American economy and politics as seen from Oz

Scary. Like watching the parent make a huge mistake. And the children must deal with the ripple effect.

The world is so incredibly affected by what happens to America's economy and political system. Or it has been.

There is intense but very quiet speculation that America has now lost its international credibility in its financial strength and expertise. That was something held in high esteem and was viewed as separate from the government. It will be some time if ever that world banks borrow from American banks, invest in American bank issued securities and it may mean that credit will not be as available to American banks from abroad.

The bailout package is seen by most as a white flag, but no one is very optimistic that it will guarantee against a recession. And with the presidential elections coming up quickly, doubt seems to prevail or at least a sense of instability. No one knows what the future will bring and speculators of all sorts love playing on that regardless of the long-term damage.

The New York Times ran an article discussing the collapse of the Swedish banking system in 1992. The government chipped in about 5% of GDP, about the same that the U.S. is allocating, but insisted that 1) banks write down their losses first meaning that shareholders of the banks would be affected first before the government and taxpayers and 2) if they aided a bank, the government became a shareholder. In the end, some banks opted to re-org themselves, like SEP who showed a profit the next year. And only approximately 2% of the GDP was spent. Adding true accountability was the Swedish model.

The U.S. did take on shares of Fannie Mae, Freddie Mac and AIG. Perhaps taking on anymore would be "over the top" as they say in Australia.

But just in, according to an article in NYT on late Sunday U.S. time,

"The [U.S.] Treasury would receive warrants giving it the right to acquire nonvoting common stock or preferred stock in firms benefiting from the bailout. The program would be subject to oversight that includes a bipartisan committee and the Government Accountability Office. The GAO would have an office located within the Treasury Department.

The Treasury plans to hire asset managers to determine the criteria for the purchase of securities and oversee the portfolio once the buying begins. While those details remain murky, the Treasury expects to buy up large chunks of assets at a single time. The asset managers would likely start buying the simplest assets first, such as mortgage-backed securities, and then move on to more complex ones, such as collateralized debt obligations."

It would seem from the outlined plan, that the U.S. Treasury will be left to figure out the details of what assets to purchase, at what price and how to manage those assets.