on ‘the Reconstruction Finance Corporation, a Depression-era relief program formed in 1932 to inject liquidity into the market’. And the New York Times comments that ‘it would be the biggest bailout in US history’. It says that legislators may also decide to bail out homeowners faced with foreclosure, as well as the banks that lent them the money.

The question that has not yet been raised in the discussions, it seems, is ‘Who pays the bill?’ The US Treasury had to borrow an extra $200bn in a hurry this week, to finance the bailouts already agreed (Fannie Mae, Freddie Mac, AIG). Will foreign investors, who initially lent the money that financed the US housing boom, now also be prepared to support the cost of cleaning up after it?

The US$ rallied recently back to ¥110, on hopes that the economy might be about to recover. But major financial market declines rarely end without a currency crisis. The blog noted last November that ‘a fall below 100 yen would take us into uncharted water’. Hopefully, if the US Treasury is indeed reading the blog, they will take this issue into account when they make their proposals to Congress.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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