The bulls charged back into the arena much too soon. When news filtered out a week ago of an unprecedented United States Government plan to nationalise the toxic debt of Wall Street, American stock markets responded as if salvation was finally on its way. The euphoria was shared here in Britain. Our own FTSE 100 registered its biggest single-day jump in its history last Friday.
After months of panic selling, investors suddenly began to buy banking shares. Our own Government's orchestrated merger of the sickly HBOS with Lloyds TSB helped generate a perception that the financial services sector was emerging from the woods.
Rarely has the colour drained away so quickly from a new dawn. The two candidates for the White House, John McCain and Barack Obama, have been objecting to the $700bn plan of the US Treasury Secretary Hank Paulson and the Federal Reserve Chairman Ben Bernanke. And the US Congress is refusing to sign off on it until members are satisfied that certain safeguards are met.
The delay has depressed markets anew. Share prices on both sides of the Atlantic have been tumbling again. And the banks are once more in the firing line. HBOS shares have been subject to a renewed pounding, as investors begin to doubt whether the merger will actually go through. If it fails to do so, the implications for Gordon Brown, who made much of his brokering of the deal, will surely be dire.
Meanwhile, Congress has woken up to the implications of the plan for US taxpayers. They are holding the process up with demands that the reckless speculators be punished. They also want the plan to help those poor Americans at risk of losing their homes. The call on Capitol Hill is to save Main Street, not just Wall Street.
Mr McCain and Mr Obama are right to want to ensure the greed-driven architects of this mess do not get away scot-free. Radical new regulation of the global financial sector is surely a political inevitability. But the frustrations of Mr Paulson and Mr Bernanke over these delays to the implementation of their rescue plan are equally understandable. Every day that the banking sector remains too scared to lend imperils further the wider economy. Businesses are being starved of money. Householders are unable to get mortgages at reasonable rates. As the world's most successful investor, Warren Buffett, put it yesterday, the West is facing "an economic Pearl Harbor".
The primary goal of policy-makers must be to protect the wider economy. Questions of moral hazard and regulatory reform should not be ignored, but they must be dealt with after the financial system has been stabilised.
Yet the larger problem with the Paulson/ Bernanke plan is not that it encourages moral hazard, but that it might not get to the root of the sickness in the credit markets. Some economists have made the case in recent days that the true cause of the banks' failure to lend to each other is not too many illiquid debts on their books, but simple insolvency among many of them. In other words, the banks need to recapitalise by raising vast sums from their existing shareholders or new investors (possibly the US Government) before funds begin to flow on a healthy scale again.
Mr Paulson and Mr Bernanke should use this hiatus to evaluate this argument. If it turns out to be close to the truth, the plan before Congress can be altered accordingly. This delay might just save the American taxpayer hundreds of billions of dollars and give investors all around the world a genuine reason for optimism.
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