Son of shock and awe

The lesson of recent weeks for financial markets is that going big makes no sense; always go bigger.

Why bet your own balance sheet, the difference between your assets and liabilities, when you can bet the government’s balance sheet, the public wealth of the nation?

Conventional wisdom always held that where private enterprises fail their shareholders take the pain of failure just as they take the profit of success. But this thinking now is so yesterday that you’d not want to float these ideas at, say a dinner party, lest you show that you are seriously, even dangerously, out of fashion.

Bailout, baby, bailout. Here, have $200-billion. Not enough? Take another $150-billion. Still not enough? Don’t worry, here’s another $350-billion. Oh, you’ve got another $300-billion in bad debts that you’ve not mentioned so far? Well, don’t worry, we’ll guarantee those too and, for good measure, we’re stumping up another $800-billion to ease other credit markets we’ve not yet reached.

This $800-billion is designed to make money — be it loans for homes, cars or study — cheaper. The Fed is taking direct action because it knows that cutting interest rates to below the present official 1% is unlikely to have an effect. There is already so much cheap money available to banks that effective rates are reckoned by some to be negative.

The United Kingdom has made its own contribution to curing the sick economy by decreeing a VAT holiday during which VAT will be cut by 2,5 percentage points for the next 13 months. Stop a while and think about this: when did you ever hear of a government cutting VAT? We had all thought that government’s job was to ensure that over the years VAT went up, but never down.

Now US president elect Barack Obama, with one foot in the White House, is signalling a monster fiscal stimulus “large enough to jolt the economy back to life”. He put no size on the cost of fighting rigor mortis, but the figure is speculated to be about $700-billion. The stimulus is being seen as the equivalent of a financial shock and awe, as though markets are not already a little overawed at the financial might thrown at them.

The timing is for the new plan to be put to Congress early next year so that Obama can sign it into law as one of his first jobs in the oval office.

There are so many bailouts and the numbers are so vast that it is easy to get confused about how much the US government is on the hook. Fortunately the New York Times has added up the numbers for us.

It says that in the past year the government assumed about $7,8-trillion in direct and indirect financial obligations. “That is equal to about half the size of the nation’s entire economy and far eclipses the $700-billion that Congress authorised for the treasury’s financial rescue plan.”

By way of comparison, South Africa has a R2-trillion economy. If we were mired in the mess in which the Americans find themselves the South A­frican government would have committed R1-trillion in bailouts and support measures.

The US government is now the largest private equity investor in the world. We have entered a new era of state capitalism where the regulator is also the investor.

A number of outcomes seem possible. One is that the economy is brought out of cardiac arrest. It moves over time off life support and the government sells out, back to the private sector.

Another outcome, though, is that the whole damn thing comes tumbling down. We have seen that the real savvy private players bet so big, and so recklessly, that the US government has rescued them, worrying that they may bring everything down with them.

Could it be that now the US is doing the same thing, betting so big, and so recklessly, that it could bring all of us down with it?

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Kevin Davie

Kevin Davie is M&G's business editor. A journalist for more than 30 years, he has worked in senior positions at most major titles in the country. Davie is a Nieman Fellow (1995-1996) and cyberspace innovator, having co-founded SA's first online-only news portal, Woza, and the first online stockbroking operation. He is a lecturer at Wits Journalism. In his spare time he can be found riding a bicycle, usually somewhere remote.

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