By Richard Muhammad
Contributing Editor
West hopes unity will defuse financial crisis tied to America’s economic troubles
The world’s leading economic nations declared a shared commitment to resolve a financial crisis that has sparked fears of a global economic collapse and Wall Street responded positively to the news. Still questions remain about how successful the efforts will be and how the recent financial crises will change the way the banking and financial business is conducted.
In addition to the loss of retirement investments and stock portfolios on Wall Street, a fundamental fear was that with banks scared to lend money a domino effect could hit businesses, which often need short term loans to meet payroll and other expenses. No credit could lead to shutdowns and layoffs. Consumers could be unable to obtain loans for automobiles, homes, school loans or other needs–dragging down an already sluggish economy.
The commitment of the G-7 nations followed protests in Great Britain and the United States as taxpayers in the West expressed anger at the prospect of bailing out major banks and financial institutions. Following a $700 billion bailout of major U.S. corporations and institutions by the American government, the British government announced a $63 billion bailout of three banks. The result will be taxpayer ownership of 40-60 percent of the major English banks, which include the Royal Bank of Scotland, Lloyds-TSB and HBOS.
The finance ministers of Britain, Canada, France, Germany, Italy and Japan met with President Bush Oct. 11 at the White House. No new strategies were unveiled but the leaders vowed to work together to uphold a staggering economy that has seen drops in global stock markets. World markets lost 15 to 18 percent of their value in a single week. “The paralyzed credit markets and warnings of a global recession led to panic selling in markets around the world,” the Voice of America reported.
“The G-7 nations have pledged to take decisive action to support systematically important financial institutions and prevent their failure, provide for robust protection for retail bank deposits, and assure financial institutions are able to raise needed capital,” said President Bush, in a statement in the Rose Garden of the White House.
“We are in this together,” the president said.
Stocks surged on Wall Street and around the world for the first time in days Oct. 13 as the U.S. said it plans to swiftly implement a broad financial rescue package and Europe put almost $2 trillion on the line to break the lending logjam threatening the world’s economy.
The Bush administration summoned executives from leading banks to a meeting in Washington the afternoon of Oct. 13 to work out details of the $700 billion plan aimed at thawing the credit markets – the economy’s lifeblood.
The Dow Jones industrials gained more than 900 points in a stunning rebound from days of big losses. European markets rallied following Asia’s lead in response to the widespread government initiatives.
“These are tough times for our economies yet we can be confident that we can work our way through these challenges and America will continue to work closely with the other nations to coordinate our response to this global financial crisis,” President Bush said following a meeting with Italian Premier Silvio Berlusconi.
Treasury Department spokeswoman Brooklyn McLaughlin said officials from the Treasury Department and the Federal Reserve would participate in the meeting at the Treasury Department. The discussions were aimed at finalizing details on the rescue package Congress passed on Oct. 3.
The package has quickly expanded from purchasing financial firms’ bad debt to include the government taking partial ownership in banks, among other possible steps.
Sec. Paulson called the heads of the five biggest U.S. banks to come to Washington for face-to-face talks about the rescue plan, according to people briefed on the matter. They were not authorized to speak publicly because of the sensitivity of the negotiations.
Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack, Citigroup CEO Vikram Pandit, JPMorgan Chase & Co. CEO Jamie Dimon, and Bank of America Corp. CEO Kenneth Lewis were all asked to attend. There was some speculation that Mr. Paulson might have expanded the invitation to at least three other CEOs from various regional banks, the people said.
It was expected that whatever comes out of the meeting will be used to put the finishing touches on the plan, the people said.
The discussions take place against the backdrop of a presidential election, with about three weeks left before Americans go to the polls.
The Bush administration’s interim bailout package chief, Neel Kashkari, said early Oct. 13 the government is moving quickly to implement the rescue program, including consulting with private law firms on how to buy stakes in banks to boost their cash reserves.
He spoke as The Bank of England, the European Central Bank and the Swiss National Bank jointly announced they would work together to provide unlimited short-term funds to make money available to ease the credit freeze. The Bank of Japan said it was considering a similar move.
“The government cannot just leave people on their own to be buffeted about,” said British Prime Minister Gordon Brown.
European governments said they are putting nearly $2 trillion on the line to protect the continent’s banks through guarantees and other emergency measures. Pledges by Britain, Germany, France, Spain, Austria and Portugal in recent days have reached a total of $1.96 trillion. The sums are considered a maximum, and might not all be spent if the financial crisis eases.
The administration Oct. 13 also announced the selection of a team of interim managers, picked an outside firm to help run the program and tapped Federal Reserve Chairman Ben Bernanke to head up the oversight board guarding against conflicts of interest.
The Bush administration in recent weeks has taken over the nation’s two biggest mortgage finance firms, Fannie Mae and Freddie Mac, and rescued American International Group, the world’s biggest insurance company.
As the bailout bill rushed through Congress, Mr. Paulson stressed that the major aim was to buy bad assets, primarily mortgage-backed securities, from financial institutions. The hope was that taking those bad loans off the books would encourage banks to return to more normal lending operations and unclog credit flows – the economy’s lifeblood.
Not everyone is optimistic about prospects for the future.
“The decision to put Paulson’s young former special assistant (Neel Kashkari) in charge of the bailout program only adds to one’s doubts. Gretchen Morgenson of the New York Times and others have raised serious questions about Secretary Paulson’s calculations in previous bailout episodes. Der Spiegel’s report yesterday that Treasury is thinking that any shares it does take should be non-voting is even more disturbing. Days after the Treasury rescued AIG, the company was throwing lavish parties. The government needs voting shares to stop such nonsense,” said Thomas Ferguson, a professor of political science at the University of Massachusetts, Boston and author of “Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems.”
“With … everyone’s pensions, 401Ks and other financial reserves shrinking by the hour, it is high time for Congress to insist immediately that the bailout program convert itself into a modern version of Franklin D. Roosevelt’s Reconstruction Finance Corporation. Treasury should not be allowed to ‘tailor its approach’–it just needs to focus like the proverbial laser on increasing bank capital by direct injections of equity into banks that can be saved. And the bailout needs to be run in a completely transparent manner, with clearly stated, publicly verifiable criteria for making the investments. It is intolerable that everyone’s financial assets continue to be put at risk for ideological goals and private profits,” he said.
Patrick Bond, a professor of development studies and director of the Center for Civil Society at the University of KwaZulu-Natal in South Africa, warned that developing nations shouldn’t suffer fallout from the crisis. More activity is needed from grassroots to keep political leaders and officials honest, said Mr. Bond. He noted that it was an “e-mail/phone swarm that intimidated the U.S. House of Representatives from approving Paulson’s initial bailout.”
Leo Panitch, a Canadian political scientist, told the Real News Network, the roots of the current go back to the 1960s during the U.S. war in Viet Nam and a domestic period of social upheaval and a lack of investment on public housing. The U.S. government needs a more equitable tax system and more state spending, he said.
Dean Baker and Mark Weisbot, of the Center for Economic and Policy Research, blamed the current problems on “an extraordinary period of economic mismanagement.”
“The world’s central banks, most importantly the Federal Reserve Board in the United States, made the decision to ignore, if not actively cultivate, the growth of asset bubbles. This was the case with stock market bubbles in the 90s and housing bubbles in the current decade,” said the analysts.
“The meeting this weekend of the G-7 provides an extraordinary opportunity to begin the reversal of this dismal record. First, it is necessary to have a coordinated financial and monetary policy to stem the immediate financial crisis. This will require bank bailouts that focus on the direct injection of capital into the banking system, following the example of the United Kingdom,” said Mr. Baker and Mr. Weisbot.
“The other key component of an economic recovery package should be a coordinated fiscal stimulus. In the United States, this stimulus should be on the order of $300 billion to $400 billion (2.0-2.7 percent of GDP). This stimulus is essential for counteracting the sharp falloff in consumption that is following the loss of $5 trillion in housing wealth and President Bush’s scare tactics for promoting his bank bailout.
“The stimulus should be designed to quickly boost demand. In the United States, this can best be done by aiding state and local governments, extending unemployment benefits, tax rebates to low income individuals, accelerating infrastructure spending and support for energy conserving retrofits of homes and businesses. It is also essential that the dollar fall against other major currencies in order to bring the trade deficit back to a manageable level.
“It is possible that even larger boosts to spending may be necessary to restore normal economic activity. The federal government must be prepared to spend whatever amount is needed to keep the economy creating jobs. This was the main lesson that we learned from the Great Depression. Concerns over deficits prevented the government from taking sufficient measures to boost the economy out of its slump until World War II left the government no choice. It would be an enormous tragedy for the country and the world if the United States were to repeat the same mistakes almost 80 years later,” the pair warned.
(The Associated Press contributed to this report.)
Related links:
America’s Bailout Prescription (FCN, 10-24-2008)
