Commentary: Scare 'em rigid ... and boost McCain vote

The language in his nationwide broadcast last night was apocalyptic but he is a politician if nothing else. A few days ago his Treasury Secretary, Hank Paulson, revealed a plan under which the US government would spend $800 billion buying sub-prime mortgages and the like from the nation's banks. The theory is that if you give the banks hard cash for duff assets it will restore them to health and allow them to start behaving like sensible banks again, providing credit to the nation's enterprises and helping them to grow. That would mark the end of the crisis - albeit at the cost of leaving the taxpayer with $800 billion of dubious assets.

Bush's problem is that the plan has run into opposition in Congress. His appeal to the nation was to get the people on his side so not only would they accept that the colossal sum of $800 billion would indeed have to be spent, but also that they would tell their Congressmen in no uncertain fashion that is what they want. It was a manoeuvre to help him to draw the sting from the opposition. He needs to do this for both economic and political reasons. It is not just the economy that is suffering. It will not have escaped his notice that each day this crisis runs, the more it damages the chances of a Republican win in the November elections. It is important that he be seen to be doing something and what better way to get the people behind him, than by scaring them rigid? It worked in the wake of 9/11 after all.

But the Bush version of Apocalypse Now ignores that the plan has two kinds of opponent. In one camp are the mainly Republican diehards who believe it is wrong in principle to use public money to bail out the private sector, however bad the consequences for innocent bystanders in letting the banks go to the wall. These people might be swayed by a voter backlash. The second camp is different. It accepts a taxpayer-funded rescue is necessary but does not think this Paulson plan is the best way to go about it.

There is indeed an inconsistency at the plan's heart. The banks' problem is that no one knows what these poor-quality assets are worth. So how much does the Treasury pay for them? If the price is rock bottom, it will be too low to help the banks and they will go bust anyway. If the price is too high it gets the banks right off the hook but it dumps all the rubbish and losses in the lap of the taxpayer.

The favoured alternative plan - so far resisted by Paulson - is to leave the assets where they are but for that $800 billion, or an equivalent sum, to be injected into the banks as new equity. This injection of capital would help by giving people confidence in the ability of banks to withstand the losses while giving the taxpayer a stake in the upside as the banks returned to health.

What actually happens will no doubt be thrashed out over the next few days, and that at bottom is probably what the President wants. He probably does not care much how the rescue is structured provided it works. That goes for the rest of us too. You don't have to share the Bush vision of a return to the Thirties to believe that these are difficult times. But while a downturn is inevitable, a disaster certainly is not.