Obama plays his $1 trillion card
Tuesday, 24 March 2009
The long-awaited $1 trillion plan to restore the toxic US banking system to health triggered a bout of frenzied buying on stock markets around the world, as investors bet that the Obama administration is now sketching a road map out of the credit crisis.
Tentative signs of stability in the US housing market, at the heart of the financial crisis, added to a rare sense of optimism that the long economic chill might be thawing. While plenty of sceptical voices were trying to be heard yesterday, buoyant investors said the rescue plan puts in place an essential building block for a recovery. By the end of the day the Dow Jones Industrial Average in New York had soared to close 6.84 per cent up, the fifth biggest day rise in its history.
Tim Geithner, Barack Obama's embattled Treasury Secretary, who had been derided for the lack of detail when he announced the outlines of his strategy to tackle the credit crisis last month, put flesh on the bones of his rescue plan yesterday. The US government put up matching funds and hundreds of billions of dollars in debt to help private investors buy the toxic loans that have been clogging bank balance sheets. In all, $1trn (£680bn) could be put to work to rid banks of these assets, freeing them up to start lending again. "This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically," said Bill Gross, the bond investor who heads Pimco, a California fund manager. Not only would the scheme relieve the doubts surrounding the solvency of the banking system, he said, but investors – and the US taxpayer – would make a tidy profit.
Most of the assets are bundles of mortgages written during the housing boom and whose value will keep going down as long as house prices are falling and foreclosures are rising. The Geithner plan is aimed at encouraging investors to buy the assets, pumping cash into the banks which decide to sell.
Video: Guillaume Meyer on the impact of Geithner's new Toxic Asset plan
The plan is the latest piece in a jigsaw of initiatives to reboot the economy, and members of the administration have argued it is even more important that the $787bn economic stimulus package pushed through Congress last month. Struggling homeowners are getting subsidies to pay their mortgages and the credit markets have been flooded with trillions of dollars from the Federal Reserve, to bring down interest rates.
"We've already taken a bunch of actions to help get mortgage interest rates down, to help millions of Americans refinance their homes, to take advantage of lower interest rates," said Mr Geithner. "All these things are designed to help get credit flowing again at lower cost to businesses and families across the country."
Lower mortgage rates and much lower house prices appear to be stimulating the housing market. Sales of second-hand homes rose unexpectedly strongly last month, according to a report yesterday, rising 5 per cent. Investors said rising stock markets and a more stable housing market could encourage consumers to start spending again. That in turn would make businesses less likely to fire staff, and an end to the recession could come into view later this year. The US economy has been in recession since December 2007, and unemployment passed 8 per cent in February.
Stock markets in other countries, which have followed the US into recession, also surged yesterday. The FTSE 100 index of leading UK shares was up almost 3 per cent, but it had closed before the buying frenzy reached its peak in New York. Wags described the reaction as a bailout for Mr Geithner. Criticism of his performance "comes with the job", the Treasury Secretary said yesterday, adding that he was focused on restoring order to the financial system.
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Comments
And they need to be answerable to the people who are giving them money they are not entitled to, they should be restricted to use that money to undo the damage they have done, and this is not to pay out contracts they are bound to.
Nice try, but not true. America's major problem is the over-consumption of energy and resources, on the back of ever-increasing debt, based on the absurd notion that something can be obtained for nothing. It therefore follows that this latest piece of lunacy to stimulate consumption can only be expected make matters worse and create yet another short term financial bubble, which will undoubtedly burst once the punters realise it is based on nothing but 'printed' money and imagined wealth.
However, making the numbers look good in the short term and ignoring the root causes of the problem is all that really concerns the average politiican, and Obama has demonstrated he is no different from all the others who practice the politics of failure.
With the Peak Oil time bomb fuse now burning furiously and oil on the rise again, it will be interesting to see how long Obama can keep the chirade going.
You're right the problem is very clear to us ordinary folk but not to the politicans, you have to bring down consumer debt gradually not heap more debt upon them. This is very much a debt crisis not a credit crisis. The crisis is all about Neo Conservative economics of the past 30 years.
I think the real problems will begin when the UK & US follow Spain & lose its AAA rating. It's totally beyond me how the UK will ever pay back all this debt.
Not much longer, judging by the very loud rumblings coming out of China recently and the suggestion that a new international reserve currency system should be established. Once that happens, America will be 'toast'.
The name of the game is not to ever pay back the debt, but to manipulate matters so the debt does not have to be repaid in full -massive devaluation, hyperinlfation or starting another world war are distict probabilities.
Recession? What recession!
It is a game you stupid!
It amazes me the Americans bother with us at all. If I was an American President I'd build a massive wall around the U.S. and let Europe sink into it's own quagmire of bickering, genocide, gloom misery and war.
Bring on WWIII but this time please can the U.S. stay out of it. Meantime I'll learn Russian or Chinese!...
Then we Europeans can have the non-American dominated world and save us from death by moaning.