Because there are elections upcoming, American politicians decided to do what they are paid to do and represent their constituents' wishes - which have been running by some reports at 200-1 against the Paulson bail-out. Predictably the Republicans blamed Nancy Pelosi's speech - the speaker of the House is about as non-partisan as ours - and the Democrats blamed the dozen or so GOP representatives who flounced away from the deal because of Ms Pelosi's speech.
The fact is the Paulson bail-out is dead and Global capitalism cannot rely on nanny state. It is going to have to grow up and prove Ms Pelosi wrong when she says
when was the last time someone asked you for $700bn? It is a number that is staggering, but tells us only the costs of the Bush administration's failed economic policies: policies built on budgetary recklessness, on an anything-goes mentality, with no regulation, no supervision, and no discipline in the system...Of course we all know that markets were never unregulated. And I suspect that at the root of many crises of capitalism is some badly thought out regulation. Let's face it, the regulators were still encouraging, nay demanding sub-prime lending well into the Noughies through the Community reinvestment act which judged banks by how much credit they were lending to poor, ethnically diverse communities, especially if they wanted to consolidate. That is sub-prime lending was demanded by the regulator. Think about that for a bit....
So the federal government, and the Regulators in the UK were encouraging irresponsible lending - actively stoking a bubble, whilst the regulators where not asking the question "what happens when house prices fall?". Meanwhile the incentive was for salesmen to ride the train and hope to jump off before it crashed. Everyone knew house prices would fall. What was the regulator doing to protect markets from such an event? Nothing - they were busy making sure that forms were filled in correctly. Making sure that poor people weren't getting honest advice but were driven into the arms of piece-work salesmen pedalling Capital asset pricing model crap according to criteria laid out by... you guessed it... the Regulator.
Sure, banks driven by short-termist shareholders chased revenue and increased risks, but there are sound banks out there. Goldman Sachs and JP morgan aren't converting to deposit-taking banks because of fear, but because they see an opportunity to buy everything in sight. Santander, HSBC, Barclays and Lloyds Even RBS are soundly capitalised the latter after begging its shareholders. These are making investments they would never have got past the regualtor last year. Only those former mutuals who do not have deposits to back their lending have gone bust, or those in the USA who most enthusiastically followed Bill Clinton's desire to foist debt onto the proles. It is no matter!
Regulators are stupid. They look in the wrong places for risk and wouldn't know it if it was charging them with pointy horns yelling "i'm risky". The best thing a Regualtor can do is ensure that no-one gets too big to fail, guarantee some or most of investor's deposits, and act as lender of last resort. Otherwise let the herd get on with it, and if some go bust, then that's Capitalisms great creation destruction cycle in action then.
In the UK it is possible to get over 6% on 3 month money. Over 100 basis points of free profit for any bank with the balls to take it. All it takes is for the banks to put greed over fear again and the problem is over - once that 6% seems easy money, it won't last long. Libor will fall, Mortgage rates will fall and everyone's singing... All the government needs to do is calm down!
Really we should be congratualting the electorate of the USA for forcing the legislators to force Wall Street to accept moral hazzard. I wish Governments would do the same - and leave well alone that which they don't understand. And I wish bankers wouldn't cry for mummy when things go bust. Are you men or are you socialists?