We apparently have an extra $700 billion of taxpayer money to spend in an effort to improve our economy. How are we planning to spend it? We are going to give it to investment banks and other financial services firms. What could we expect the result to be? America’s investment banks and financial services firms will be in great shape; the rest of the U.S. will lag behind.
What do you call a country with a thriving financial services sector and everything else rusting and obsolete? England. The City of London has been a leading provider of financial services worldwide for the last couple of centuries. During this period the rest of the country has lost its empire, lost its military power, lost its leadership position in scientific and engineering research, lost its leadership in manufacturing, and suffered from slow economic growth compared to its European neighbors.
By some accounts, the 1.22-square-mile City of London contributes roughly 20 percent of the UK’s GDP, employing only 300,000 people. (This compares to the U.S. financial services industry, which has grown from about 6 percent of the economy in the 1970s to roughly 10 percent today.)
Seven hundred billion dollars is enough money to reshape the American landscape. New York City real estate will become even more desirable. The rest of the country will decline gradually.
Do we have to spend our money this way? Why not put the $700 billion into tax credits for businesses that make capital investments? Or reduce the corporate tax, which would increase the value of American stocks? Or give tax breaks to foreign companies that open factories or R&D facilities here in the U.S.?
If the companies are too big to fail then they should be broken up. The simplest way of doing that is using existing frameworks namely bankruptcy. The $700bn is the worst way of achieving this because what we really want is for the ones that are going to fail to do so soon, rather than having a bunch of sick companies in long drawn out death spirals. (See airline industry 🙂
If we are going to invest $700bn then it should be in people. Their health, their education, their living conditions, their environment and their safety net. The economy is better served by lots of small and medium sized companies.
http://www.guardian.co.uk/commentisfree/2008/sep/28/usforeignpolicy.useconomicgrowth
The global financial crisis will see the US falter in the same way the Soviet Union did when the Berlin Wall came down. The era of American dominance is over
Or, if the threat to the economy is that businesses will not be able to get loans, why not just lend $700B directly to businesses, à la the Department of Education’s Direct Student Loan program.
This isn’t my ideal plan, but it’s better than just lining the pockets of the financial industry in really poorly-conceived plan.
Another point for this analogy: American cars have sucked for the past couple decades and continue to suck every year. Not a single friend of mine chooses to drive an American-made car or truck (some have to, for work). Detroit will eventually shrivel up and Ford and Chevy will be relegated to making niche cars for enthusiasts, like the handful of British brands still left, while Japan and South Korea continue their global dominance.
Just a note, that AIG was bailed out after Paulson was lobbied not by American citizens whom he is supposedly beholden to, but by the French minister of finance, since AIG had sold them credit protection on some $300 billion of securities.
So there is the possibility that the now $925 Billion of assistance ($700 B plus the “sweeteners”) will go at least partially, towards bailing out Europe and not the USA.
Philip,
Three more industries are making big contribution to UK.
1) Fashion Industry – 0.8%GDP
2) Tourism
3) Food and Wines
I am not sure how they help contributing to the growth of country in
Scientific and industrial growth.
I fail to see how this will result in terrible weather .
@patrick giagnocavo
If you think ploughing $75b into America’s largest insurer to stop them defaulting to the tune of $300b in obligations to an EU country, the world’s largest economic zone, thereby ruining the credibility of US financial services in the eyes of the world, is a bad idea – sure, don’t do it.
That’s not a “bail out”. That’s meeting obligations in order to avoid far worse consequences. It’s an extremely bad omen that it was even necessary, but necessary it was.
The larger bailout, though – I don’t know what its motivations were. If it were indeed to satisfy overseas creditors, it might well also have been absolutely necessary. If China and others stopped buying T-notes, America would rapidly find itself in a very bad way indeed.
I am hesistant to join the chorus of those saying “this right here right now is the end of global dominance for America” like the above Guardian article – that seems premature and smells more than a little like schadenfreude. But something has certainly shifted. It might not be the beginning of the end quite yet, but it’s certainly the end of the comfortable middle act.
When the finance minister in Germany is saying “the United States will lose its superpower status in the world financial system” then you know something big has changed.
I think maybe the only thing saving America is that this is all happening now, and not 5 years from now, when China might have felt powerful enough to just let the USD sink into the black hole it so richly deserves.
Anyway, one thing is for sure – America’s fate is in the hands of foreigners, and if they demand a bailout, then they are getting a bailout, and there’s not a whole lot of choice a country with twelve trillion dollars of foreign debt has in the matter.
The End of America? No, of course not. The End of American Exceptionalism? Yes, I think so, and that is exactly how it should be – the end of a temporary privilege, one that was unfortunately abused, and will now be withdrawn.
Some corrections of error:
The City of London, aka The Square Mile, aka The City, is the finacial district of Greater London, the capital city of the UK (England is not an independent country). It contributes around 3-4% of UK GDP in gross added value. LONDON itself accounts for around 20% of UK GDP. Financial services in the UK account for around 9% of UK GDP in gross added value, so little different to the USA.
In fact, UK financial services have grown by 50% in the last five years, so if anything, the UK was copying the US, not vice versa.
And now we’re as broke, unequal and unhappy as you are.