By DPA,
Washington : As Wall Street tottered on the brink of collapse and the US government unveiled one the largest market interventions in its history, stakeholders from every side weighed in with incredibly stark views of the country’s economic future.
The assessments did not just focus on the country’s short-term economic health. Many believe this week’s events could drastically change the way the US does business.
“Capitalism as we knew it – free-market capitalism – seems to be dead,” declared Rob Cox, editor of financial website breakingviews.com.
The extent of the US government’s reach into the operations of private companies has been unprecedented. On Tuesday it took control of the world’s largest insurer, American International Group Inc. The week before it took over mortgage giants Fannie Mae and Freddie Mac, which together guarantee nearly half of the $12-trillion US mortgage market.
If Congress approves the necessary legislation next week, the government could become the biggest player in the US financial sector, taking control of hundreds of billions of dollars in shaky mortgage-related assets that are at the centre of the credit crisis.
Some were calling it “socialized capitalism” and predicting a price tag for the taxpayer as high as $1 trillion , yet even typically free-market Republicans seemed to acknowledge there was little other choice.
Republican Senator Jon Kyl described the effects of Wall Street’s risk-taking as a “cancer” spreading across the wider economy, shutting down the availability of credit to the average consumer and making it unavoidable for the government to take over.
It marks a stark change from the support of deregulation and smaller government that has led economic policy over the last few decades in the US.
The last time the government staged a similar intervention was in the 1980s during a mass failure of savings and loan institutions. A separate trust was set up then to absorb and liquidate troubled assets, along the lines of what has been proposed this week to fix the mortgage crisis.
In the 1990s the watchword of political circles once again became deregulation. Congress in 1999 approved, with broad bipartisan support, getting rid of many existing checks on investors and financial firms.
That bill, signed by then-president Bill Clinton, has been blamed for much of the current crisis, and politicians are promising not to go down that same road again this time around.
Many congressional leaders became unequivocal about calling this the worst economic crisis of their lifetime, after a stark briefing of congressional leaders Thursday night by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.
“The oxygen went out of the room. People were stunned by what they heard,” Democratic Senator Christopher Dodd, chairman of the Senate Banking Committee, told CNN Friday.
Once the current crisis passes, Paulson has called for a major overhaul of the country’s “outdated” regulatory framework.
Even those in the financial community reluctantly agreed times are fast changing, and that a new wave of direct government oversight is inevitable once the current crisis comes to an end.
Kenneth Lewis, chief executive of Bank of America Corp, this week acknowledged a culture of “greed” had developed on Wall Street, as financial firms created ever-more innovative vehicles for making money.
As housing prices surged through much of this decade, banks began making riskier loans at variable interest rates to homeowners who could ill-afford them. The mortgages were packaged together and sold to investors, who themselves used loans to finance their investments and generate more profit.
Both US presidential candidates Democrat Barack Obama and Republican John McCain have joined the calls for more regulation, simplifying the kind of investment opportunities on offer, and slamming Wall Street’s old practices.
“We did not arrive at this crisis by some accident of history,” Obama said Friday. “What led us to this point was years and years of a philosophy in Washington and on Wall Street that viewed even common-sense regulation and oversight as unwise and unnecessary.”
McCain was just as harsh, citing “reckless conduct, corruption, and unbridled greed that have caused a crisis on Wall Street”.
Whoever wins in November’s general election will likely preside over the greatest overhaul of financial regulation since the Great Depression.