No government bail-out of the banking system was ever going to be pretty. This one deserves support
SAVING the world is a thankless task. The only thing beyond dispute in the $700 billion plan of Hank Paulson, the treasury secretary, and Ben Bernanke, chairman of the Federal Reserve, to stem the financial crisis is that everyone can find something in it to dislike. The left accuses it of ripping off taxpayers to save Wall Street, the right damns it as socialism; economists disparage its technicalities, political scientists its sweeping powers. The administration gave ground to Congress, George Bush delivered a televised appeal and Barack Obama and John McCain suspended the presidential campaign. Even so, as The Economist went to press, the differences remained. There was a chance that Congress would say no.
Spending a sum of money that could buy you a war in Iraq should not come easily; and the notion of any bail-out is deeply troubling to any self-respecting capitalist. Against that stand two overriding arguments. First this is a plan that could work (see article). And, second, the potential costs of producing nothing, or too little too slowly, include a financial collapse and a deep recession spilling across the world: those far outweigh any plausible estimate of the bail-out’s cost.
Mr Market goes to Congress
America’s financial system has two ailments: it owns a huge amount of toxic securities linked to falling house prices. And it is burdened by losses that leave it short of capital (although the world has capital, not enough has been available to the banks). For over a year, since August 2007, central bankers, principally Mr Bernanke, have been trying to make this toxic debt liquid. But by September 17th, following the bankruptcy of Lehman Brothers and the nationalisation of American International Group earlier that week, the problem started to become one of the system’s solvency too. The market lost faith in a strategy that saved finance one institution at a time. The economy is not healing itself. If credit markets stay blocked, consumers and firms will enter a vicious spiral.
Mr Paulson’s plan relies on buying vast amounts of toxic securities. The theory is that in any auction a huge buyer like the federal government would end up paying more than today’s prices, temporarily depressed by the scarcity of buyers, and still buy the loans cheaply enough to reflect the high chance of a default. That would help recapitalise some banks—which could also set less capital aside against a cleaner balance sheet. And by creating credible, transparent prices, it would at last encourage investors to come in and repair the financial system: this week Warren Buffett and Japan’s Mitsubishi-UFJ agreed to buy stakes in Goldman Sachs and Morgan Stanley. Some banks would still not have enough capital, but under Mr Paulson’s original plan, the state could put equity in them, or, if they become insolvent, take them over and run them down.
The economics behind this is sound. Government support to the banking system can break the cycle of panic and pessimism that threatens to suck the economy into deep recession. Intervention may help taxpayers, because they are also employees and consumers. Although $700 billion is a lot—about 6% of GDP—some of it will be earned back and it is small compared with the 16% of GDP that banking crises typically swallow and trivial compared with the Depression, when unemployment surged above 20% (compared with 6% now). Messrs Bernanke and Paulson also have done well by acting quickly: it took seven years for Japan’s regulators to set up a mechanism to take over large broke banks in the 1990s.
Could the plan be better structured? Some economists want the state to focus on putting equity into the banks—arguing that it is the best way to address their lack of solvency. In theory you would need to spend less, because a dollar of new equity would support $10 in assets. Yet the banks might not take part until they were on the ropes and, if house prices later fell dramatically more, the value of the banks’ shares would collapse. The threat of the government taking stakes would scare off some private investors. And in the charged atmosphere after this bail-out meddling politicians, as part-owners, would have a tempting lever over the banks.
Mr Paulson’s plan also has its shortcomings. He will find it hard to stop sellers from rigging auctions, if only because no two lots of dodgy securities are exactly the same. Taxpayers may thus pay over the odds and banks may be rewarded for their stupidity. Yet these costs seem small against the benefit of putting a floor under the markets. And fine calculations about moral hazard are less pressing when investors are fleeing risk.
If the economics of Mr Paulson’s plan are broadly correct, the politics are fiendish. You are lavishing money on the people who got you into this mess. Sensible intervention cannot even buy long-term relief: the plan cannot stop house prices falling and the bloated financial sector shrinking. Although the economic risk is that the plan fails, the political risk is that the plan succeeds. Voters will scarcely notice a depression that never happened. But even as they lose their houses and their jobs, they will see Wall Street once again making millions.
Buckle a little, but do it briefly
In retrospect, Mr Paulson made his job harder by misreading the politics. His original plan contained no help for homeowners. And he assumed sweeping powers to spend the cash quickly. He was right to want flexibility to buy a range of assets. But flexibility does not exclude accountability. As complaints mounted, Mr Paulson and Mr Bernanke buckled—agreeing, for instance, to more oversight. Now that Messrs McCain and Obama have returned to Congress to forge a deal, more buckling may be necessary. Ideally, concessions should not outlast the crisis: temporary help for people able to stay in their houses, a brief ban on dividends in financial firms, even another fiscal package. They should not be permanent or so onerous that the programme fails for want of participants—which is why proposed limits on pay are a mistake (see article).
Mr Paulson’s plan is not perfect. But it is good enough and it is the plan on offer. The prospect of its failure sent credit markets once again veering towards the abyss. Congress should pass it—and soon.
The International Monetary Fund (IMF) has backed plans to redistribute voting power in the organisation.
It has recommended changes which would base the power of each of the IMF's 185 member countries on the size of their economy, reserves and trade.
The US has expressed reservations about the move but said that it would support it because it represented progress.
However poorer nations and charities have said the plans, which must still be ratified, do not go far enough.
IMF members have spent more than a year negotiating the changes - which would move some sway away from traditional industrial powers including the US, the UK and Germany - to the faster-growing emerging and developing economies.
China, India, South Korea, Mexico and Brazil are among those that will see their voting power increase.
However, under the proposal the likes of Saudi Arabia, Egypt, Russia, Iran and Argentina would lose influence and all five countries either voted against the plans or abstained from voting.
Final decisions will be made after the IMF's spring meeting next month.
"Today's agreement is a major step forward in the modernisation of the Fund and our efforts to adjust its structures to the dynamic and changing realities of the global economy, but it is only a first step," said IMF Managing Director Dominique Strauss-Kahn.
"We are creating a more flexible system for quota and voice, which involves further changes over time as the relative positions of countries in the world economy evolve."
The IMF said the proposed reforms feature simpler and more transparent formulae and some ad hoc quota increases to better represent more dynamic economies.
India's executive director to the IMF, Adarsh Kishore, said the move fell short of what it "had expected, hoped for and strived for".
The information could help the UK recover unpaid taxes and comes as Germany steps up its own tax evasion investigation regarding Liechtenstein accounts.
Why has HMRC obtained the data?
HMRC says the information it has bought will recoup £100m in unpaid taxes from UK citizens who have evaded taxes using bank accounts in Liechtenstein.
It said it was seeking "to protect the UK exchequer from those who seek to hide behind secrecy laws".
Is the move legal?
HMRC has the right to pay for information that helps prevent tax evasion. It has held this power since 1892 although analysts say it is not widely used.
Unconfirmed reports say HMRC paid £100,000 for the data, after initially turning it down.
The Financial Times reported that Germany's success with a tax crackdown based on information from the same informant prompted the HMRC to reconsider its decision.
What's happening in Germany?
The investigation has sparked a diplomatic row
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Germany's tax crackdown came to light when Klaus Zumwinkel, the high-profile chief executive of Deutsche Post, was questioned by police over suspected tax evasion.
Reports have said hundreds of other people are being investigated after Germany paid 4.2m euros (£3.2m) in January 2006 for a list of wealthy Germans with money stashed in Liechtenstein.
The crackdown has sparked a diplomatic row with Liechtenstein; Liechtenstein's Prince Alois has accused Germany of placing "fiscal interests above the rule of law".
What penalties do UK tax evaders face?
Any UK resident found to have evaded tax will have to pay back the amount of tax owed plus interest. A further penalty of up to 100% of the tax due can also be imposed.
In certain circumstances, those found guilty of tax evasion can face a prison sentence of up seven years.
Richard Murphy of the Tax Justice Network, advises anyone with money in an Liechtenstein account to make a voluntary declaration to the HMRC.
"They will still face an investigation but the penalties will be much lighter," he says.
Who is the informant?
The informant is thought to be a former employee of Liechtenstein's LGT Bank.
The Wall Street Journal named him as Heinrich Kieber, a 42-year-old former archive worker who allegedly stole the data earlier this decade.
LGT has filed criminal charges alleging Mr Kieber stole digital copies of customer archive files, the journal reported.
What are some of Liechtenstein's attributes?
The Principality of Liechtenstein borders Austria and Switzerland. It has 35,000 residents and 75,000 businesses are registered there.
"It has an image of being secretive but it is major financial centre. An awful lot of extremely reputable business goes on there," said John Whiting, a tax partner at Price Waterhouse Coopers.
The Organisation for Economic Cooperation and Development lists Liechtenstein as one of only three states remaining on its blacklist of "uncooperative tax havens".
The other two are Andorra and Monaco.
The fund, backed by the Chinese Development Bank and aimed at farming, infrastructure and basic industries, will eventually rise to $5bn.
Chinese President Hu Jintao set out plans for more trade in Africa at a key African-Chinese trade summit last year.
But China's foray into Africa - notably for natural resources - has prompted accusations of modern day colonialism.
Development organisations have attacked China for ignoring alleged human rights abuses - especially in oil-rich regions such as Sudan - simply to secure resources.
A Chinese official attending a conference on Darfur underway this week in Paris opposed the idea of sanctions on Sudan, and criticised suggestions of a boycott of the 2008 Beijing Olympics.
Following the fund announcement Gao Jian, the vice governor of the Chinese Development Bank (CDB), rejected the notion that China simply wanted to secure natural resources but said the country was instead making investments that would help Africa.
China says it will "support Chinese enterprises in developing cooperation with Africa and in investing in Africa".
The maximum tax rebate per disabled worker will be 35,000 yuan (4,550 U.S dollars) a year. Meanwhile, salaries of disabled workers will be exempted from employees income tax.
Companies whose work force comprises more than 25 percent of disabled workers will be eligible for rebates on both income and value-added tax, according to the new policy announced by the Ministry of Finance and the State Administration of Taxation (SAT).
Those with less than 25 percent of disabled employees will only get income tax rebates.
China has issued a series of preferential tax policies since the 1980s to promote the employment of disabled people.
But a SAT official said that current policies had left many private and foreign companies out in the cold, unable to qualify for tax rebates.
The new policy, which will apply nationwide from next month, is aimed at "creating a favorable taxation environment for fair competition and promoting employment for disabled people," the official said.
Statistics show that China has nearly 83 million disabled people, with only 22.7 million in employment and about 8.6 million officially listed in unemployment statistics.