In little more than six months, the government has put a federal guarantee behind the biggest Wall Street firms, taken over half the $11 trillion mortgage market, gained ownership of the world’s largest insurance company, enacted the biggest financial bailout in history and, on Tuesday, became the lender of last resort for corporate America.
The unprecedented series of actions, most of which were bred of desperation and occurred with increasing speed in just the past month, have left even the most worldly wise pundits short of breath and wondering where this government intervention into what was strictly private realms for decades will end — and when.
“The financial landscape will be remarkably different, and we suspect so too will the social landscape” after the historic events of the past month, said Bob Andres, chief investment strategist at Envestnet Asset Management. “Don’t be surprised by additional strong policy actions by the Federal Reserve or Treasury to exorcise the credit dilemma.”
Cities and states such as California, which has alerted the Treasury that it may need an emergency loan, are next in line behind the banking and corporate sector, he said, and so is the ailing market for student loans.
Talk surfaced Tuesday that the government also may set up a loan program for small businesses, many of which are on the ropes and clamoring for help from Uncle Sam.
Tuesday’s move by the Fed to set up a program to purchase commercial paper without collateral from major corporations like General Electric Co. and General Motors Corp. crossed a critical line of demarcation that had been honored for nearly a century between the worlds of banking and commerce in the United States.
“Think of it as kitchen sink monetary management,” said Edward Hadas, an analyst with Breakingviews.com. “The central banks throw in everything they have — cash, government securities and eventually the full faith and credit of the sponsoring governments” to try to stop the rapid unraveling of credit markets.
In frantic bids to stem the credit contagion, governments in several European countries have gone even further than Washington in recent days, nationalizing their entire banking sectors and offering blanket guarantees on all bank deposits to prevent dangerous runs that can bring down the whole financial system.
“Central banks were determined to keep deleveraging from turning into debt deflation, even if they have to assume much of the lending role of normal banks,” Mr. Hadas said.
But he worries that the independence and unique roles of the Fed and other central banks as defenders against inflation have been seriously damaged. “The distinction between central banks and governments is blurred,” he said.
French President Nicolas Sarkozy capsulized the trend in Europe last week when he declared that the world has seen the end of free-market economies that dominated in the last century.
“Laissez faire, it’s finished. The all-powerful market that is always right, it’s finished,” he said. We would, he added, need “to rebuild the entire global financial and monetary system from the bottom up, the way it was done at Bretton Woods after World War II.”
Mr. Andres said the extensive intrusions into the economy by the Fed and Treasury, whose Republican leaders once championed deregulation and privatization and continue to do so as they tout their actions as temporary, may be just a prelude to greater governmental activism in the future.
Many Democrats and Republicans in Congress are vowing to impose strict new regulations on the financial sector to punish excess and greed and prevent similar market implosions in the future, while momentum is building for an infrastructure spending program to promote jobs and counter recession next year.
“Federal expenditures to date represent remedial spending, or ‘empty calories,’ designed to enhance credit and avoid a systemic collapse,” Mr. Andres said. “Once we clear the credit issues, policymakers may consider supporting a massive spending initiative to rebuild the dilapidated infrastructure within the United States.”
Mr. Andres said the hasty and purportedly temporary interventions after decades of a shrinking government role in the marketplace were needed to heal “self-inflicted wounds” from too much debt-binging by consumers and businesses.
He traces the current monumental financial and economic problems to the culture of “instant gratification,” which prompted Americans to buy houses, cars and lifestyles that were more expensive than they could afford, and finance them with loans they could not pay off.
“The concept of debt has been with us since the beginning of our nation,” he said. “What has occurred since the end of World War II is a blurring of the lines between productive and consumptive debt.”
James A. Dorn, editor of Cato Journal, said the country will come to regret the precedents the government is setting.
“Opening the doors of the U.S. Treasury to Wall Street may be necessary to avert financial meltdown, but it will expand the size and power of government far beyond what the framers intended,” he said. “The innocent victims will be market liberalism and taxpayers.”
Mr. Dorn added: “The danger is that U.S. sovereign debt itself will be downgraded, not by official rating agencies but by global capital markets. It seems highly likely that the bailout will mean higher interest rates and lower asset prices, and do nothing to increase domestic saving” needed to restore health and balance to the economy.