It’s a world of hope and it’s a world of fear
There’s so much that we share, that it’s time we’re aware
It’s a small world after all
Bush to announce bank rescue plan – news stories and blog posts with some variation of that headline are all over the web tonight.
President Bush was scheduled to announce the new initiatives early Tuesday after executives of the country’s biggest banks were summoned to a remarkable meeting at the Treasury Department on Monday.
Almost as many seem to have a headline suggesting our approach has been I’m the leader, wait for me – Europe puts more on the line.
Europe put $2.3 trillion on the line Monday to protect the continent’s banks, a figure that dwarfs the Bush administration’s $700 billion rescue program, in its most unified response yet to the global financial crisis…
“The time of each one for itself is fortunately over,” French President Nicolas Sarkozy said …”United Europe has pledged more than the United States,” added Sarkozy, who has taken a lead in getting the cooperation.
Sarkozy has a point. However, the point that caught my eye was actually a side comment in a Washington Post story.
Over the weekend, global leaders agreed in meetings in Washington to launch a coordinated program of injecting cash into the world’s banks and guaranteeing their debt. The action by U.S. officials yesterday represented the U.S. version of those broad principles, and it was matched by similar efforts in Europe yesterday.
As part of the effort to flood the financial system with cash, the Federal Reserve made unlimited funds available early yesterday to other major central banks so they could inject money into banks in their countries and ease the shortage of dollars they face. Previously, the Fed’s program of lending dollars to the European Central Bank, Bank of England, Bank of Japan and others had been capped at a total of $380 billion. (emphasis added)
Under the rescue legislation signed into law earlier this month, the Treasury is allowed to take equity stakes in banks.
Putting money in banks is makes sense – a lot more sense than buy bad investments from banks IMO. I just had not considered the banks might not be in this country. Given the way other countries feel about our role in what is now a global financial crisis, a global approach may be appropriate.
First you mess up the world’s financial system. Then you blow the rescue of it. Now let’s show you how to do it properly.
That, in a nutshell, is the less-than-flattering message European governments are sending to the U.S. as they mount their own gigantic bank bailout. The plans, announced Monday after two weeks of dithering, involve Britain, Germany, France and some others recapitalizing national banks that require help, and providing state guarantees and other measures to kick-start the stalled credit market. The details are strikingly different from the U.S. approach adopted by U.S. Treasury Secretary Hank Paulson and the Federal Reserve Board. And there’s a big reason for that: The Europeans think Paulson got it badly wrong, and have watched aghast as he failed to restore confidence in the world’s financial system.
In particular, they now think – and are openly saying – that it was a huge mistake to allow Lehman Brothers to fail. But they also believe that the $700 billion bailout plan was badly misdirected. Rather than buying up toxic assets, as the Paulson plan initially intended, they believe the role of government intervention should be to recapitalize the banks directly in exchange for some control of operations. That’s at the core of the European plans announced Monday (and apparently the direction Treasury is now heading, too)
The second lesson from the U.S. handling of the crisis concerns the way government money is best used. Here the Europeans have a valuable precedent: Sweden’s banking crisis in the early 1990s, which was resolved by the state forcing a consolidation and clean-up of the system even as it kept the banks afloat. Starting in Sept. 1992, the government in Stockholm announced a general guarantee for the whole of the banking system, encouraged the central bank to organize massive injections of liquidity, and created a state agency that essentially forced banks to give up any remnants of make-belief accounting and quickly write down the value of their assets to much more realistic levels. The strategy worked, and Urban Bäckström, the former Swedish central bank president who played a central role in the rescue, has said that “prompt and transparent handling” of the problems were a key to the success.(emphasis added)
By contrast, the initial Paulson plan involved the U.S. government buying up the problem securities of banks in a procedure that risked being anything other than prompt and transparent.
“It looks as complex as the credit derivatives that caused the problem in the first place,” one top European finance official told me, on condition I didn’t quote him by name.
It really is a small world after all. Who do you think will prove to be the Lion King?