'Intelligent discontent is the mainspring of civilization.' -- Eugene V. Debs

Saturday, March 22, 2008

The Largest Bailout in History? 

From Friday's Financial Times:

Central banks on both sides of the Atlantic are actively engaged in discussions about the feasibility of mass purchases of mortgage-backed securities as a possible solution to the credit crisis.

Such a move would involve the use of public funds to shore up the market in a key financial instrument and restore confidence by ending the current vicious circle of forced sales, falling prices and weakening balance sheets.

The conversations, part of a broader exchange as to possible future steps in battling financial turmoil, are at an early stage. However, the fact that such a move is being discussed at all indicates the depth of concern that exists over the health of the banking system.

It shows how far the policy debate has shifted in recent weeks as the crisis has spread to prime mortgage assets in the US and engulfed Bear Stearns, the investment bank.

The Bank of England appears most enthusiastic to explore the idea. The Federal Reserve is open in principle to the possibility that intervention in the MBS market might be justified in certain scenarios, but only as a last resort. The European Central Bank appears least enthusiastic.

Any move to buy mortgage-backed securities would require government involvement because taxpayers would be assuming credit risk. There is no indication as yet that the US administration would favour such moves. In the eurozone it would require agreement from 15 separate governments.

The implications of such an effort would be staggering. Earlier in the week, Paul Krugman, the economic house liberal at The New York Times, described the use of trillions of dollars of public funds to bail out the global financial sector as inevitable.

His column read suspiciously like a preemptive effort to condition people to accept it. If I find the time next week, I will post about how the left should consider responding to this situation. Needless to say, it will be something different than just accomodating the needs of the transnational institutions and financial markets that created the problem in the first place.

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