For Franz Kafka, the Czech writer, the most terrifying thing he could imagine was waking up finding himself transformed into a giant insect. I woke up yesterday morning to an even scarier prospect: that I agreed with the far right of the Republican party. I had opposed the US Treasury secretary Henry Paulson's plan to bail out the Wall Street banks on a number of counts, but never expected it not to be passed. I am now squarely in the camp that insists on the right of everyone to carry a gun, oppose abortion and believe in creationism. There were also a number of Democrats who voted against the proposal; perhaps I can console myself with this fact. Either way, one can only admire the politicians who - faced with the masters of the universe coming cap in hand to Washington - turned around and said the equivalent of Marie Antoinette's dismissive phrase: "Let them eat cake".
Mr Paulson, the man who had urged Congress to vote for the largest bailout in financial history, looked like he was about to be sent to the guillotine. In a couple of weeks he had virtually nationalised two of the biggest mortgage lenders, seized a major chunk of its largest insurance company and sat on his hands during the biggest bank collapse in the country's history. The bullet-headed banker, a former head of Goldman Sachs, had tried - and failed - to save Wall Street.
The talk now is of trying to tinker with parts of the plan to enable the bill to pass. Just 12 congressmen are needed to change their minds, 12 good men and true. All the financial experts had agreed that something had to be done to save the banking system, and that without prompt action the world economy would grind to a halt. Troubles on Wall Street would soon filter down to Main Street. This may be true, which for me makes the decisions of those 12 people who did not back the bill particularly laudable.
Was it self-interest that prevented them from voting for it - after all, one senator was quoted as saying that "everyone wants this bill to be passed, they just don't want to be the ones doing it" - or was it because they, too, opposed the bill on principle? Whatever their reasons, for me they are the heroes of the hour. We may well be in uncharted waters, but unlike Greek sailors, who hug the shoreline, they were willing to turn the tiller to the sea and head away from land.
What will happen next? That is anybody's guess, but I suggest that things may not be as dire as people were saying to pass this bill - the sky will not fall on our heads, bank lending will not dry up altogether; banks, after all, are in the business of lending money. There are a number of reasons why I opposed the Paulson plan. I instinctively object to legislation that is rushed through. Some may credit him with moving swiftly to avert a crisis, but his original plan seemed aimed at doing whatever was necessary to bail out his pals on Wall Street. The key was to get something agreed upon, never mind how bad a deal it was. This reminded me of the dodgy property salesman you run into on holiday who tries to persuade you to buy something on his charming development opposite the airport and next to the cement factory. He knows that once you get home you will shake your head and wonder what you were ever thinking about.
So I think it would be with the Paulson Plan. It was never sufficiently clear exactly how he planned to use the money - "Trust me, I'm a banker" doesn't really inspire much confidence these days. For US$700 billion (Dh2.57 trillion), although a mighty sum, would only be the tip of the iceberg. On Monday, $1tn was wiped off shares. The last major bailout of America's troubled mortgage-lending sector, the savings and loan crisis that hit at the end of the 1980s and beginning of the 1990s, occurred because the thrifts or property lenders were borrowing short and lending long. They had been like traditional British building societies, taking in deposits and lending out a bit less. Then they began tapping the capital markets and things got out of control. Under the first President Bush, a plan was cooked up to save the thrifts. It was initially thought that $20bn would be needed. The final bill was 10 times that sum, a whopping $200bn. This now looks like small change when compared to Mr Paulson's request for $700bn. However, multiply that amount by 10 and you get a sum of $7tn, exactly half of America's GDP. Is anyone willing to spend that sort of money?
I also opposed the Paulson plan on principle. If you believe in the benefits of the free market, you also have to go with it when the markets turn choppy. If you are going to ban short selling, you should also abolish long buying - or perhaps behave like the Russians did a week ago and ban trading altogether for a couple of days. But if you are going to use taxpayers' money to bail out bankers every time they get themselves into a mess, you might as well do away with Wall Street altogether and build a command economy or resort to countertrade and barter.
This is, of course, ludicrous. We can't go back, but we could go better. The banks that have failed should be allowed to go bust. Bankers will have to retrain; perhaps they can all become waiters and their offices turned into restaurants. It is this approach to business that made America great. When an industry fails, it is rebuilt, and quickly. This is in contrast to many other parts of the world, which prefer sclerosis. Japan was faced with a similar financial crisis in the 1990s and for 10 years did nothing. The result was zero growth. The Europeans are going to bail out their failed financial institutions, and the result will be 10 more years of zero growth. We expect better from America.
Around the world, people are going to wake up to discover that they are much poorer than they were when they went to bed - $1tn was wiped off the US stock markets. Their investments have turned into cockroaches. That happens; such events are not unprecedented. In Oct 1987, the Dow Jones industrial average fell by 508 points, or nearly 23 per cent. Yesterday, despite all the turmoil, the market only fell by five per cent, although perhaps this was due to the ban on short selling. Without it, the markets would probably have doubled their losses. This is not - yet - the Great Depression of the 1930s, when one in three Americans was out of a job. There are no soup kitchens on Wall Street yet.
Traders are calling the politicians and public "idiots" for not agreeing to this package. Time will tell. There may yet be benefits for Main Street. The price of oil is falling. Most Americans would probably prefer to pay $2 a gallon for petrol, rather than sitting watching investment bankers fly overhead in their private jets on their way to their own Caribbean islands. rwright@thenational.ae
