Parliamentary Connections

Up until late last night it looked as if AIG was a dead man walking. Then the US government stepped in and effectively nationalised it, the second time in a fortnight that the right wing Bush administration has played the public ownership card, following the bale out of Fannie Mae and Freddie Mac. It is a measure of the chaos in financial markets that both moves have been greeted with big upswings on the world's stock markets.
It used to be part of the mantra of the left of the Labour Party when socialism was still alive that it would nationalise the "commanding heights of the economy", including banks and insurance companies. Now that is a reality in the country that always liked to paint itself as the home of free markets and unfettered capitalism.
But, as we know all too well, state ownership of commercial businesses does not work. I am sure the US government knows that too which is why it is totally mistaken to paint this move as the saving of AIG. It is far from it. It will be dismembered and parts sold off as quickly as is decent and practical. It is also hard to see how its revenues, certainly from insurance business, will stand up. How can any broker recommend placing business with an insurer that would be bust if it wasn't for a huge state subsidy? Surely, its new premium income will nosedive? At best, AIG is living on a life support machine that, one day, will be turned off. At worst, it is a dead man in chains.
There is, however, something rather fitting about governments having to dig deep into public funds to prop up the financial services sector – we mustn't forget that the UK government nationalised Northern Rock last year too. For the best part of 20 years, governments around the world have allowed themselves to be mesmerised by to so-called Masters of the Universe that run (ran) the major financial institutions and passed far too much responsibility for the running of financial markets to them. Now they are having to pick up the tab for that reckless abdication of political responsibility as the one time masters are revealed as the Muppets of the Universe.

It is hard to judge whether the massive rises on the financial markets on Friday (not so far continued this morning) were driven by anything other than a naive sense of relief. The huge, unprecedented lifeline thrown to the rapidly sinking banking sector by the US government possibly made many in the markets believe that the worst is over. In truth, for them, the worst may be yet to come.
There will be a huge price to pay for the massive support from public funds that has been made available to the financial services sector around the world ever since the Labour government in the UK took Northern Rock under its wing. These massive subsides will screw up public finances for years, leading to cuts in public expenditure and increases in taxation, most likely a combination of both. Electorates will simply not stand for that unless they feel the incompetence, greed and sheer lunacy of the financial markets have been purged and brought under control. That means regulation on a scale that hasn't been contemplated before. It is isn't about transparency - what is the point of being transparent about hedge fund and derivative products so complex that only a handful of people understand them, and certainly not very many of the people selling them?
It will be a different sort of regulation. It may even see the abandonment of the regulation by solvency and a move towards the strict regulation of products. This should be looked at as the financial services sector has an appalling record when it comes to creating the right products for the right people in the right circumstances. On the retail side in the UK we have pretty much had 20 years of product-related scandals and now, across the globe, the wholesale markets have proved themselves catastrophically inept too.
May be this morning's cautious opening on the European markets is a the start of the realisation that the world has changed forever and that the immediate future will not be very rosy for those who plunged us all into this crisis.