Leading article: Our financiers need not just a rescue, but a reckoning

Share
Related Topics

Forget Northern Rock. Forget Bear Stearns. The United States Government's decision to nationalise Freddie Mac and Fannie Mae is the single most significant episode of state intervention in the financial markets since the credit crunch began. The American government now takes on to its national balance sheet $5.4 trillion (£3 trillion) of US mortgage liabilities. And the US Treasury will inject at least $200bn into the two companies. It amounts to the biggest corporate rescue in history.

The US Treasury Secretary, Hank Paulson, hoped that the implicit guarantee of funding he made in July would be enough to shore up market confidence in the two giant mortgage lenders. Investors were not convinced. The share prices of Freddie and Fannie continued to fall. And when overseas investors in the two companies began to lose their appetite for new bonds, a state rescue became inevitable.

Freddie and Fannie were, in that dreaded phrase, "too big to fail". If either had been allowed to go bust and default on payments it would have sent a catastrophic shockwave through the American economy. And so many foreign states have invested in the two that this shockwave would have travelled around the world.

But while a rescue became inevitable, it is interesting to note that when Washington finally decided to move, it was prepared to take much more decisive action than our own Government did over the failed mortgage bank Northern Rock. Mr Paulson has wiped out the incompetent managements of Freddie and Fannie and intends to hit shareholders hard. By contrast, our own Government was content to let the hapless management of Northern Rock stagger on for months. And our Treasury was much more humble in dealing with shareholders demanding compensation. The land of the unbridled free market has been rather more radical in using the power of the state to intervene. It is also notable that while the heads of Wall Street investment banks such as Merrill Lynch and Citigroup have been forced out (albeit with enormous payouts) the heads of our own write-down issuing banks have all survived.

Yet we should not make too much of the differences. The truth is that there has been stunning "moral hazard" on both sides of the Atlantic in the past year. Taxpayers' money has been used on an unprecedented scale to inject liquidity into dried-out markets, something which has thrown a lifeline to thousands of greedy investors and irresponsible banking groups that would otherwise have gone bust. The extent of the public liabilities resulting from this crisis, both in America and Britain, will only become clear over time. But we can be certain that they will be vast.

The US government and Federal Reserve have now done – and will continue to do – what is necessary to protect the American economy. Our own Government and the Bank of England will have to follow. That should mean an extension of the Bank's Special Liquidity System to underwrite the issuance of new mortgages. The priority of both of our governments has to be to stop the present slowdown from turning into a depression.

But when it is over, there needs to be a reckoning. The banks that relaxed their lending standards so irresponsibly in the boom must be constrained to stop them doing the same thing again. Those regulators and politicians – amongst them our own Prime Minister – who rode the housing and speculation boom while neglecting to demand sound lending practices must also be held accountable. The credit crunch is not just a market failure. It is a damning failure of regulation.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: Telesales & Customer Service Executives - Outbound & Inbound

£7 - £9 per hour: Recruitment Genius: Are you outgoing? Do you want to work in...

Recruitment Genius: National Account Manager / Key Account Sales

£30000 - £35000 per annum: Recruitment Genius: An opportunity has arisen for a...

Recruitment Genius: Operations Manager

£30000 - £35000 per annum: Recruitment Genius: An exciting opportunity to join...

Recruitment Genius: Recruitment Consultant

£30000 - £35000 per annum: Recruitment Genius: We have an excellent role for a...

Day In a Page

Read Next
Pakistani volunteers carry a student injured in the shootout at a school under attack by Taliban gunmen, at a local hospital in Peshawar  

The Only Way is Ethics: The paper’s readers and users of our website want different things

Will Gore
 

Labour's Simon Danczuk is flirting with Nigel Farage, but will he answer his prayers and defect?

Matthew Norman
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

Marian Keyes

The author on her pre-approved Christmas, true love's parking implications and living in the moment
Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

Bill Granger's Christmas Eve fish feast

Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

Rodgers fights for his reputation

Liverpool manager tries to stay on his feet despite waves of criticism
Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

Michael Calvin's Last Word

Sepp Blatter is my man of the year in sport. Bring on 2015, quick