THE Bush administration unveiled over the weekend a plan authorizing the government to take over $700 billion in worthless assets and bad debts held by failing institutions in the largest financial bailout ever taken by any American administration since the Great Depression.

Declaring that the United States was facing “unprecedented challenges,” President George W. Bush said, “This is a pivotal moment for America’s economy,” as the government was set to take “unprecedented measures” to restore the financial system’s health.

Although the full details of the rescue plan have not been released, it would give sweeping powers to the government to dispense gigantic sums of tax money sheltered from judicial review. Bush said the plan would allow “the federal government’s purchase of illiquid assets such as troubled mortgages from banks and other financial institutions.”

The precedent-shattering financial intervention marked a watershed in US history as a Republican administration turned its back on the ideological creed, that the best government is less government.

Bush acknowledged this historic shift when he said, the federal government “should interfere in the marketplace only when necessary,” but that “given the precarious state of today’s financial markets, and their vital importance to the American people, government intervention is not only warranted; it is essential.” No Republican president ever said this before.

The plan would risk “a significant amount” of taxpayers’ money, Bush said, but “swift, bipartisan action” was needed to keep the US economy from grinding to a halt as problems sparked by the credit crisis had begun to spread through the entire financial system—leaving jobs, pensions and companies under threat.

Risks to taxpayers

“These are risks the US cannot afford to take,” he said. “We must act now to protect economic health from serious risk.”

Bush acknowledged the risks to the taxpayers in the sweeping government intervention to rescue failing financial institutions. He said he worried the financial troubles “could ripple throughout” the economy and affect average citizens, but “the risk of doing nothing far outweighs the risks of the package … Over time, we’re going to get a lot of money back.”

He added: “People are beginning to doubt our system. People were losing confidence and I understand it’s important to have confidence in our financial system.”

In the twilight of his presidency, Bush, who is saddled with a sinking popularity rating over the US war in Iraq, should be haunted by the memory that the October 1929 Wall Street Great Crash took place during the Republican administration of President Herbert C. Hoover.

Bush’s doctrinal apostasy in the 2008 financial crisis is taking place under the shadow of the Great Depression. The rescue package would give the government stronger regulatory powers over financial institutions.

Last weekend’s more sweeping federal intervention followed the government bailout of two leading Wall Street institutions, Merrill Lynch and Lehman Brothers, and extension of an $85-billion loan to American International Group (AIG), the world’s largest insurance company, in a move to avert its collapse which was feared might precipitate a worldwide financial breakdown.

More than averting a global financial crisis, this series of interventions depicted a profound transformation of the global financial system, probably with more far-reaching consequences than the Wall Street Crash of 1929.

Fed stretched to limit

Economists worldwide were quick to note the tectonic seismic shift in the events of the past few weeks. From the interventions of the Federal Reserve, the New York Times noted that the Fed was being stretched to its limits, both in the range of problems it is being asked to fix and in its financial firepower.

“The central bank has also transformed itself almost overnight into The Fed Inc. by essentially taking over American International Group after already taking on hundreds of billions of dollars in mortgage securities to help ailing financial institutions,” the Times said.

“Instead of just setting monetary policy in its ivory-tower-like setting, the Fed now must wear several hats of the insurance conglomerate, investment banker.”

Investor of last resort

The Times quoted Allan Meltzer, a professor of economics at Carnegie-Mellon University in Pittsburgh, who said, “This is unique, and the Fed has never done something like this before. If you go all the way back to 1921, when farms were failing and Congress was leaning on the Fed to bail them out, the Fed always said, ‘It’s not our business.’ It never regarded itself as an all-purpose agency.”

The Times added: “The Fed has often been described as the country’s lender of last resort—the one institution that would lend money when everything else had failed. But by acquiring almost 80 percent of AIG in exchange for lending it $85 billion, and holding $29 billion in securities once owned by Bear Stearns, the Fed is now becoming the investor of last resort as well … But in the past few months, the central bank has transformed itself from a regulator of the money supply to a white knight for troubled financial institutions.”

Other quarters observed a qualitative change in US financial intervention.

Double standard

The Agence France Presse (AFP) noted: “The US criticized the Asian economies for attempting to bail out cash-starved companies during the regional financial crisis a decade ago, yet now throws a lifeline to its companies ravaged by credit crisis.” It said this move “smacks of double standards.”

The move to rescue financially stricken companies, such as AIG, Merrill Lynch, Lehman Brothers, and mortgage giants Fannie Mae and Freddie Mac and investment bank Bear Stearns contrasted with the approach taken by the United States and the International Monetary Fund during the 1997 Asian financial crisis, according to AFP.

The region was told to let inefficient corporations bleed to death.

Shoe on other foot

Raghuram Rajam, chief economist at the IMF between 2003 and 2006, told AFP: “I guess some of the pundits in Washington arguing against government money being used (to bail out local companies) in Asia at the time are now basically for various government intervention.”

Now the shoe is on the other foot. “Well, it’s when it hits you that you realize what other countries were experiencing,” he said. “It’s all very well to say, ‘Let the financial system go. Let it find its equilibrium.’

“But when it is in the face of speculative attacks and prices are being hammered and it looks like the larger institutions are going to collapse, it is pretty natural for the government to step in and say, ‘We can’t let this happen.’” (Continued on Wednesday)

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