Crash looms as McCain rejects bail-out plan
Posted on 26 September 2008 with no comments from readers
Global capital markets edged close to the brink of a major collapse today as the House Republicans appear to have scuppered the $700 billion bail-out plan and the Washington Mutual became the largest bank failure in US history.
This is brinkmanship of a dangerous kind and reports suggest US presidential candidate John McCain is backing a revolt against the bail-out plan by House Republicans. A meeting in the Oval Office with President Bush yesterday, including John McCain and his opponent Barrack Obama, broke up in complete disagreement with participants wondering how markets would take this news.
Widening credit spreads over the past few days have been an ominous warning that capital markets are going to take a failure to agree a bail-out plan for the US banking system very badly, and the failure of Washington Mutual has underlined the importance of recapitalising the US banking system.
The rally in US banking stocks caused by the sudden ban on shorting last week is likely to come to a sudden end, and there will now be no shorts to cover to prevent a major crash in the sector.
All eyes will again be on the Treasury Secretary Henry Paulson for a statement to shore up market confidence at the opening today, but it is hard to know what he can say as his authority appears to have been undermined at the highest political level, and President Bush seems no longer in charge of the Republican party.
None of this bodes well for capital markets, and it may now be that right wing Republicans will get the market collapse and cleaning of the system that they seem to favor. But as President Bush warned earlier this week a ‘painful recession’ will follow, and a Wall Street Crash comes with that territory.
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Bryan Johnston, investment director at Bell Lawrie, said: “If Paulson’s plan fails we will see a collapse in the markets and taxpayers will effectively pick up the tab. We could also see 1,000-point falls on the FTSE on Monday and we would be out of a job, while the banking system would freeze up.”
Dear Peter,
Do ring the alarm bell. Some will act on it. Some will sit lazy. Twas ever thus. Thank you for the forewarning. 20% of my £ is now in gold and silver, for my children’s sake.
Thank you for your commentary, very much read and respected in England.
Memo to UAE: do not bail out Western excess. See how the Chinese and Japanese are losing for doing that?
Think of our children. They deserve better. Just a thought…
2009 and 10 may be the moment for UAE investment in the West. Not now.
Thanks Clr – Dubai has canceled a couple of big investment deals over the past month, so I think your counsel is already well heeded. You have taken an excellent insurance policy in precious metals, and one that should pay out huge dividends, and you probably do not have long to wait. Even if this bailout is passed this week the implications for inflation and the US dollar are incalculable.