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Saturday, September 27, 2008

When the world has changed - mixing politics and the credit crunch

The wrangling in Washington over the terms of the $700bn bail-out deal continues, though the latest seems to be that a deal is closer. We are now in the situation where a deal has to be struck, with little debate on what overall approach governments should take. What will become increasingly clear is that the likelihood of further government action to support financial institutions directly has increased (as opposed to just buying toxic assets).

However, a real problem is that not many people have an idea about what to do. On this basis at least, Paulson and Bernanke should be praised since they do have a plan and a clear idea about how to implement it. John McCain's admission last week that he hadn't read the bail-out plan was telling - if only all this finance stuff could get sorted, we can go back to normal campaigning.

But the world has changed. And politics will have to change too. On the Left, the challenge is to avoid sounding like we hope the 1970s are back (that was not a good time economically):. Government has to have a role; the free market philosophy has flaws (though markets are the best system we have in most cases for communicating and satisfying needs); and in a worst case scenario, the government may have to become employer of last resort.

The Right has challenges too. How can it fashion a pro-market ideology that is not harsh and uncaring towards those who are particularly adversely affected (some benefiting from the 'misery of others' in Shadow Chancellor George Osbourne's words)?

So expect 'radical' calls to give regulators new powers, restrict executive pay in some circumstances etc. In other words, democratically elected politicians giving more power to unelected regulators to make decisions based on...well, no one's worked that out yet.

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