State Capitalism, Day Three
it's now clear that the Fed's intervention into AIG is a state takeover of unprecedented scale: an 80% stake, the management ousted and Hank Paulson said to be mulling further "systemic moves". Meanwhile in the UK a government-brokered takeover of HBOS by LloydsTSB is under way.
On top of Northern Rock, Fannie & Freddie and 11 US deposit-taking banks now in public ownership (or "conservatorship") this is turning into a modern version of state capitalism: Professor Nouriel Rubini of NYU told me yesterday that the 500bn losses declared to date would amount to 2 trillion, and that whole swathes of the finance system will end up publicly owned. I am beginning to believe him. (He is calling the USA the United Socialist State Republic of America and is scathing of Paulson's intervention.)
On US TV they are calling it "the end of the age of greed" - and both parties are vying with each other to slag off Wall Street, with McCain's rhetoric hinting at criminality on the part of some of the recently failed companies. One network signalled this with a rolling tickertape caption that simply said: "The candidates get real".
With hindsight we spent yesterday with the greatest systemic risk hanging over the financial sector since the 1930s - it was hard to report this because nothing was happening; which shows you that the gobbledygook talked on financial channels is no longer a guide to reality: only the sudden, sporadic and unpredictable action of the lawmakers is what matters right now.
The biggest "correction" is ideological - as my lengthy ramble on the subject of Atlas Shrugged below explores. But it is happening in America fastest because there's an election: McCain and Obama can break free from the entire market philosophy of the Bush years with impunity and Paulson does not have to stand for election; he just has to prove his mettle (which I think he is proving massively) as a creative pragmatist.
But in Britain there is still political stasis: the Labour Party can't exactly say "light touch regulation was a disaster" because the man who championed it is in charge and fighting for his political survivial; and the Conservatives certainly have no political imperative to change their generally laissez faire outlook, because there is no popular revulsion at Wall Street-style capitalism in the UK. It is rawer in the USA because there is no welfare state; people are exposed indirectly to dealings with companies like AIG over their health care and retirement income.
So, once again, there are parallels with the early 1930s: the Brits stick to the old ideology longest because they invented it, meanwhile the Americans rapidly improvise a new regulatory stance, flying in the face of tenets they have believed their entire careers.
I think this will inject a new dynamic to the US election: because McCain's rhetoric, though sharply anti-corporate now, contradicts his policy statements. He was against the state takeover of AIG; he wants to abolish Fannie & Freddie not keep them afloat as state-backed institutions. His economic adviser is Phil Gramm is the man who deregulated investment banking. His big backers include Stan O'Neal, Merrill Lynch boss who presided over the first phase of the bank's demise.
But Obama, after initially seeming to refuse the chance to go in hard on the corporate greed line, is now going for the jugular. It's a measure of his triangulating instincts (and what is an emerging pattern, his non-killer instincts) that only on Day Three is he beginning to land punches on McCain over the collapse of neo-conservative financial ideology (which, believe me, is the main theme of the TV coverage now - much as, 1984 style, having been at war with Eastasia they are now at war with Eurasia). However, Obama too is vulnerable to the charges of over-friendliness with a failed financial institution - namely Fannie and Freddie.
It remains to be seen which the American public cares about most: the collapse of Wall Street or the hubris of two part-privatised institutions that are the only remaining source of cheap mortgages. There's useful summary here on why the Federal bailout action effectively blows away the campaign promises of both parties.
Going forward Paulson is said to be eyeing further system-shoring measures - keep your eye on Washington Mutual (looking at takeover) and the Detroit car makers. The pressure is on now to bail out Motown to the tune of 50 billion dollars plus. And Michigan is a swing state.