Bankrupt

I don't want to take this point too far, but if you had told someone 8 years ago when the Bush administration took office that by the end of its time there, and even as its would-be successors attempt to get elected on a platform that calls for smaller government and less regulation, it would have for all practical purposes nationalized America's leading investment banks, I for one would not have believed you.

I would have argued that nothing short of a world war, or possibly a natural disaster on a truly biblical scale, could have prompted that outcome.

And yet, with the federal buyout of AIG this morning, adding to the recently propped up Freddie and Fanny Macs, we find the US treasury calling the shots at all three.

As David Leonhardt suggests here, the staggering events of this week would in theory have heralded a far more serious economic calamity than has thus far occurred, and in that respect the federal response has been reasonably effective.

What is has not done, in the course of putting the American taxpayer on the hook for hundreds of billions of dollars, is address any of the underlying causes of slack regulation that allowed this situation to occur in the first place. So, embracing their perceived economic imperatives, the Bush administration has inadvertently transformed the US banking system into something rather closer to the Asian Tiger economies, in which governments and the banking systems have poorly defined boundaries. In both Japan and China, the system has created massive and still undisclosed liabilities that distort their national economies in only guessed-at ways.

And still, no one seems to know what this will ultimately mean here in the US. Is the flood dammed, or only only diverted to break through in some new, unforeseeable place in another week? Will this fix, as Hong Kong's leading bankers are suggesting, save the economy immediate pain only to contribute to the long term decline of the dollar (and US economy) as billions more in currency is printed to fill the balance sheets? Now that the Fed is running our major investment houses, what does it do with them? Sell them off at sweetheart prices? Continue to run them as they currently are, almost certainly entailing massive taxpayer loss? Or some new model, necessarily experimental, yet to be revealed? This is a brave new financial world, in which the American taxpayer is being asked to pay for the fairly egregious mismanagement of people whose massive salaries and bonuses largely insulate them personally from the outcomes of their decisions. It should also render utterly laughable Republican calls to continue, let alone extend, their financial model of non-regulation. After 8 years of the invisible hand, the market has bankrupted itself, and we can't live with the consequences. In another 8, we might all be buying our lunches with Euros, Renminbi, or bartering with goats.