Like the banker George Bailey in the Hollywood classic "It's a Wonderful Life," the US financial system isn't sick. "No, worse" as George's guardian angel says. "He's discouraged." Indeed, a buy-up of bank shares by the US Treasury is aimed at fixing a "lack of confidence" in credit markets. But where does that confidence really lie?
A bold plan to inject capital into banks will put Uncle Sam inside America's biggest financial institutions. Taxpayers will own a $250 billion chunk of Wall Street while other federal actions will put taxpayers on the hook for potential losses. As lender of last resort, the government will increase the currently low flow of loans to giant hedge funds and small doughnut shops alike.
If it works, the social compact of an economy – shared risk – will be renewed. "Crises often have a way of revealing our better selves," said John McCain. Or as Barack Obama said Monday, this is a moment when people realize the "common stake that we have in each other's success" – just like George Bailey's pleas to the citizens of the fictional Bedford Falls to believe and invest in each other.
We are all "credit swap derivatives" now. (In fact, the word credit comes from the Latin "to believe.")
But restoring trust in a debt-driven economy won't be easy. As with many a government hand in private matters, there's a risk of politics and bureaucratic incompetence also creating doubt and inefficiency. And if this plan fails and the economy doesn't recover for years, tax burdens will rise.
This "temporary" share purchase by Treasury is the latest step in a year-long drama triggered by a mortgage crisis that exposed how many banks hold excessive and shaky credit.
It's important to look at the timing of this move. Only when Americans felt a common sense of crisis with a drastic fall in stock prices did a bipartisan consensus emerge in Washington. The old debate between socialism and free markets gave way to a recognition that Main Street and Wall Street must hang together or else hang separately. Community trust was reinvented.
A financial system originally set up by government – by issuing currency, through rule of law to settle disputes, and in regulating abuse – fell apart from too much debt, too much complexity, and a lack of transparency. Now, as in the savings and loan crisis of the 1980s, government is buying assets to stabilize markets with plans to resell them. The difference in this crisis is that markets are much more global while supervision remains largely at the national level.
In Europe, where banks are more indebted than in the US and tied more closely to national industries, a consensus for using tax money to put capital into the weakest banks was quickly reached. The US has followed suit but by injecting capital into both weak and strong banks – to avoid playing favorites.
Global markets lack the depth of trust found within nations. Both Britain and France are now calling for new global rules on transparency, integrity, and genuine competition – or the values that lie at the heart of free-market capitalism.
Markets rely on the morality of the society they operate in. Businesses can have freedom of choice only if they keep the public's trust. Around the world now, the public, with its money, is trying to restore that trust in financial markets.