The stalemate in resolving the biggest financial crisis in the United States, described by billionaire investor Warren Buffett, as an "economic Pearl Harbour", has brought the country and the world to an unprecedented phase of uncertainty.
While the latest figures of US unemployment reached a new high at 6 per cent, with more dispossessions of houses, the general environment is one of gloom.
The words of the famous American poet, Robert Frost amply brings out the sense of despair.
"And nothing to look backward to with pride
"And nothing to look forward to with hope"
In his national TV address, President Bush pleaded for quick legislative approval of $700 billion to rescue the financial sector, by buying bad debts and selling them at a later date, conceded that there were failures on many fronts including poor regulation of financial institutions as well as greed on the part of mortgage lenders for housing.
None of them did any proud to the largest economy in the world.
Using the dreaded "P word", panic, President Bush warned fellow Americans: "Without immediate action by Congress, America could slip into a financial panic and a distressing scenario would unfold".
Bush explained "how easy credit, combined with the faulty assumption that home values would continue to rise, led to excesses and bad decisions".
He faulted many mortgage lenders who approved loans for borrowers, without carefully assessing their ability to pay.
Many borrowers, who took out loans larger than they could afford, had to face the music soon, as a boom in home construction followed. With supply exceeding demand, house prices fell, and this created a problem. "Borrowers with adjustable-rate mortgages, who were planning to sell or refinance their homes at a higher price, were stuck with homes worth less than expected, along with mortgage payments they could not afford."
Widespread effects
These home loans were packaged together and converted into financial products called mortgage-backed securities. These securities were sold to investors around the world. Investment institutions in emerging economies and banks in poor countries have purchased these securities, as US is always a safe haven.
That explains the global ramifications of the current financial crisis, which landed the US Government guaranteed enterprises of Freddie Mac and Fanny Mae and Lehman Brothers into financial mess.
The US legislators until late Friday night did not arrive at any tangible plan. Some of Bush's own Republican Party senators opposed the proposal.
There will be another round of negotiations during the coming week.
So, there is agonising uncertainty and diminishing hope for speedy recovery.
Objections to bailout plan
Aside from pushing the taxpayer burden up due to buying the mortgaged debt at a value higher than the market value, the plan will raise the national debt from the current level of $9.5 trillion, which is 60 per cent of GDP to an expected figure $11.3 trillion.
The legislators have also objected to entrusting the bailout plan implementation to one single person: the US Treasury Secretary.
Further, they are not satisfied with the provision of a twice-yearly report.
The legislators want a separate body to supervise and report.
Above all, the critics do not want the executives in the financial institutions continuing to earn fat salaries or get "golden parachutes" in terms of severance pay.
This moral indignation is well expected of the legislators.
Way back in 1989, a former British prime minister John Major defending his anti-inflation measures, told his audience:
"If the policy is not hurting, it is not working."
If the bailout plan, as it stands now, does not hurt those who got the economy into a mess, it is not going to work.
That is the concern of the US Congress.
Importance of rescue efforts
The world needs an acceptable and workable plan for restoring global financial stability.
All countries, rich and poor and the emerging economies, want the US economy to get out of this financial mess quickly and avoid recession.
All of them have trade relations with US. America's recession would result in lower growth in other industrial countries, which would ultimately result in less demand for developing countries' exports, both manufactured goods, intermediate products and raw materials.
Export-dependent developing countries would be seriously affected by declining demand for their exports.
Due to global credit crunch, investors would tend to become more risk averse, reducing their investment in developing countries. They would switch to domestic investment, such as traditional treasury bonds. Consequently, there would be a fall in capital outflows to developing countries, adversely affecting foreign direct investment.
Further, there would be a decline in foreign aid flows to poor countries in Africa and Asia, including Pacific islands.
Can the US Congress and the Bush Administration come to an acceptable agreement and forge a successful bailout program?
Talking of success, we remember the words of T.S. Elliot: "Success is relative: It is what we can make of the mess we have made of things."
* Associate Professor Jayaraman teaches economics at USP.
This article was written before the US Congress agreed on a deal for the $US700 billion bailout plan
