By Andrzej Zwaniecki
WASHINGTON, DC — The U.S. government is taking partial ownership of some of the largest banks and is applying other extraordinary and aggressive measures to return confidence to financial markets and restore their capacity to lend to consumers and businesses.
President Bush announced October 14 that the federal government will inject $250 billion in healthy U.S. banks in return for preferred shares of stock as part of the $700 billion financial rescue plan enacted by Congress earlier in October.
The administration says it is moving as quickly as possible to implement the entire rescue package.
The government also will insure all deposits in non-interest-bearing bank accounts and temporarily guarantee most new bank debt. Insuring non-interest-bearing accounts, together with an earlier plan to buy short-term business debt called “commercial paper,” should help small and large businesses get bank loans to fund employee salaries and other routine operations. Temporarily guaranteeing bank debt aims to restore flows of credit between financial institutions reluctant to lend to one another.
Bush called the plan to take stakes in U.S. banks “an essential short-term measure to ensure the viability of America’s banking system.” Nine major U.S. banks already have agreed to participate in the program, which puts restrictions on executive compensation and contains taxpayer protections.
Some private-sector economists have promoted such a program as a necessary component of the rescue package. Martin Baily and Robert Litan of the Brookings Institution argued in an October 10 paper that all other measures would have been insufficient to persuade banks to lend to each other.
After Treasury Secretary Henry Paulson participated in a meeting at the White House together with Ben Bernanke, the chairman of the Federal Reserve, the U.S. central bank, he said the government is taking action to reverse the lack of investor confidence that is at the root of the crisis.
“Without confidence that their most basic financial needs will be met, Americans lose confidence in our economy,” he said.
Both the president and Paulson went to great lengths to assure Americans they resorted to “unprecedented” measures only reluctantly, and that those measures will be “limited and temporary.”
“These measures are not intended to take over the free market, but to preserve it,” Bush said.
The actions in September and October amount to the largest U.S. government intervention in private markets since the Great Depression of the1930s.
THE WORLD RISES TO A GLOBAL CHALLENGE
The speed at which the crisis has spread from the U.S. mortgage market to other financial markets and other countries has surprised policymakers around the world. They have been compelled repeatedly to change their positions and announce measures they earlier resisted.
Bernanke said the U.S. strategy “will continue to evolve and be refined as we adapt to new developments and the inevitable setbacks.”
The White House announcement was preceded by a unified action by the 15 countries that use the euro as currency to purchase equity stakes in their major banks and guarantee bank deposits and inter-bank lending. In a separate action, the United Kingdom, which is not part of the euro area, has proposed an $85 billion rescue package for its financial institutions. Other countries including Australia, New Zealand and the United Arab Emirates have acted in recent days to shore up their financial markets.
Bush said the United States and the other nations are implementing the action plan agreed October 10 by the Group of Seven (G7) large industrialized countries and endorsed a day later by the Group of Twenty (G20) nations and the International Monetary Fund (IMF). The G20 includes large markets such as Brazil, China, India, Mexico and South Korea.
Following a week of heavy losses in stock markets around the world and a bleak IMF forecast for the global economy in 2009, the G7 approved October 10 a shared approach to the financial crisis based on principles of preventing the failure of “systemically important financial institutions”; adopting “all necessary measures” to restore functioning of credit markets; ensuring banks’ ability to raise capital; protecting consumer bank deposits; and restarting secondary markets in mortgages and other securitized assets. Devising detailed plans was left to individual countries.
U.S. Treasury Secretary Henry Paulson said after the meeting that “never has it been more essential to find collective solutions to ensure stable and efficient financial markets and restore the health of the world economy.”
But he dismissed as “naive” expectations by some private-sector economists for a concerted global response or “precisely the same policies” in countries with different legal, financial and regulatory systems.
Around the world, stock markets surged October 13 on the news of more aggressive measures being considered by policymakers.
The full texts of statements by Bush, Paulson and Bernanke are available on the Web sites of the White House, Treasury Department and Federal Reserve System respectively. A summary of the recent U.S. action can be viewed on the Treasury Department Web site.
