Rescue package should be followed by reform
The backing of American political leaders for a revised US$700 billion plan to rescue Wall Street comes as a huge relief to the world financial system. But it does not end market uncertainty, as evidenced yesterday in Asia, including Hong Kong. It is to be hoped, therefore, that lawmakers give the package a speedy passage through both houses of Congress. Without it, a financial meltdown cannot be ruled out. Hopefully, once some confidence has been restored, the authorities can focus on policies to head off or limit a recession arising from the global credit seizure, and turn their minds to the lessons of the crisis.
The bailout by taxpayers makes no one happy, even though it was necessary. Congressional leaders denied Treasury Secretary Henry Paulson the blank cheque he asked them to sign. But he got most of what he wanted, subject to oversight and conditions to safeguard taxpayers from bearing all the pain. That was to be expected, given Republicans' opposition to government intervention, and Democrats' objections to protecting bankers from the consequences of their mistakes and greed. Indeed, much of the blame for the crisis can be attached to the lack of market oversight and regulation, and a betrayal of trust in government and financial institutions.
The deal authorises the government to spend the money on buying up bad debt from the institutions. To meet the concerns of politicians, it will get US$250 billion straight away, another US$100 billion at the request of the White House and the remaining US$350 billion with the approval of Congress. Banks will have to give the government shares in return, so that taxpayers can share in the benefits of their financial recovery. Top bankers' pay will be limited and huge severance payouts banned. If after five years the cost of the bailout cannot be recovered from banks, the banking industry will have to help finance it.
Such taxpayer safeguards should not make the plan unworkable, and may avoid a public backlash in the November elections. But it is difficult to predict the repercussions of the impact on future profitability of financial services companies. There are also concerns that imposing a cap on rewards may drive the best financial managers away from banks and into other financial sectors.
No one knows yet if the plan will calm the panic in financial markets. It had to be crafted in a hurry, in the shadow of an election, even as fresh runs on financial institutions emerged in Europe and the United States. The US government and Congress must be prepared to adapt it to circumstances if necessary.
The American economy faces a long period of adjustment to deflation of an asset bubble. This is the time for the US to put its financial house in order.
At the same time, the authorities must heed the lessons of the credit seizure. The first is the need to overhaul regulation of the financial industry if repeat crises are to be avoided. Such reforms should include greater co-operation between national regulators to monitor the global market for complex securities. Greater accountability and transparency will help ensure that nothing like this ever happens again.