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US bank buy-in no economic quick-fix

(Agencies)
Updated: 2008-10-15 14:39

Washington - With any luck, the US government's quarter-trillion dollar cash infusion in banks will get them lending again, but the radical move won't quickly turn around the tottering economy.

US Treasury Secretary Henry Paulson looks over his entourage after announcing that the Treasury Department will take equity stakes in potentially thousands of banks totaling about US$250 billion at the Treasury Department Cash Room in Washington, October 14, 2008. Standing besides Paulson, (2nd L-R): Federal Reserve Chairman Ben Bernanke, President and CEO of the Federal Reserve Bank of New York Timothy F. Geithner, OCC Comptroller John Duggan and SEC Chairman Christopher Cox. [Agencies]

The pain will almost certainly drag on as vanishing jobs, shrinking paychecks and nest eggs, and slumping home values continue to force millions of Americans to pull back.

 

Special coverage: Financial Crisis

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Sales at the US retailers are expected to drop in September even as they get a break from record-high energy prices. Uncertainty about the country's economy -- and their own financial fortunes -- probably will force consumers and businesses alike to hunker down further, spelling more problems for the already troubled economy.

Anxiety about the economy is the No. 1 concern of voters. With the US presidential election just weeks away, Democrat Barack Obama and Republican rival John McCain are working furiously to convince people that each is the best choice to steer the economy through these perilous times.

In addition to September retail sales numbers, other economic data out Wednesday is expected to show that even though the recent retreat in energy prices calmed inflation at the wholesale level bit, costs are still high and are squeezing businesses.

Many economists believe the country is on the edge of -- or already in -- its first recession since 2001.

If the US government's new plan works — it will merely cushion the blow. Democrats on Capitol Hill are pushing for another round of stimulus that could cost as much as US$150 billion, an effort to provide additional relief and lift the country out of the doldrums.

Federal Reserve Chairman Ben Bernanke will provide an up-to-date assessment of the country's economic and financial challenges in a speech in New York on Wednesday.

Big banks started falling in line Tuesday behind the rejiggered bailout plan that will have the US government forking over as much as US$250 billion in exchange for partial ownership -- putting the world's bastion of capitalism and free markets squarely in the banking business.

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.

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