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Wednesday, September 24, 2008

US Taxpayer generously bails out the world(?)

Brad Setser -Sharing upside and downside risk

Prof. Brad Setser has a wonderful post on the US taxpayer bailing out “global” financial system. He examines the various ways in which the US could have bailed out the system while ensuring it gets something in return. The current bailout terms actually make the US taxpayer party to downside risks without any means to access the upside gains.

This touched a niggling thought in my mind. Is the US taxpayer carrying the burden of global financial system bailout?

US taxpayer is financing the “global” liquidity crises. Is it not similar to central bank intervening in domestic markets to provide liquidity? So in effect, the US is acting like central bank of the world. Then does the US have the clout/muscle to regulate globally?

If US attempts so - is a political transgression. Naturally, this will lead to diplomatic games that often result in lot of dinner and drink expenses and little else.

If not, US taxpayer is getting a raw deal. In effect, the already stretched taxpayer is bearing the global financial rescue burden. At this point, it is overwhelming. Add to it consumption responsibility that developing countries expect US to carry out. I think the system is near break. It is MUST that global leaders / central banks sit and hammer out the solution at a global level. Else, we will be perilous close to political turmoil.