Monday, September 22, 2008

Will the People's Republic of the United States lose it's AAA rating?

I'm from the centre-left, but I'm gobsmacked at the latest events in the United Staes. It was OK to nationalise Fannie Mae and Freddie Mac (initial cost $100bn) and rescue AIG for $85bn, and rescue Bear Stearns for $30bn. Despite the $5.4 trillion of liabilities Fannie and Freddie have, and the $185bn liabilities in AIG, most of those will come good, only a small part are bad. In the long-run the taxpayer will make a profit (and this is the case for Northern Rock too), and the present cost to rescue them is reasonable in the circumstances.

But this $700bn rescue fund being proposed by the Bush administration to buy toxic assets is something else. These "toxic assets" are worthless, that's why there is a problem in the first place. Unlike Fannie and Freddie where the nationalisation meant that the taxpayer gets the good with the bad, this new plan means that the taxpayer is essentially giving away a load of money for junk with no value and the only ones to benefit are the companies receiving the gift. Talk about getting rewarded for screwing up the system.

The markets are nervous too - stocks, bonds and the dollar all collapsed today and NYMEX oil for October delivery jumped $25 in a day, as people sought a safe haven. Because the end result of this can only be a sharp downgrading of the superpower's own credit rating, which implies that being loaded with junk like this might cause Uncle Sam to default in the future.

I can't believe they are even considering doing something with those sorts of implications. Frankly they'd be better off nationalising the whole banking system, even if it made them more Commie than the People's Republic of China (which has been privatising stuff in recent years). Nationalisation at least means the state gets the good bits with the bad, plus control over the banks - it means the state has a chance to break even or make a profit (with the potential for future privatisations) and thus the state/taxpayer gets to survive all this relatively intact. But gifting money to robbers in return for worthless paper, just puts too much strain on the state.

Even worse was Hank Paulson's exhortation for the rest of the world to follow his example. Eeeu! If our government wants to make emergency nationalisations, fine. Gifting taxpayers money to the city, no.

3 comments:

broncodelsey said...

Can you have a word with our great leader about his PFI's,whereby any profit goes to the private company and any loss to the taxpayer?

Maybe you can also get him to stop hiding all these off balance sheet PFI's so the electorate can see how much debt their great grandchildren will owe?

snowflake5 said...

You appear to completely misunderstand how PFI works, broncodelsey. It functions like hire-purchase - you pay the operator money over the course of the project, and at the end of it, the taxpayer owns the asset.

This is a little different from the way treasury bonds raise money in that when the treasury sells a bond, it raises the capital upfront, and then pays coupons over the term, and then repays the capital at the end of the term.

You mention "loss" to the taxpayer, but the interest rates charged on PFI are considerably less than those paid by the previous thick-as-two-planks Tory government, who were paying as much as 15% on gilts.

The salient point to note is that at the end of the PFI project, the taxpayer owns the asset. What the US treasury is proposing in their $700bn bailout is to give Wall Street the money for assets valued at $0 - i.e. a straight transfer of wealth.

You talk about "hiding" the figures - but Eurostat complies debt figures including all UK PFI - see here, which is readily available on their website, so tis no secret.

You will note that even including PFI, UK debt was 43.8% of GDP in 2007 (it will have gone up since then as we have taken on Northern Rock). In the USA by contrast federal debt plus state debt was 63.4% of GDP in 2004 (the last date the total figures are available). If the Americans include Fannie and Freddie, plus borrow $700bn to give to Wall Street as a sort of gift to the rich for cocking up, US debt approachs Japanese levels. Hence the reason their credit rating is likely to be downgraded in the way the Japanese one was, if they go ahead with this.

broncodelsey said...

Can you remind us how many billions the collapse of the metronet PFI has cost the taxpayer?