This is what we might call the $1trillion question. That's $1,000,000,000,000, by the way. It is a little like surgery. The US government has amputated the gangrenous leg of the banking system to save the patient. But it is now preparing to graft the infected limb on to the body politic of America. The US taxpayers will be lucky if they do not feel distinctly unwell as a result of this little experiment.
The truth is that simply buying the banks' worthless securities has been an option, if an unpalatable one, for the authorities since the credit crunch began a year ago. All the plans to lend against these assets, such as the Bank of England's Special Liquidity Scheme, and other "injections of liquidity", were temporary solutions, born out of a hope, if not an expectation, that the crisis would not be prolonged.
We know better now. What the American authorities have done is the only sure way to protect the banking system against further destabilisation. Short-selling or not, left to their own devices, the markets would sooner or later force more banks into the arms of the taxpayer anyhow. It is a sad day when hard-pressed citizens find themselves subsidising private banks for their stupid mistakes. But that is what's happening in the US, and it will surely be done here. The Bank of England hates the notion; but Gordon Brown may well feel that he has no choice.
So for the banks and their shareholders and staff, the US rescue plan is already working, and it will save the wider economy from yet more damage. It is less clear whether it will end the credit crisis or preserve America's fast disappearing economic hegemony.
Even taking a trillion dollars of crud out of the equation can't save the financial system from damage already done. Despite the Fed's efforts, many banks in America and around the world have severely enfeebled balance sheets. They cannot lend, even if they wanted to. With the developed world in recession – Japan, Britain, Germany and Spain are leading the way – the banks will soon be losing money on their conventional lines of business, as mortgages suffer defaults and companies go out of business. We will then see a vicious cycle of bad debts leading to less lending, more job losses, more defaults and so on.
The turning point in all this will be the moment when the US real estate market recovers, and the whole sorry cycle of decline starts to right itself. Sooner or later American homes will look cheap enough to attract even the most nervous buyer. That could take another year or two.
The other legacy of the rescue plan will be another huge debt burden loaded on to the shoulder of the American taxpayer (and the British one, if the precedent is copied).
The good news is that the great vitality of American enterprise has survived such traumas before. Franklin Roosevelt's Federal Reconstruction Corporation used $1.2trillion (at today's prices) of federal funds to fix the banking system and get the economy moving in the 1930s. The rescue of America's savings and loans associations at the end of the 1980s cost $125bn. Yet now we have a different dynamic. Behind all of this is an irreversible shift of income, wealth and power eastwards; from America and Europe to China.
The oil price was another tool in this redistribution – they bid the price higher and made us poorer. The Chinese also, in effect, lent us the money to buy all those overpriced houses. How? Because they had the savings to lend to us to do so, funded, in turn, from the huge trade surpluses – trillions of dollars – they built up with the US and Europe, earned from selling us all of those cheap DVD players, dog food and toys. All that money looking for a home pushed interest rates down to very low levels (aided by their cheap electronic goods, which reduced inflation as well). Now China is lending us the cash to get ourselves out of trouble again, by buying yet more US Treasury bills and shares in the likes of Barclays and Citigroup. For now, they seem content to do so; but we cannot be sure that they, and the Gulf states, the Russians and the others holding dollar assets, will do so for ever. The savers' run on Northern Rock, the institutional runs on Bear Sterns and Lehman Brothers, and every other run in this crisis will be as nothing to a global run on the dollar itself.
Could the US itself soon suffer a crisis of liquidity?