If anyone asks how you conceive the new Europe”, Joseph Goebbels, the Nazi regime’s cultural czar, told German journalists in 1940, “we have to reply that we don’t know.” As Hitler’s forces carried their onward march across Europe, the Fuhrer and his cronies remained clueless about the role of the empire they were creating. That empire lasted less than a decade, but in its short span it turned the world upside down.
Ironically, the same can be said about the damage caused now by the Wall Street financial crisis. The financial and political elite in the United States, the epicentre of the financial revolution across the world since 1990, had little clue about how to cope with the meltdown that began with the collapse of Lehman Brothers. When it became clear that the Lehman Brothers, a prized jewel among the global investment banks, would not be rescued from the financial follies it committed in amassing toxic mortgage assets and money-market funds, the global financial system went into a tailspin.
Soon, it was the turn of American International Group (AIG), the world’s largest insurer. AIG is not only present in almost every country but, more worryingly, its depositors included a large small-saving community across nations. But those who decided not to bail-out Lehman Brothers chose to adopt a different course when it came to AIG. Ben Bernanke, the chairman of the US Federal Reserve, and Hank Paulson, the US treasury secretary who came from Goldman Sachs, chose to nationalise AIG at a phenomenal cost of $85 billion on the assumption that its bankruptcy would result in an unstoppable financial contagion.
Surely, it is bound to be questioned as to why Lehman Brothers was not bailed out while AIG received kid-glove treatment. The New York Times says in a news report that Goldman Sachs, a Wall Street investment banking behemoth, “was AIG’s largest trading partner” and that “a collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side”. Doubts are bound to be cast whether the powerful duo — the fed chief and treasury secretary — acted at arm’s length in choosing which banks to rescue and which banks to die a natural death. “Why does one person have the right to grant $85 billion in a bail-out without scrutiny and transparency the American people deserve?” asked Nancy Pelosi, the speaker of the US House of Representatives.
Once it became clear that not one bank is safe from the housing mortgage mayhem, in which they ploughed thousands of billions of dollars over the last two decades, the Fed and the Treasury decided to provide a $-700 billion lifeline for mortgage assets or anything else to stabilise the system. After considerable squabbling over how this largest financial bail-out must be implemented, the US Congress and the Bush administration reached an agreement on early Sunday. It would authorise the US Treasury to purchase $700 billion in troubled debt from sick firms to prevent financial Armageddon.
It is still uncertain how this bail-out will pan out both in its implementation as well as its overall systemic impact on the American economy in particular and global economy in general. After all, the $-700 billion bail-out — which is called the Troubled Asset Relief Programme (TARP) — is meant to restore “confidence” in the American economy by addressing house prices and mortgage defaults. But the financial crisis has now reached what some analysts call the malignant stage where it is likely to claim the next big victims who splurged on auto loans, credit card loans and student loans.
However, for the time being the writing on the wall is clear: The financial revolution that began on Wall Street over two decades ago and its violent crisis now is bound to create a new global financial atlas. Besides, the US has lost the moral authority to preach the world about crony capitalism, conflict of interests and moral hazard. “The global financial system will become more multi-polar” and “the US will loose its status as the superpower of the global financial system”, declared Peer Steinbruck, the German finance minister.