09 October 2008
U.S. Moves Forward on Financial Rescue, Considers Other Measures
International coordination sought, but unified response unlikely
Washington — U.S. government and central bank officials vow to apply bold and innovative measures to stabilize financial markets, which so far have failed to respond to U.S. and international actions.
Treasury Secretary Henry Paulson said in a prepared October 8 statement that his department has made progress in implementing the $700 billion financial rescue plan, which gives the government broad powers to intervene in the markets. But it will take several weeks before the department will make its first purchases of troubled securities, he said.
“We will implement our new authorities with one simple goal — to restore capital flows to the consumers and businesses that form the core of our economy,” Paulson said.
For example, the Treasury is considering injecting cash directly into banks in exchange for ownership stakes to persuade financial institutions to resume lending, according to news sources.
But Paulson warned that more banks will go down before rescue programs are in place.
He said some earlier actions have already brought positive results. For example, the takeover of two huge mortgage enterprises by the government in September has caused interest rates on home loans to drop. (See “Government Rescues Two Biggest Mortgage Companies.”)
But the Treasury secretary cautioned that it is “too early to look for encouraging signs in the credit markets” and urged patience: “The turmoil will not end quickly and significant challenges remain.”
Paulson said the federal government will not hesitate to use “all resources at its disposal” to address the financial system’s troubles and mitigate their impact on the economy.
The International Monetary Fund (IMF) forecasts the United States will enter a recession in 2008. The slowdown is expected to take “considerable time” to resolve, according to the fund’s latest October report.
The U.S. government and central bank have taken a number of unusual steps in recent weeks, including a temporary guarantee of money-market deposits and an offer to buy short-term business debt known as commercial paper. The Federal Reserve in an October 8 emergency move lowered its key interest rate by half a percentage point to 1.5 percent.
Those moves, however, have failed to sway the markets as the turmoil has spread to Europe and emerging markets. Stocks have fallen sharply across the world.
Adam Posen, deputy director of the Peterson Institute for International Economics, said the stock market downturn stems from investors’ “wait and see” attitude.
“There had been enough panic built up [before the enactment of the financial rescue plan] that people are in a sort of ‘show me’ mode,” he told America.gov.
Posen expects the markets to calm down and credit markets to thaw somewhat once the programs under the plan start working for good, probably a few weeks after they are launched.
COORDINATED INTERNATIONAL RESPONSE SOUGHT
Treasury officials have called for stronger international cooperation to address the crisis as finance ministers and central bank governors from around the world gather in Washington to attend the October 10-12 meetings of the Group of Seven industrialized countries, IMF and World Bank.
“Strengthened international collaboration is needed now more than ever,” Treasury Under Secretary David McCormick said October 8.
Some countries that initially viewed the financial crisis as a phenomenon limited to the U.S. markets have sprung into action in recent days as banks outside the United States, particularly in Europe, have turned out to be more exposed to troubled assets than earlier thought.
The governments of several European countries have injected cash into or taken over faltering banks; the United Kingdom has proposed a bailout fund for the country’s troubled financial institutions; and the European Union (EU) has strengthened protections for bank deposits in member countries.
But the EU failed to agree on a broader common plan to deal with the crisis, an indication of difficulties ahead in devising coordinated international measures.
So far, central banks have consulted closely and worked aggressively to supply money to the financial markets. The recent Federal Reserve interest rate cut was coordinated with and matched by five other central banks and supported by monetary authorities in a number of other countries.
But finding a common approach beyond monetary policies will not be easy, if possible at all. Financial systems, regulations, national priorities and other aspects differ across countries, McCormick said, so there is no one-size-fits-all strategy for addressing the current financial and economic challenges.
Instead, he said, countries need to develop “a global framework” that would make global strategizing and collaboration possible.
Posen said a global response is unlikely due to the lack of an institution designed to coordinate such an action.
“We may fantasize that the IMF may do that but it is not going to happen,” he said.
Paulson said that rather than a global response, “closely coordinated and communicated measures” are needed to ensure that “the action of one country does not come at the expense of others or the stability of the system as a whole.”
For example, the move by Ireland to guarantee all deposits, bonds and other debt at six Irish financial institutions has been heavily criticized, as it is expected to attract depositors from other countries, damaging the banks in those countries as they lose deposits.
The full texts of Paulson’s and McCormick’s statements are available on the Treasury Department’s Web site.
