George W Bush will go down as arguably the worst US President in history and it will come back to two points: Iraq and the housing-induced credit crash.

Alan Kohler had a fascinating column in Business Spectator on February 29 reviewing a new book by Joseph Stiglitz, the former chief economist of the World Bank, which blamed the credit crisis on the $3 trillion Iraq war.

The $3 trillion was all borrowed and, as Kohler summed up Stiglitz, this became “the hidden cause of the credit crisis because the Alan Greenspan Federal Reserve colluded with the Bush Administration by flooding the US with cheap credit to keep interest rates down.”

Throw in the various frauds which put loans into the hands of 10% of Americans who couldn’t afford them and then flogged them off to the rest of the world and you have today’s global credit crisis.

The collapse of Bear Stearns is certainly the biggest disaster for Wall Street in a generation. Long Term Capital Management got a Fed-induced $US3.6 billion bailout from its peers, whereas Bear Stearns got $US30 billion of liquidity from the Fed.

Whilst the British Government effectively funded the $150 billion run on Northern Rock, the Federal Reserve has funded the sale to stop the run.

Stand by for a huge backlash against the US investment banks, starting with new US legislation which will make Enron’s Sarbanes-Oxley look like a picnic.

Everyone from gangsters to US Presidents knows that you need a combination of brains and muscle to prosper. American multinationals have long surfed on the coat-tails of US military power and trade negotiations.

Unfortunately, the Yanks went brain-dead over Iraq – producing more expensive rather than cheaper oil – and now can’t afford to maintain their huge military spending, let alone bail out investment banks or guarantee housing for Americans.

When saddled with $US7 trillion in government debt, a banking and credit crisis is disastrous for America. You just can’t keep borrowing $US2 billion a day from the rest of the world to fund huge budget and current account deficits. No wonder the US dollar is free-falling when people start talking about the Fed printing money.

It was largely foreign governments which pumped more than $40 billion into Wall Street banks last year because the US government simply didn’t have the cash.

These foreign governments are collectively more than $10 billion underwater and so this time the Fed had to borrow even more money to facilitate a sale to the only American bank left with a strong balance sheet, JP Morgan.

London has already replaced New York as the world financial capital and what we are seeing here is the rapid decline of American power and prestige.

Check out the skinhead raving about sacking directors in this Mayne Report video.

Peter Fray

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