Credit, credibility and political creed - by Linda Lim

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Credit, credibility and political creed
Linda Lim, For The Straits Times

14 October 2008
Straits Times
English
(c) 2008 Singapore Press Holdings Limited
THE United States and European governments have announced a bewildering, and still incomplete, array of policies aimed at stabilising financial markets.

These include: interest rate cuts; massive and novel liquidity injections into financial markets; bailouts and forced mergers of failing financial institutions; expanded guarantees of bank and money-market deposits; liberalised state lending facilities for banks; government purchases of financial institutions' 'toxic assets'; and governments taking equity stakes in private sector banks, amounting to partial or complete nationalisation of banking systems. These sweeping and unprecedented actions have not yet worked in persuading banks to lend to each other.

There are many reasons for this. To begin with, the rescue measures occurred in piecemeal and sequential fashion, creating an impression of trial and error. Rushed out in a hurry, some proposals were insufficiently detailed and specific to convince cynics that they would work. And some - like the temporary ban on short-selling, and perhaps the failure to prevent the Lehman bankruptcy - may in retrospect prove to have been misguided. In the US, the delay in approving Treasury Secretary Henry Paulson's US$700 billion (S$1 trillion) bailout package, and in all countries, the appearance of a lack of decisive leadership, undermined confidence.

Until the weekend, coordinated action among governments was also lacking despite the increasingly global nature of the crisis. Coordination is necessary in order for individual national policies not to 'beggar my neighbour' and thus worsen the overall situation. For example, if one country guarantees all bank deposits whereas others do not, this could lead to capital flowing out of the latter countries' already cash-starved banking systems.

Already, emerging economies with otherwise healthy finances, like Brazil and South Korea, have suffered massive capital outflows and currency devaluations as developed-country financial institutions repatriate capital from small markets overseas to shore up their deteriorating balance sheets at home. This lack of international coordination is the result of a leadership vacuum in global financial markets. No multilateral monetary institution currently exists to coordinate policy for financial crises in developed countries.

Also, the US is particularly unable to exercise world leadership at this time. The deeply unpopular lame-duck President George W. Bush's previous unilateralist foreign policy severely damaged America's credibility in the world community, while his domestic policy of fiscal and monetary laxity and aggressive deregulation contributed to the current financial mess. It seems that every time Mr Bush addresses the nation and the world, the market downturn accelerates. Though a Harvard MBA, he, like Mr Paulson, seems unable to explain what is happening to the general public. This is naturally taken by many to reflect a lack of understanding and loss of control.

On top of this, a contentious US presidential election season is entering its tense final weeks, with the Republican ticket in particular unable to convince the American people, let alone a nervously watching world, that its candidates understand the crisis. In addition, their jingoism - as well as hatred directed at the
Democratic presidential candidate Barack Obama, whipped up by the otherwise inarticulate Governor Sarah Palin - have already drawn sinister parallels with the 1930s.

The irony is that virtually all economists agree that the way out of this mess requires more and not less government intervention, regulation and even ownership of financial institutions, at least for the short- to medium-term. Many right-wing Republican politicians have condemned this as 'socialism'. Retreat to 'America-first' parochialism and populism is woefully inappropriate at a time when global cooperation and global solutions are needed, including continued US dependence on foreign capital inflows.

The Democratic ticket is less scary, but still needs to watch its protectionist promises to the increasingly anti-globalisation working class white voters whose support it needs to win the election. Beyond the need for liquidity and fiscal and monetary stimulus, the Great Depression taught us that trade protectionism and currency manipulation did indeed 'beggar my neighbour' and myself as well.

Given the anti-business rhetoric of the campaigns on both sides, uncertainty about the likely economic policies of the next US administration and Congress is deterring domestic and foreign investors' re-entry into financial markets, a situation that is likely to last at least till the next administration's policies are known.
Fear and panic are understandable in financial crises. But their manipulation for bad policy recommendations, ideological advantage and electoral gain, is not. Truly, the stakes in the US presidential election are very high, for America and for the world, as financial creditworthiness and political credibility increasingly, and perhaps dangerously, overlap.

The writer, a Singaporean, is Professor of Strategy, Ross School of Business, University of Michigan.

Truly, the stakes in the US presidential election are very high, for America and for the world, as financial creditworthiness and political credibility increasingly, and perhaps dangerously, overlap.

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