By John Kaponi

$700 billion from the US Fed, £50 billion from the Bank of England, UAE Central Bank injected $13.6 billion; all to prevent a further meltdown in the markets at home and abroad.

But why should central banks step in to try and save ailing and badly managed financial institutions? As we saw yesterday in the United States intervention is politically a high risk move and damaging to market economics and does not solve the underlying problems that exist.Hank Paulson the Treasury Secretary in the US said last week "We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses."  

The US Senate disagree with Paulson in particular A Democrat Senator Chris Dodd said:

"Barely 72 hours ago, Secretary Paulson presented is a proposal that he believes urgently needed to protect our economy. This proposal is stunning and unprecedented in its scope and lack of detail. It would allow him to intervene in the economy by purchasing at least $700 billion of toxic assets. It would allow him to hold on to those assets for years and to pay millions of dollars to handpicked firms to manage those assets. It would do nothing to help even a single family save a home. It would do nothing to stop even a single CEO from dumping billions of dollars of toxic assets on the backs of taxpayers—and walking away with a bonus and a golden parachute. And it would allow him to act with utter and absolute impunity—without review by any agency or court of law. After reading this proposal, I can only conclude that it is not just our economy that is at risk, Mr. Secretary, but our Constitution, as well."

It is inherently wrong and dangerous for central governments to acquire failing companies and the "toxic assets" of the private sector and the structural problems which have caused this crisis are still to be addressed head on.  CEO's of banks need to be told by central banks that they are on there own if they screw up and not depend on state money to bail them out. 

Was Northern Rock a prudent investment of around £50 billion of public money?  In hindsight it was a very poor investment with a larger percentage of mortgages in arrears than was originally thought by the government.

The state and central banks should enable the private sector to operate and allow the private sector to fail if it has made errors, not intervene and fix’s things.

photo credit: London Daily News