The politics of market bailout

September 25th, 2008 - 11:35 am ICT by IANS  

Barack ObamaWashington, Sep 25 (RIA Novosti) As US Treasury Secretary Henry Paulson proposed a $700 billion market bailout plan to Congress, politicians have begun discussing what is missing in it, who would benefit from the plan and who has been left out.Opinions split into two major groups. One group says the bailout package gives too much power to regulators, while the other argues it protects the wrong victims.

Republican presidential candidate John McCain has been accused of supporting the interests of Wall Street, especially their top managers whose tremendous compensation packages need to be investigated.

His opponents hint that his wife’s net worth is over $100 million, so it is no wonder that the wealthy would naturally protect their own, forgetting those who have a mountain of bad mortgage debt to shoulder, small investors, and average Americans in general.

That criticism has come despite McCain’s earlier statements about top managers’ salaries and the need to monitor the distribution and spending of the bailout money.

Liberal economists and part of investment companies, in turn, are criticizing Democrats for trying to centralize all regulatory functions with the government, undermining the basic American idea of a strong free market and competition.

Incidentally, Democrats, too, has taken the rap for worrying about Wall Street executives and not about “Main Street,” even though their candidate, Barack Obama, said taxpayers should not give 10 cents to bail out Wall Street managers.

The government’s package to help the private sector has generated heated debates over several pressing social and economic issues.

First is the issue of whether the government should be handing out cash so generously at a time when the country’s budget deficit has reached a 25-year high.

Economists have estimated that the US budget may run a deficit of 3.6 percent of GDP next year, after fluctuating at about the 2.4 percent mark for the past 40 years. It reached a high of six percent in 1983, which prodded the government to start economic reforms.

Despite the alarming statistics, both presidential hopefuls view the proposal to cut taxes as quite realistic.

McCain cited a possible reduction of the corporate income tax, which would in fact be a second reduction, the first one was introduced by the Bush administration several years ago.

Obama said taxes for low and middle income households should be reduced. Importantly, both pledge the government will recoup the shortfall of treasury revenues without elaborating any further.

The second issue topping this week’s political discussion is directly linked to the first one: whether the world will be willing to further “finance” US financial might?

Sebastian Mallaby, director of the Maurice R. Greenberg Center for Geoeconomic Studies, said during the recent debates on US foreign policy that the Russians had vetoed the Iraq resolution but were buying American assets.

He said that large numbers of American stocks are held by Russian, Chinese and other foreign investors. Will they agree to continue financing the US budget deficit?

Mallaby said he could not be sure of that, especially in the near term, when the current crisis subsides. However, if investors begin shunning dollar-denominated securities, it will lead to even more disastrous consequences for America’s economy.

Other issues are highlighted alongside the future of crisis-ridden investment banks, Wall Street top managers and American taxpayers. One issue is what the average American really wants now. This question is not easy to answer.

When the two front runners only reached the final straight in the current presidential race, even opponents of the Democratic Party praised Obama for his slogan about America needing changes.

Still, observers took to counting the number of times he would say the word “change” in his speeches about anything, including relations with Iraq, Iran, and other regions where the United States has done harm by its blunt policy lately, plus the country’s budget deficit and the dramatic economic changes of the past eight years.

One analyst commented sadly that he was now living in a different country, and not only because of the 9/11 tragedy.

He implied that during George W. Bush’s presidency America has gone a long way from a model economy and democracy to a turbulent country which annoys the world rather than attracts it, and creates more problems for everyone including its own citizens than it is able to solve.

The past few days’ turmoil in financial markets has altered the dominating sentiment. Doubts are being voiced about needing any more changes. People probably need more stability, more of a good old America for a change.

Okay, anything “good and old” is unlikely to come back amid the global capital flow and unbreakable economic interdependence. But it does not mean people cannot dream of it. ? There is still a large group of Americans who say they will make their final choice between the two candidates at the last moment.

The current situation in American finance can still play an important role in the November vote, which is only six weeks away. Experts do not believe the financial situation can be stabilized before yearend, and the next US administration will have to face its consequences, whoever heads the government.

Even the Iraq war, the Guantanamo bases, and Georgia have been pushed to the margins.

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