The end of rescues

June 12, 2009

As the current crisis evolved, global governments and central banks went into their arsenals and wheeled out a series of fiscal and monetary weapons — including, famously, a bazooka. The central banks even managed to improvise a few brand-new armaments of their own, mostly carrying unpronounceable four-letter acronyms like TSLF.

But while the world’s governments had a certain amount of momentum a few months ago — enough that a $700 billion stimulus package got passed in the US, anyway — it seems that momentum has now been lost. John Gapper bemoans what’s happened on the regulatory front:

“We must not let turf wars or concerns about the shape of organisational charts prevent us from establishing a substantive system of regulation that meets the needs of the American people,” Mr Geithner testified to Congress in March. Unfortunately, he was talking to a bunch of turf warriors.

And more generally, as any number of European elections are currently demonstrating, disaffection with government is high. Floyd Norris wraps it all up in a blog entry entitled “Government Failure”:

If this is a double-dip recession, it will fall on governments to take further steps to counteract it. The outlook on that score is not good.

Essentially, the financial crisis was met by robust government response. The economic crisis was met by weakened, but still reasonably effective, government response. But if things get worse again, the prospects of strong world governments rising to the occasion have pretty much evaporated at this point. If anything, governments are more likely to be the problem than they are the solution — look at California’s fiscal woes, for instance, or the wave of devaluations and possible defaults which threatens to crash over central and eastern Europe.

At that point, we’ll have run out of saviors. The IMF can’t singlehandedly save the world, and there aren’t any superheroes able to save the day against the odds. Which is one reason why, if and when the markets turn south again, the next bottom is likely to be significantly lower than the previous one.


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