US invests in lifestyle preservation
* Anne Davies
* September 22, 2008
AMERICA, the land of credit cards and seemingly endless debt financing, is standing on a precipice.
For the first time the US Administration is having to consider what might happen if the world decided the US was not such a sure bet to pay back what it owed.
What if investors stopped buying investments in US dollars? What if they stopped investing?
The possible consequences for a country that depends on Chinese savings and Arab oil wealth to fund its lifestyle are so horrifying that no one — not President George Bush nor Treasury Secretary Hank Paulson — is prepared to contemplate it. The President has announced an unprecedented $US700 billion ($A840 billion) plan to buy up poorly performing mortgage-backed securities.
The hope is that this extraordinary commitment will so reassure investors about American markets that the fear of further collapses will recede — and with it fears about American credit-worthiness.
But the announcement is a blow to free-market ideologues.
For the first time, the US may have to come to terms with economic rules that most countries, including Australia, have laboured under for years: that if you run big deficits and accumulate foreign debt, eventually the rest of the world will punish you, beginning with your currency and your interest rates and culminating in a decision to invest elsewhere.
Announcing the first details, Bush said he had become convinced that the contagion could spread to the broader economy and start affecting Americans' ability to get a home loan or a college loan.
"There's going to be billions — hundreds of billions of dollars at risk. This is a big package because it was a big problem," he said.
The President is asking for bipartisan support for a scheme that would generally find greater support from the Democrats than fellow Republicans, because at heart it is a massive nationalisation of risk.
Bush is urging a pragmatic approach to markets that have largely gone unregulated under his own Administration.
When the bill comes before Congress this week, it is certain to lay bare this fissure in the Republican Party.
Republican presidential nominee John McCain, having initially signalled he might favour leaving Wall Street to market forces, tried to seize the initiative by announcing his own rescue package.
Democratic nominee Barack Obama has kept his powder dry so far but from the Democrats' perspective, the issue is just as complex.
A Rasmussen poll last Wednesday, taken in the early stages of the meltdown, showed that only 7% of people supported a Government bail-out — 65% thought Wall Street should bear the losses.
The Democrats are almost certain to push for a part of the package that helps ordinary Americans, whether it be more help for people trapped by subprime loans or a second stimulus package.
After all, asking taxpayers to stump $2000 each for Wall Street is a big deal. It has raised complaints about why it's fine to expand the federal deficit to bail out Wall Street, but it was not appropriate to do so to pay for a national health scheme.
The Bush Administration's hope is that the latest action will serve as inoculation against the worst version of a Wall Street collapse.