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It may be a few years before things become orderly again. Rescue funds are not just sitting there; they must be obtained from somewhere. The U.S. Treasury receipts and expenses are all balanced, rather than being in deficit as in the last eight years. Therefore, without additional taxes, there is no way to fix the broken system.
Alternatively, exporting countries with huge cash surpluses that leave their earnings in the United States may provide the much-needed cash to save the country from disaster.
This could include China, Japan, India, South Korea, Taiwan and the oil-producing countries. In fact, this could be dubbed a “Marshall Plan in reverse” to help the United States.
Immediately after World War II, George Marshall, Harry Truman’s secretary of state, put forth a financial plan from 1948 to 1950 to help Europe rebuild after the war’s devastation. It was a highly successful and benevolent venture on the part of the United States, which catapulted it into world power status with one difference – it was benevolent. By present-day estimates, the cost of the Marshall Plan then was US$90 billion.
Sixty years later, the United States needs a similar plan in reverse. Instead of the $90 billion it provided, it needs $700 billion. Nothing less will do, given the devastation of the merchant banking system, investment banking houses, stock market and insurance sector. A bunch of greedy Wall Street brokers, fund managers and conniving bankers blew the money in a system that included paying themselves huge paychecks. The rest was invested in worthless securities that have zero value today.
The United States is a free economy where responsible capitalism has always prospered. “Freedom” was the advice the United States gave to others. Excessive bureaucracy and an overload of controls were despised as hindering growth. Today, the United States is regretting that it has so few controls and no strong bureaucracy for the financial sector. Now it is creating a new agency to manage the Herculean task at hand and bureaucracy is back in vogue with banks and investment houses about to face much stricter controls.
Before a reverse Marshall Plan is concocted, let us try to understand what happened the week of Sept. 15. In the preceding months, everybody in North America knew things were not right on Wall Street. But after Freddie Mac and Fannie Mae were taken over by the U.S. government, it appeared the immediate danger might recede.
However, that was not to be. The Treasury secretary and federal chairman already knew that, without further government intervention, the U.S. financial sector’s Armageddon was at hand. Publicly they maintained their poise; privately, they were talking to the president and the Congress. On the evening of Sept. 17, in a private meeting, Treasury officials advised congressional leaders that the U.S. financial system would collapse within five trading days.
The impending collapse of American International Group, the insurance giant, became news the next day, and on Friday the Treasury secretary announced a US$700 billion bailout was on its way. The U.S. stock market took this news in stride and recorded a day of huge gains. The market put its confidence in the government bailout.
No matter how the Treasury secretary polishes it, the US$700 billion bailout is nothing but an effort to rescue Wall Street and pardon its sins, allowing the big guys with influence to get away with what they have done.
Only a year ago, a similar proposal to bail out troubled homeowners at a much smaller cost was shot down, with a footnote that irresponsible homeowners who signed on the dotted line should suffer the consequences of their actions. Surprisingly, those who rejected that proposal are looking for a handout today.
How much will Wall Street troubles affect “Main Street?” Main Street depends upon Wall Street for credit, finance and banking, and for daily operations. Businesses receive credit to finance their activities, meet their payrolls and export goods and services. If this credit facility is withdrawn, Main Street will come to a halt. That is what the Treasury secretary and the Fed chairman told congressional leaders. If quick measures were not adopted, people would be eating at soup kitchens, spelling the end of the United States as a great world power.
Europe and Asia would fall if the United States fell. Twenty years of globalization would end in a mere fortnight.
And all this would happen because a few clever Wall Street operators bent on making big bucks devised a plan of subprime home loans, devised the mortgage-backed securities and a whole lot more, to take the nation on a ride. Anywhere else, they could be in jail today. In the United States, since they did not break any laws, they have become advisors of the bailout.
Let us assume Main Street survives the impact of this catastrophe and legislation is enacted to remove bad debt from Wall Street’s books. The question is: who is going to finance this huge bailout? The United States has about US$10.5 trillion in debt, with this $700 billion adding another 7 percent. It will additionally burden the US$13-trillion economy, which is manageable. However, this is a poor suggestion.
A second thought is that a 5 percent consumption tax could pay for this bailout. If this tax is retained for 15 years, it could pay off all the debt. This is an unpalatable suggestion to Americans, since they do not like to be taxed; but the plan is workable. The United States is the only major economy where a central consumption tax does not exist; one could do wonders for the debt.
Another option is to leave the previous debt alone and concentrate on the US$700 billion bailout. China, India, Japan, Korea, Taiwan and oil exporters are exporting and leaving part of their export cash in the United States. The bulk is in U.S. Treasury bonds and a host of other investments. This export surplus is estimated to be US$400 billion to $600 billion a year, enough to bail out Wall Street easily. One catch, however, is the United States already has this cash, which has already been worked into future plans.
Suppose then the above-mentioned countries pool their resources. They could ask the United States to scale down future plans concerning the Iraq War or another Cold War with Russia or to stop funding the Pakistani military, in return for cash for the bailout. All the United States has to do is to acknowledge the donor’s contribution. This could be the Marshall Plan in reverse. Imagine Chinese, Japanese and Indian money bailing out the biggest economic power on Earth.
This idea is workable. The recipient should feel overawed by the generosity of donors, just as Europeans and Japanese felt after World War II.
In summary, the United States needs a reverse Marshall Plan, where exporting countries would bail it out in return for acknowledgement from the United States for their contributions.
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(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)
