Love him or hate him, Karl Marx was a pretty smart bloke. While perhaps a long bow to draw, his observation that ‘democracy is the road to socialism', strikes a certain chord with events in modern day America.
Just about everyone knows about the dire state of the US housing market. But news that the US Treasury and Government are seeking to bail out struggling homeowners indicates just how serious the situation really is. In what can only be viewed as a supreme irony, we are now witnessing the champion of capitalism and free markets intervening in an unprecedented way.
Bloomberg reports that tomorrow, US time, the US Government will announce an agreement "to freeze interest rates on subprime mortgages for five years to stem rising foreclosures".
Essentially, those who should not have received loans in the first place will get interest rate relief while those who can afford it will continue to pay. While only in the early stages, this socialisation of the housing market could be fraught with danger.
In addition to (ostensibly) being a champion of capitalism, the US is also a great democracy. Could the upcoming elections (admittedly, they're in November 2008, but the US has a long campaign) be behind the government's desire to provide a solution? A cynic would say yes.
Politicians in modern day democracies find it difficult to make tough decisions because the voting public don't take too well to tough policies. When a large part of any constituency finds itself in trouble, and particularly financial trouble, the political response is to provide a solution, often at the expense of the minority.
It's still too early to tell who will foot the bill for the co-ordinated bailout. But one thing's is for sure, the arrangements are just as much about bailing out Wall Street as bailing out Main Street. News of plan spread throughout US trading last night, and the financial sector rallied strongly. This has flowed through to solid gains in early Australian trading.
While the shorter term outcome will probably prove positive for all parties involved, interfering with the natural course of markets never produces a sound outcome. This time is not likely to be any different.
