Analysis: U.S. bends the rules of free markets
— -- Throughout more than a decade of recurrent crises in nations such as Mexico, Russia and Thailand, the United States offered the same advice: Let the market solve the problem and get the government out of the way. Even when the consequences of such economic "tough love" included widespread joblessness, soaring poverty and domestic turmoil, Washington insisted on the rule that the market knew best.
"We're not doing what we preached," says economist Sung Won Sohn of California State University.
In their bold response to the deepening financial trauma, the Federal Reserve and U.S. Treasury Department appear to have tossed aside the playbook that guided official thinking on the economy for three decades. As a wounded financial system teeters on the edge of the abyss, the economic consequences of allowing major financial institutions to take their market lumps became apparent. "Disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Federal Reserve warned in a statement announcing its extraordinary $85 billion aid for AIG.
At the White House on Thursday, a conservative president with a business pedigree and no affinity for overweening government made clear that authorities felt they had no choice. "These actions are necessary, and they're important. … Our financial markets continue to deal with serious challenges," President Bush said.
Former White House economist Nouriel Roubini, who forecast the current financial storm two years ago, has a harsher verdict. He says the USA is turning into "the United Socialist State Republic of America."
Sen. Jim Bunning, R-Ky., describing himself as "outraged" by the Fed's assertiveness, sounded a similar theme: "The only difference between what the Fed did and what Hugo Chávez is doing in Venezuela is Chávez doesn't put taxpayer dollars at risk when he takes over companies. He just takes them."
