The US Economic Rescue Package.

I've noticed that I've been a bit remiss in posting on this very important and sensitive topic. This is partly because I have already discussed it at length online and partly because my computer seems to get very angry every time I do but here we go the credit crunch in less then 3000 words.

Over the past twelve to eighteen months the American and by extension the rest of the world has experienced a severe and worsening economic crisis know as the credit crunch. This crisis has seen hundreds of thousands of Americans lose their homes. Many of the large industries that Americans rely on for their jobs have been forced to close their doors and some of the oldest and largest banks have run out of money and gone bankrupt. This crisis can be seen in three distinct phases; The Cause, The Problem and The Solution.

The Cause; The causes of this crisis are many and varied. Some people think it is all the fault of irresponsible and predatory lenders forcing loans onto people who cannot afford to repay. Others think it is the fault of irresponsible borrowers taking loans and mortgages where they can barely afford the interest repayments. Some have blamed President Bush's deregulation of financial markets while some have blamed property speculators for building too many homes meaning that the supply of housing exceeds demand pushing the price of property down. A large group have even blamed oil speculators from driving up the cost of a product which is the life blood of the US economy.

The correct answer is probably all of the above because the economic crisis has been described as a perfect storm. Everything that could possibly go wrong with the economy has gone wrong and it has gone wrong at the same time. This convergence of things going wrong has left the banking system which drives the US economy with one simple yet highly destructive problem.

The Problem; Banks like all other capitalist organisations are governed by one thing - the Balance Sheet. The size and complexity of a balance sheet varies with the size and complexity of the business it belongs too but basically all they are is a list with two columns on it. One column lists the businesses assets and the other lists it's liabilities. In the case of a bank the assets are money or "capital" people have deposited in that bank and the liabilities are capital that the bank has loaned out to other people often in the form of mortgages. As the name suggests the two columns of a balance sheet have to "balance" meaning that any entry in the liability column has to cancelled out by an entry of equal value in the asset column.

With the value of houses falling the value of the banks liabilities have been increases meaning that they have to inject even more capital into the asset column to cover them. As a result the bank then has less capital to lend out to people causing something known as a mortgage famine. With no mortgages available to buy houses the value of houses falls increasing the banks liabilities and so on. Unchecked market forces will conspire against themselves and the process will continue in a self-feeding downward spiral which like water draining down a plughole will only increase in speed and severity until the basin is completely empty.

The Solution; The rescue package the US government is currently trying to get through Congress is as brilliant as it is simple. They are going to buy $700bn of these liabilities taking them off the banks balance sheets and putting them on the governments balance sheet which being the governments balance sheets doesn't actually have too balance and very rarely does. With the liabilities taken off their hands the banks will then have much more capital available to lend to each other, to lend out in mortgages and lend to employers who wish to expand or consolidate their operations.

This simple and implicitly capitalist solution will increase the supply of money allowing the economy to recover and house prices to stabilise. In the short term this will allow more employers to keep more Americans in their jobs and give the banks the confidence to avoid increasing mortgage rates and be more patient with those homeowners who may through no fault of their own be having trouble keeping up with their repayments. In the long term house prices will recover decreasing the value of these liabilities allowing the government to sell them back to the banks at either the price they paid for them or even possibly at a profit.

Although the initial outlay of $700bn is quite a lot of money it is a fraction of the trillions of dollars that would need to be injected into the markets to keep them from collapsing or the quadrillions of dollars that America would lose from that collapse and there is a strong possibility that the taxpayer will recover a large proportion of that $700bn and there is even a chance they may make a profit.

Unlike other solutions which have been proposed such as mortgage protection this package will quickly and efficiently solve the problem with no real impact on the way that America's capitalist system functions. It is unfortunate that Congressional Democrats have tried to manipulate such and important bill to provide funding for socialist housing programs but this crisis is not a problem that can go unsolved and I'm sure that in the next session House Republicans will be able to deal with the add on's long before the package starts providing the programs with any money.

So in summary I hope that Congress passes this rescue package as soon as possible not least because it will really piss off those who were hoping to use an US economic downtown to close the gap with their own national economies.