U.S. takes plunge into banking business
Radical plan to ease financial crisis inspires hope, skepticism
Some early signs were hopeful for the latest in a flurry of radical efforts to save the nation's financial system: Credit was a bit easier to come by. And stocks were down but not alarmingly so after Monday's stratospheric leap.
The new plan, President Bush declared, is "not intended to take over the free market but to preserve it."
It's all about cash and confidence and persuading banks to lend money more freely again. Those are all critical ingredients to getting financial markets to function more normally and reviving the economy.
The big question: Will it work?
There was a mix of hope and skepticism on that front. Unprecedented steps recently taken — including hefty interest rate reductions by the Federal Reserve and other major central banks in a coordinated assault just last week — have failed to break through the credit clog and the panicky mind-set gripping investors on Wall Street and around the globe.
Initially the U.S. government will pour $125 billion into nine major banks with the hope that they will use the money to rebuild their reserves and to increase lending to consumers and businesses. Another $125 billion will be made available this year to other banks — if they need it — for cash infusions.
In return, the government will get ownership stakes in the financial institutions. Banks, meanwhile, will have to accept limitations on executives' compensation.
"Government owning a stake in any private U.S. company is objectionable to most Americans — me included," Treasury Secretary Henry Paulson said in announcing the initiative. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."
Whether the $250 billion will be sufficient to encourage banks to lend again is hard to tell, said Anil Kashyap, professor of economics and finance at the University of Chicago's Graduate School of Business. The Treasury Department arrived at the $250 billion figure after consulting with banking regulators.
"This plan will work if we wind up with everybody pretty well capitalized," Kashyap said. "But if it doesn't reach that point, we'll be back in soup down the road."
The government is counting on banks not to just clutch onto the cash, which aggravated the credit crisis to begin with.
Recent comments
Nevermind, I'll go to some other news website for news of the day.
How's the Dow doing today? | Oct. 15, 2008 at 9:16 a.m.
