Bankruptcies send markets into shock

The world's financial crisis refuses to go away. Ever since the end of 2006, over exposure to American sub prime mortgages has forced the world's banks to lose billions, and nothing has yet stopped the run.

President George W. Bush issued his ludicrous Economic Stimulus Act in February 2008, and then announced in March that he was "on top of the situation". Obviously not.

Yesterday the financial world saw two icon investment banks vanish, as Lehman Brothers declared bankruptcy after 158 years of business, and Merrill Lynch was bought by Bank of America for $50 billion. In addition, the insurance giant AIG asked for a $40 billion bridge loan from the US Treasury.

These dramatic events created major falls on the world's stock markets. India and Japan were in free fall, and Gulf markets continued to hit near all-time lows. European stocks had crashed five per cent by midday, and Wall Street was set to follow as trading got underway.

What really spooked the markets was the decision by the US government not to rescue Lehman Brothers, and let the market decide what happens. Treasury Secretary Henry Paulson made a political decision to not get involved, despite rescuing mortgage lenders Freddie Mac and Fannie Mae last week.

His change of heart has come at the worst moment. Paulsen has been in charge of years of spendthrift management of the US economy, during which the Bush administration has accumulated huge cumulative deficits as it mismanaged the economy and spent trillions on the war in Iraq.

The willingness of Bush's government to accumulate debt is obvious from the expected deficit of $407 billion for fiscal year 2008, compared to a 2007 deficit of $161 billion.

The only good thing about this failure of policy is that it will end, and the present incumbents will leave after the US elections. But they will leave the incoming administration with an enormous set of problems.