Still Time for Bush to Achieve Something Positive

THE TURMOIL IN THE financial markets is a greater challenge to President Bush than September 11 was. He faces a slowdown in the world’s most powerful economic engine, a credit crisis of unknown limits and a regulatory system whose antique tangles reflect the United States’ origins and the 1930s financial trauma rather than the needs of the 21st century.

September 11 profoundly shocked Americans and shattered their sense of security. So did the obstruction which the US military met in Afghanistan and Iraq, from mere roadside bombs and AK47s. But September 11 was not, for all the horror, much of a threat to the daily lives of Americans or their country’s record of success.

It would be useful, then, if the Administration’s response to this crisis were clearer than that to 9/11. It is a chance for Bush to add a small positive legacy to his record, even though many of the decisions will fall to his successor.

After all, there are not many achievements that he can nail down in the ten months that remain. Even those that looked half-solid are dissolving. Iraq has plunged into new battles. North Korea has just thrown out South Korean factory workers, one of its most hostile gestures for years. The Middle East peace process has died again.

But the financial crisis is far from dead. Unfortunately, Bush’s inclinations so far – which are against regulation – appear to be guided by ideology rather than by analysis of the particular threat. In a rift between the White House and the Federal Reserve, Bush has recoiled from the Fed’s decision to use taxpayers’ money to bail out Bear Stearns, Wall Street’s fifth-largest investment bank.

As instincts go, that is not a bad one. The precedent which the rescue sets is unattractive. But in this case, to challenge the Fed’s decision is to presume that it was wrong about the threats of this bankruptcy to other banks. It is entirely fair to ask the Fed to explain why it thought the threat was so serious but it is hard to imagine that the White House was better placed to make that judgment.

Bush also needs to say something soon about whether, if taxpayers’ money is used to bail out banks, it should be used to write down the mortgages of people who have bought houses they cannot afford, in order to protect neighbourhoods as well as mortgage lenders. If he doesn’t, the presidential candidates will beat him to it. Again, while they may draw their position from ideology (and the desire to get elected), it would be better if the answers came from analysis of the fragility of the housing market.

Henry Paulson, the Treasury Secretary, has called for an overhaul of bank regulation and supervision, to preserve stability. Some tidying up would be sensible – banks are now regulated by a web of seven federal agencies, and state ones on top, a legacy of the measures taken in the 1930s to try to prevent future collapse. But it is far from clear what an overhaul would aim to do – surely not to prevent bank collapses entirely.

Bush’s instinct to do little is not the worst one around, in the chorus of calls to do something dramatic. If he used the ten months to back it up by clear analysis of the options – even if he then did little – it would add something valuable to his legacy.