US bail-outs

In tough times, we like to believe a supreme being – Barack Obama, say – is in control. The reality, however, is that hundreds of US government committees are wrestling with the country’s future. On Wednesday alone, as the Federal Reserve pondered its next move, the House of Representatives voted on a near-trillion dollar stimulus package and the Treasury honed a new bank bail-out plan.

Are the right decisions being made? Take the Fed. Slashing interest rates nine times to near-zero in just 15 months looked panicked at the time, but the Fed deserves credit for moving quickly. But now the crucial question is if and when it starts buying Treasuries. If overseas demand for US debt slides, interest rates will rise. That may eventually force the Fed to extend quantitative easing further along the yield curve. Still, if falling prices persist, there is little the Fed can do to stop real interest rates from being too high.

The stimulus package, meanwhile, looks a done deal save the predictable horse trading. So debating the efficacy of fiscal policy in economic downturns is academic. What is certain is that the brutal contraction in demand in the US is accelerating and will swamp a proposed package that measures only 5.6 per cent of gross domestic product and is spread over years.

Finally, the banks. Backing for an aggregator bank to mop up bad assets is growing. Here the Treasury is right to bend the troubled asset relief programme back towards its original objective. The problem, as ever, will lie in the detail and implementation. Toughness and clear rules are needed: banks must write down bad assets in return for taxpayer funds, for example, and recapitalise themselves by a fixed deadline or face nationalisation. The coming days will be critical. But policymakers should act with speed not haste.

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