Geopolitical Diary: A U.S. Financial Plan Takes Shape

STRATFOR analysts — well, those of us on Austin time — arrived at work Tuesday morning in time to hear brief speeches by the U.S. financial trio: Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and FDIC Chairman Sheila Bair. The government's three economic leaders were explaining changes to the government's financial and regulatory structure that are intended to deal with the ongoing financial crisis. The long and the short of it is this. The Treasury will spend $250 billion on purchasing direct shares in the country's banks. While technically this is voluntary, the nine biggest banks were informed that they were volunteering, in order to remove any stigma for signing on to a "bailout." Participating firms are directed to help homeowners avoid foreclosure and restart normal financial interactions with other banks. That is intended to deal with the two major problems at the core of the current crisis: falling home values caused by rising foreclosures, and liquidity shortages caused by banks not trusting each other and thus refusing to lend to one another. Backing up the share purchases is a new government policy managed by the FDIC which will insure most types of debt — including unsecured debt — issued by participating banks, again with the intent of improving interbank trust. Finally, any non-interest-bearing account will also be insured, regardless of size, so that businesses need not fret that their operating accounts are in danger. For these last two provisions, the protection begins immediately and is free for the first 30 days. After that the FDIC will add a small fee to existing insurance premiums. So the government now has a stake in banks, those banks are being heavily discouraged from allowing foreclosure, $700 billion is being pumped into the financial system by various means (part of this is the aforementioned $250 billion in share purchases), the Fed is granting unlimited dollar loans to any bank that can offer collateral, and deposits of any size along with the entire interbank market are now fully insured. The plan is not perfect — and having a 30-day blanket guarantee for anything will raise fraud concerns — but in this sort of environment, a blind one-winged duck with gout hobbling around in a desert could probably run a bank reasonably easily. Decisive action was required, and now it has been taken. The only question in our minds is whether these steps were taken in time. Ultimately the success of the above measures will be defined by the return of consumer and business confidence — consumer spending accounts for roughly 70 percent of American gross domestic product, and business spending most of the rest — and this is not something that a glance at the stock markets can confirm. Confirmation will only come in a few weeks, after loans are granted, purchases are made, and the money that has funneled into the system has a chance to do its lubricating work. Or at least that is the case for the United States. Elsewhere the picture is less optimistic. In Europe the liquidity crisis is only the first step in a broader banking crisis; even in the best case scenario Europe faces months — not weeks — of recession. In East Asia an American and European slowdown — even if only for a few weeks in the United States — will depress demand for Asian exports during the Christmas shopping season, normally the period of greatest demand. So even in the best-case scenario, an inevitable enervation in the export sector will create gross problems for the Asian economies. All in all the signal fire for the way out of the crisis has been lit, but that does not mean that the road from here to there is a short — or easy — one for all travelers.