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This week’s front page editor


Francesc Badia i Dalmases is Editor and Director of democraciaAbierta.

Constitutional conventions: best practice

Don't be fooled: Britain's social ills can definitely be blamed on rising inequality

Why the FT's economics editor is wrong to dismiss concerns about inequality.

Egypt's political system is a pressure cooker: it will explode

Egypt will at some point explode in everyone's faces. The question is when, how and most of all, at what cost. How much more blood will flow?

Money where your mouth is: Salaita, freedom of speech, and the new market of education

I'd like to unpack the widespread idea that one's freedom of speech is relinquished when it is used in the form of “hate speech” or to “spread hate.” Hate is a legitimate and reasonable response to certain morally reprehensible realities.

Arab Spring countries need to think outside the neoliberal box

Arab countries should be wary of applying new neoliberal economic policies, since it may have been adherence to these policies that led to the conditions causing social unrest

For my Dad: on what’s wrong with, ‘Being liberal’

The historical misdirection involved in 'being liberal' persists today and affects those vulnerable to ideological revisionism. We must protect them.

This isn't what recovery looks like. Cameron's house price gamble will cost us all.

Cameron's recovery isn't really a recovery, and he's betting the house on a rise in the price of homes. This is exactly the mistake we made before the crash.

What do Syrians eat? Food and the war economy

The long-run viability of Syria will depend on economic recovery, it will not be decided by military victory on whichever side.

Response to Curzon Price on a British devaluation

Devaluation alone is not the solution to the UK's economic woes. But it is the necessary foundation needed for other policies to work.

Is devaluation of sterling the answer to Britain's economic woes?

In his new book John Mills makes a strong case for a British devaluation of sterling but we must start thinking about the socio-political foundations which shape our dysfunctional economy - you can't have a German economy sitting on the UK's political structures.

All stations but America: why the US can't fall in love with rail

Train tracks : flickr/jurvetson There are many reasons why Amtrak suffers from an unenviable reputation: sluggish operating speeds, expensive tickets and long journeys being among the most obvious. But just as important is the American philosophy of ‘individualism’, which has proven incompatible with the idea of nationalized transport.

Would you trust Paulson?


The price of mistrust

Tony Curzon Price

September 22nd 2008

Gamekeeper Hank Paulson has asked taxpayers to put up $700bn of risk capital to spend on his erstwhile and future colleagues on Wall Street. He has given permission to his previous employer, Goldman Sachs, to become a deposit-taking institution. (I am no financial adviser, but I would caution anyone to think twice before transferring their balances to Goldman Sachs today). Are the Democrats right to be resisting the blank cheque, or are they playing loose with the world economy?

The dilemma is clear: crises require flexibility, rapid action and leadership; but the power of flexibility can be abused. Paulson, who rose to the top in the macho culture of ``take no prisoners'' Wall Street is not the man the taxpayer should trust. Worse, the Bush administration's systematic capture by energy, military and religious interests does not suggest a culture that can be trusted with huge power.

Here, concretely , is the worry. The US taxpayer gives Paulson the risk capital. He spends it on buying up the assets that banks do not value--he buys them at a price that the banks find attractive. Once the bad assets out of the way, the banks no longer have to worry that their colleagues and counter-parties will go suddenly out of business and they can start to lend again. It is back to the good old days, except the taxpayer holds all the junk. Paulson has bailed his buddies; the Bush administration has rewarded its friends; bankers and lawyers learn to subvert the new regulation as they subverted the old. Wall Street--indeed world finance--can return to being a cosy club dedicated to personal enrichment.

This is why the Democrats now resist nodding through Paulson's plan. Paul Krugman summarises the problem on his New York Times Blog. The presidential politics make this particularly hard. It is a crisis and your leader asks for urgent help. As you start to raise objections, you can easily be turned into the cause of problems. Every time Nancy Pelosi says ''no'', markets will fall. There is a basic political Pavlovianism that will make the Democrats seem anti-economy. Obama's response to the plan--''it seems very big, but this is an emergency and I will not get in the way''--clearly recognises the danger. McCain's response--''Fine, but No New Taxes''--is clever: McCain protects the taxpayer, and no one thinks he would fail to support Wall Street.

The solution? The Democracts must put flexibility into the rescue package so that the next administration is not tied down to supporting a bad bail-out. Taxpayers should agree to put new money into banks in exchange not only for the toxic assets, but also for various options. Firstly, the option to turn those toxic assets into shares in the banks at the price before last Friday's announcement of a bail-out. This means that if world finance does recover past profitability, taxpayers will not have been the ultimate suckers, the ones who will always patiently take on the losses while others take on the gains. Second, taxpayers should require the option to monitor and cap all pay deals in the rescued institutions. As the Lehman case shows, profitability can go down while individuals still command astonishing rewards--not the rewards that an effectively nationalised industry should tolerate. Third, taxpayers should insist that the risk be borne by those who profited most from the leverage-bubble. Mark Thoma is very convincing that this should be done through a strong dose of progressive income tax.

The basic rule of finance is ''Who has the gold makes the rules''. When the banks have no capital, and the taxpayers are asked for gold, they need to remember that they make the rules. This is the moment to set the rules, not tomorrow, after a recapitalisation. There is a critical difference of a few months between today's crisis and the 1932 banking crisis that brought in the New Deal. Banks started failing in November '32, after the election. Roosevelt's plan was the important one. Today, unfortunately, three months make all the difference. It will be Paulson's rescue. The Democracts must avoid being cast as the destroyers of the economy, while standing firm as the rule-makers of last resort on behalf of that unlikely risk-capitalist, the taxpayer. Nouriel Roubini, long the Casandra of the this crisis, warns in his FT commentary that the crisis will spread to the real economy and to Europe's as well as the US's.

It is going to be hard, so now is not the moment to waste the hardship on a crony's solution.


tony curzon price 2008-09-22
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