WASHINGTON DIARY: Bailout blues —Dr Manzur Ejaz

If the bailout’s mammoth injection of funds works as envisaged — which is very unlikely — and the financial system finds it legs, inflation and interest rates will skyrocket down the road

Now that the US Congress and President Bush have signed into law a $700 billion bailout plan, every one is waiting to see its impact. It may be perceived as a disastrous step taken in the direction of same old perilous path that has sucked in the US and the international financial system. By now, over a trillion dollars have been pumped in to revive the financial system with no light at the end of the tunnel. On the contrary, the huge bailout package can lead to stagflation (rising inflation and unemployment) or a depression — ‘mini’ or full-fledged.

First of all, it should be clear that the bailout package will be financed by the US Treasury through printing money garbed as bonds and bills sold to investors. Another provision approved by Congress will give further tax cuts to businesses. It means that some social programmes for poor Americans will be eliminated because the tax rebates will reduce government revenues.

The bailout package has been approved despite wide-ranging public opposition. The public rightly perceived that over a trillion dollars — if one takes into account last month’s bailouts as well — are being dolled out to Wall Street fat cats who were responsible for the financial mess to start with. Once again, the business lobbies, with deep pockets, have prevailed over the common US citizen.

It is not only President Bush and his Republican Party, the entire US Congress and Senate have a strong bias in favour of the rich. From one-third to one-half of the senators are millionaires or billionaires and it is always easy to get a pro-rich law passed through Senate. That is why after the bailout bill failed in Congress, reflecting public sentiments more accurately, Senate rushed to rescue the most expensive pro-rich financial package.

The House representatives also went along because they know that large political contributions come from the wealthy. Furthermore, the dissenting Republicans were more amenable to approve the bill in the second run because it was providing greater tax rebates to businesses, which are owned mostly by the rich. They also figured that their wish to cut more spending on social programmes was being fulfilled.

The basic problem with the US is that capitalism is not taken merely an economic system but as a religion. The ‘capitalism as religion’ doctrine is worshipped not only by the rich, but the poor as well. One can get away with criticism of religion, but critique of American capitalism is not taken very well.

By extension, the capitalists are considered the gods who provide bread and butter to the common people. Therefore, preservation of the capitalist pantheon is the duty of common human beings. Their faltering has to be ignored because it is not the prerogative of mortals to find faults with the gods.

The main logic behind the bailout plan was derived from the basic scripture of the capitalist bible. If common mortals are to fill their bellies, the capitalist gods have to be propped up one way or the other. Their plundering and greed has to be ignored.

Economists, claiming to be objective about the system, are also devout believers who provide justifications and apologies for the capitalist religion. They provide jargon and rationales to justify whatever direction the capitalist gods take. Therefore, they never have a clue about where the economic system is headed. And, when the capitalist gods take the economy from one peril to the other, the economist, shamelessly, rushes to provide reasons for the state to help them to get off safely. If one understands the core ideology of American society, it is easy to see why the bailout package was approved without any research on its impact. However, the bailout is another bomb that will cause a lot of destruction.

If the bailout’s mammoth injection of funds works as envisaged — which is very unlikely — and the financial system finds it legs, inflation and interest rates will skyrocket down the road. The stock market tumbled after the passage of the bailout plan anticipating its ultimate effect. Of course, the stock market dictum is to buy on the rumour and sell once the news is out. Nevertheless, the stock market may rise a bit, but will eventually fall once interest rates start going up. Most likely, the US will be trapped in a 1970s type stagflation where unemployment and inflation will go up simultaneously.

If the bailout plan does not work and the financial system continues its downward trend, the uncertainty may prohibit businesses from new borrowing. The newly pumped money will find no takers and the US will fall into a liquidity trap. (Lowering of interest rates does not boost demand for credit and the system keeps crashing.) Usually, such conditions lead to economic depression.

In any case, the bailout plan approved to save the rich at the expense of common citizens — every citizen is burdened by thousands of dollars — will bring additional complications. The elites approving this bailout package have been part of the ‘political bubble’, which may burst in coming few years. Until that bubble bursts, the US economic system will not be cured.

The writer can be reached at manzurejaz@yahoo.com

Source: Daily Times, 7/10/2008

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