Rupert Cornwell: A spectacular volte-face in the spiritual home of capitalism

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The Independent Online

The sum, when set against the stratospheric amounts promised by governments of far smaller economies, is relatively modest. But even at "only" $250bn (£143bn), Washington's plan to part-nationalise some of the country's largest banks is an astonishing – if inevitable – volte-face by the country that sees itself as the spiritual home of unadulterated free-market capitalism.

Not that such things haven't happened here before. During the Great Depression, the federal authorities spent the then-considerable sum of $1.3bn on stakes in 6,000 banks. In the end, it got most of its money back. In 1984, the Government took over Continental Illinois Bank when it came to grief over bad oil loans, that era's equivalent of securities backed by dud mortgages. Like Bear Stearns and AIG, (but not Lehman Bros), Continental Illinois was deemed too big to fail.

This time around, the direct injection of public capital into banks in the form of preferred shares, coupled with a temporary Government guarantee of new debt, was the solution advocated by many academic economists, as the quickest way to rebuild trust and get the banks lending again. It was also the one favoured by Fed chairman Ben Bernanke – a recognised expert on the Great Depression and the policy mistakes which helped make it happen.

But Mr Bernanke's views at first did not prevail. Instead, the Bush administration, led by Treasury Secretary and former Goldman Sachs alumnus Henry Paulson, rammed its $700bn bailout package through Congress, based on the Treasury buying up "toxic" mortgage-related assets of the banks. These latter would remain in full private ownership.

That scheme however proved too slow and too arbitrary to cope with the direst financial emergency since the 1930s. Yesterday Mr Bush and Mr Paulson were forced to swallow their pride and their ideological principles.

"Government owning a stake in any private US company is objectionable to most Americans, me included," Mr Paulson declared. "But the alternative of leaving businesses and consumers without access to financing is totally unacceptable."

The President himself chimed in, declaring the plan "an essential short-term measure" to ensure the viability of America's banking system, boost growth and preserve jobs. For Mr Bush the operative word is "short-term". The programme, he said, was intended to enable banks to buy the shares back, once markets had stabilised and capital could once more be raised from private investors. This may happen and the government may get its money back and more, just as occured once the Depression ended. But one final thought is in order.

This near-unprecedented intervention has been carried out by a Republican administration, in theory as conservative as they come. As matters stand, the next President seems likely to be a Democratic Senator, with one of the most liberal voting records in Congress. He will work with a strongly Democratic House, while his party could emerge from the election with a filibuster-proof 60-40 seat majority in the Senate. What further indignities might then be heaped on America's battered free market?

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