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NUMERO 20 - 22/10/2008

 The US financial crisis and the economic strategies of McCain and Obama

The debate held in Tennessee on October 7, 2008 between senators John McCain and Barak Obama was conducted according to what purported to be a town-hall type of format. It lasted 90 minutes, with the moderator (Tom Brokaw, the famous television journalist and author) choosing questions from previously selected “undecided voters” in the audience and asking additional questions selected from among thousands submitted via internet. The economy took center stage. No wonder. The previous four weeks had been dominated by most dire news concerning the financial markets. We shall look first at some of these very recent developments and then briefly examine how they have impacted the broad economic strategies of the two presidential candidates.
The events
First came the announcement on September 7 of the nationalization of Fannie Mae and Freddie Mac through a $200 billion bailout. A week later came the news of the bankruptcy of Lehman Brothers and of the Fed-encouraged acquisition by Bank of America of Merrill Lynch. Then, two days later came the bailout of insurance behemoth AIG by the US government, at a cost to the US tax payer of $85 billion. After that, following days of massive turmoil in stock markets all over the world, on September 19 Treasury Secretary Henry Paulson publicly illustrated the broad outlines of a $700 billion bailout plan for the financial sector. Then, three days later, came the announcement that the last two large stand-alone investment banks, Morgan Stanley and Goldman Sachs, had felt it as necessary to transform themselves into bank holding companies to better cope with the changed market realities. This was the completion of a cycle that had started with the partially Fed-financed takeover by J.P. Morgan Chase of Bear Stearns in March 2008. The investment banking sector, within a span of six months, had changed permanently. The sense of doom among financial operators and the public at large was heightened further by the collapse on September 26, 2008 of Washington Mutual. It was the largest-ever US bank failure, triggered by a massive wave of deposit withdrawals. At the same time, in a move confirming the tumultuous changes taking place in the competitive landscape of the US banking sector, Federal regulators sold Washington Mutual off to J.P. Morgan.


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