THE WALRUS

The huge bailout by the US and other governments appears to be doing something to settle the financial crisis, thugh many countries are probably already in recession and most of the others are likely to follow. Though such bailouts go against one of the fundamental principles of capitalism - that businesses should suffer the consequences of their bad business decisions - they were necessary to preserve the whole global financial system. In the case of the US, the whole financial system may well have fallen over without it, and a genuine depression may well have resulted. Of at least equal importance was the effect on overseas investment in the US. USA needs enormous inflows of overseas capital just to balance its books, and these may well have dried up. An interesting point is: how will the US government pay for the bailouts, which will increase the national debt (already the world’s highest) by about 50%? Raising taxes will not be popular, and both Presidential candidates have denied any intention to do so. In the long run, the partial nationalisation of some financial institutions may prove a good investment, but that could be a very long run. Make no mistake, that is what has happened in the US and many other countries: a partial nationalisation of some financial institutions. Many would suggest that this shows a fundamental flaw in capitalism which can only be solved by more regulation. Though President Bush is still firmly ideologically committed to a free market system, the rest of the G20 is virtually unaminous in the view that more regulation is necessary, and this is likely to occur. I think capitalism as we have known it in recent decades will certainly be much modified. The pendulum may well swing back the other way in the future, but how far in the future who can tell.