Finally, this past weekend, Irish Prime Minister Brian Cowen confirmed what foreign government officials, private sector economists, and global investors knew for weeks: namely, that the Irish government would accept a fiscal bail-out from the European Union in order to help it manage its way out of crisis. Ireland thus follows Greece as the latest nation to require such a bail-out; rumors abound that Portugal is the next country in line for consideration.
At a very early stage of the global financial collapse in February 2009, the Irish government proudly proclaimed that it didn’t need significant grants of monetary support from the European Union to help it bring its troubled fiscal situation under control. Instead, it opted to bail out its domestic banks as an independent nation, and it paid for its decision through a combination of massive tax increases and budgetary program reductions. In fact, the Irish were so widely admired by some for their responsible activities that British voters later voted for a new government that promised to follow the Irish model towards economic prosperity.
Regrettably, though, the Irish model has led the Emerald Isle down a path to continual economic decline, as well as outright population loss as working age professionals and laborers emigrate to other nations in search of employment opportunities. These challenges led to escalating bond market pressures on the Irish government, pressures that may finally be relieved, now that the European Union has come to its rescue.
Although naturally oriented towards free markets and against government intervention in the macro-economy, global investors quietly accepted the impending news of this additional massive government bail-out. Interestingly, private investors have begun to accept — and even applaud — similar governmental rescue efforts in the United States as well.
Intervention, American Style
This past week, for instance, the financial markets enthusiastically bought into General Motors’ (GM’s) gigantic Initial Public Offering (IPO) on the New York Stock Exchange. Although GM’s prior shareholders saw their investments decline to zero value during the auto maker’s bankruptcy filing last year, most investment analysts have supported President Obama’s decision to invest directly in the firm’s reorganization and rebirth. Last week’s IPO, which priced the stock at the high end of the range of values predicted by industry pundits shortly before the event, was deemed a rousing success by Wall Street.
Investor reaction was somewhat more mixed in response to U.S. Federal Reserve Bank Chair Ben Bernanke’s vow to stimulate the economy by directly purchasing Treasury securities from the American capital markets, thereby injecting additional liquidity into the hands of the general public. Although some pundits worried that an economy drowning in cash would eventually experience hyper-inflation and a devastating decline in domestic currency values, most accepted Bernanke’s reassurances that there were no signs of an impending spike in inflation. Most also agreed with Bernanke that recent moves by China and other Asian nations to weaken their own currencies were potentially more destabilizing to the global financial system than his own actions.
As if to emphasize the oversight power of America’s national government, representatives of the Federal Reserve Bank also announced plans last week to stress test the nineteen largest financial institutions in the United States. The only other time the Federal Reserve decided to perform such tests was during the heart of the global financial crisis, when investors legitimately feared the imminent collapse of the world banking system. Last week, though, the Fed’s announced intention to monitor the fiscal health of America’s largest banking institutions was perceived by many as a reassuring signal that “big government” oversight functions would remain in place indefinitely to prevent future investment bubbles and economic meltdowns.
The Pendulum Swings
Much was made of the symbolism of the Obama election in 2008. The American people, many thought, had voted to reverse a thirty year trend of free market, anti-government philosophy, and had opted to swing the policy pendulum back towards active government oversight of (and intervention in) the nation’s economic affairs. Earlier this month, though, the upstart Tea Party voters fueled election victories for the Republican Party; many interpreted these contrary results as a signal that the return of “big government” would halt dead in its tracks.
Despite the Republican Party’s vow to repeal President Obama’s national health care plan, though, individual Republican lawmakers have acknowledged that they lack the votes to actually achieve that goal. And despite continuing complaints about the economic policies of the current administration, no rival politician has presented a comprehensive plan to overturn (or even modify) the current policies and strategies of President Obama’s economic team.
It thus appears, then, that “big government” politicians and bureaucrats will continue to play major roles in managing the national economies of the United States, the European Union, and other countries around the world for the foreseeable future. Interestingly, perhaps contrary to conventional expectations, the private investment markets appear to be satisfied with that prospect.