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

C# Developer (C#, ASP.NET Developer, SQL, MVC, WPF, Real-Time F

£40000 - £48000 per annum + benefits+bonus+package: Harrington Starr: C# Devel...

C# Swift Payment Developer (C#, ASP.NET, .NET, MVC, Authorize.N

£45000 - £60000 per annum + benefits+bonus+package: Harrington Starr: C# Swift...

Front-End Developer (JavaScript, HTML5, CSS3, C#, GUI)

£55000 - £70000 per annum + Benefits + Bonus: Harrington Starr: Front-End Deve...

Graduate C# Developer (.NET, WPF, SQL, Agile, C++) - London

£30000 - £40000 per annum + Benefits + Bonus: Harrington Starr: Graduate C# De...

Day In a Page

Read Next
Would you fork out to spend time on Sting's Tuscan estate?  

Happy to pay for the privilege of picking olives? Then Sting might have a job for you...

John Walsh
Clockwise from top: Zafran Ramzan, Razwan Razaq (main picture), Adil Hussain, Umar Razaq and Mohsin Khan were sentenced for grooming teenage girls for sex in 2010.  

Nothing can make up for the trauma of Rotherham's abused young girls, but many more heads must roll

Jane Merrick
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone
Amazon is buying Twitch for £600m - but why do people want to watch others playing Xbox?

What is the appeal of Twitch?

Amazon is buying the video-game-themed online streaming site for £600m - but why do people want to watch others playing Xbox?
Tip-tapping typewriters, ripe pongs and slides in the office: Bosses are inventing surprising ways of making us work harder

How bosses are making us work harder

As it is revealed that one newspaper office pumps out the sound of typewriters to increase productivity, Gillian Orr explores the other devices designed to motivate staff
Manufacturers are struggling to keep up with the resurgence in vinyl records

Hard pressed: Resurgence in vinyl records

As the resurgence in vinyl records continues, manufacturers and their outdated machinery are struggling to keep up with the demand
Tony Jordan: 'I turned down the chance to research Charles Dickens for a TV series nine times ... then I found a kindred spirit'

A tale of two writers

Offered the chance to research Charles Dickens for a TV series, Tony Jordan turned it down. Nine times. The man behind EastEnders and Life on Mars didn’t feel right for the job. Finally, he gave in - and found an unexpected kindred spirit
Could a later start to the school day be the most useful educational reform of all?

Should pupils get a lie in?

Doctors want a later start to the school day so that pupils can sleep later. Not because teenagers are lazy, explains Simon Usborne - it's all down to their circadian rhythms
Prepare for Jewish jokes – as Jewish comedians get their own festival

Prepare for Jewish jokes...

... as Jewish comedians get their own festival
SJ Watson: 'I still can't quite believe that Before I Go to Sleep started in my head'

A dream come true for SJ Watson

Watson was working part time in the NHS when his debut novel, Before I Go to Sleep, became a bestseller. Now it's a Hollywood movie, too. Here he recalls the whirlwind journey from children’s ward to A-list film set
10 best cycling bags for commuters

10 best cycling bags for commuters

Gear up for next week’s National Cycle to Work day with one of these practical backpacks and messenger bags
Paul Scholes: Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United

Paul Scholes column

Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United
Kate Bush, Hammersmith Apollo music review: A preamble, then a coup de théâtre - and suddenly the long wait felt worth it

Kate Bush shows a voice untroubled by time

A preamble, then a coup de théâtre - and suddenly the long wait felt worth it
Robot sheepdog technology could be used to save people from burning buildings

The science of herding is cracked

Mathematical model would allow robots to be programmed to control crowds and save people from burning buildings
Tyrant: Is the world ready for a Middle Eastern 'Dallas'?

This tyrant doesn’t rule

It’s billed as a Middle Eastern ‘Dallas’, so why does Fox’s new drama have a white British star?