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![Bush said the latest US measures are meant to help thaw the frozen credit markets [AFP]](http://mwcnews.net/images/stories/USA3/1/Bush-latest.jpg "Bush said the latest US measures are meant to help thaw the frozen credit markets [AFP]") | | Bush said the latest US measures are meant to help thaw the frozen credit markets [AFP] |
The US government is to buy stakes in some of the country's largest banks in an act of interventionism seen by many economists as contrary to the principles of laisse-faire capitalism.
George Bush, the US president, on Tuesday unveiled the plan that will see up to $250bn of the $700bn bailout injected directly into financial institutions to help thaw frozen credit markets and fuel economic growth. Bush also said the US government would temporarily guarantee all non-interest bearing transaction accounts, providing some relief for small businesses. It will also temporarily guarantee most new debt issued by insured banks and that the Federal Reserve would take steps to become the "buyer of last resort for commercial paper". "These measures are not intended to take over the free market, but to preserve it," Bush said. Executive pay limited Henry Paulson, the US treasury secretary, said that nine large banks agreed to the government equity stakes in exchange for new capital. Banks joining the programme will have to agree to limits on executive pay and other benefits, he said. Other banks will have an option to accept the programme, in which the government gets "senior preferred shares" which the treasury says will not give them voting rights. "Today's actions are not what we ever wanted to do," Paulson said, delivering his comments alongside Ben Bernanke, the Federal Reserve chairman, and Sheila Blair, the head of the government's Federal Deposit Insurance Corp. "But today's actions are what we must do to restore confidence to our financial system. "Government owning a stake in any private US company is objectionable to most Americans - me included - yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable. "When financing isn't available, consumers and businesses shrink their spending, which leads to businesses cutting jobs and even closing up shop." European markets Stock markets in Europe saw gains on Tuesday, recovering from severe losses incurred over the past week. London's FTSE 100 rose 4.2 per cent in early trading, while the German DAX climbed 2.9 per cent. France's CAC-40 gained 4.2 per cent. The stock exchange in Iceland, which is teetering on the edge of bankruptcy after its financial sector crashed, opened on Tuesday with a 76 per cent loss, but the massive drop was due mainly to the removal of three ailing banks nationalised last week by the Icelandic government. When adjusted to reflect that, the index showed only a 0.5 per cent loss. Asian rally The gains in Europe's major indices came after Asian stock markets rallied for a second straight day following schemes by Western governments to give cash to ailing banks in an attempt to encourage bank-to-bank lending. The Japan's Nikkei index closed 14.15 per cent up on Tuesday, its biggest-ever gain in a single day's trading. Europe's rescue-package breakdown Germany: Up to 400bn euros ($543bn) in guarantees for banks, up to 80bn euros ($109bn) to recapitalise banks and 20bn euros ($27bn) to back up the guarantees. France: Up to 360bn euros ($489bn), including 320bn euros ($435bn) to guarantee bank refinancing and another 40bn euros ($54bn) for a government-backed agency to provide banks with extra capital. Spain: Will guarantee up to 100bn euros ($136bn) in bank bond issuance this year after 30bn euros ($41bn) promised last week for bank capitalisation. Austria: Up to 85bn euros ($115bn) in guarantees, and an additional 15bn euros ($20bn) in capital. Netherlands: Will guarantee up to 200bn euros ($272bn) in inter-bank loans, on top of what it pledged for bank capitalisation last week. Portugal: Announced on Sunday it would guarantee 20bn euros ($27bn) in inter-bank loans - nearly 12 per cent of annual economic output. Britain: Announced on October 8 a 50bn-pound ($87bn) plan to partly nationalise major banks and promised to guarantee a further 250bn pounds of bank loans. Up to 37bn pounds ($64bn) to boost balance sheets at three of Britain's largest banks unveiled on Monday. Norway: Outside the euro zone and the EU, Norway plans to offer new government bonds worth 350bn kroner ($56bn) to banks to help improve liquidity in the market. Hong Kong's Hang Seng index closed 3.2 per cent higher while Australia's benchmark S&P/ASX 200 index climbed almost six per cent before paring some gains. All bank deposits in Hong Kong will be fully guaranteed until 2010, John Tsang, the territory's financial secretary said on Tuesday. Australia's government unveiled a A$10.4bn ($7.3bn) emergency stimulus package on Tuesday to guard the country's economy from a global recession. The move to make one-off state payments to low-income earners and pensioners came two days after the government guaranteed all bank deposits for three years. It also made wholesale funding to Australian banks to protect them from the fallout from the global credit crisis. Following Europe and Asia's strong stock market performances Jamie Chisholm, a journalist for the Financial Times, said it appeared that the immediate banking crisis had been stemmed. "We have killed the virus, but the problem now is that we have to deal with the infection. The infection is the effect that all this has had on Main Street; people who go about their daily lives [and] businesses who make and produce things," he told Al Jazeera. "We are going to be faced with at least a downturn, maybe a recession, possibly a technical global recession. Once this market bounce has sorted itself out, the markets will look to that [possibility]." "This sort of [crisis] has not happened to such a degree in the past - everyone gives the example of the 1930s but this is very different from then." Arab stock markets also rose on Tuesday, with emirate Dubai gaining nine per cent at the opening of trade and Abu Dhabi and Oman each gaining six per cent. The jump in Gulf markets came after the United Arab Emirates announced that it had set aside $19bn for local banks to encourage bank-to-bank lending and stave off a credit freeze. The funds bring the total amount set aside by the UAE in the last month to prop up banks to $32.6bn. Government intervention The markets' surge follows co-ordinated moves over the weekend by European nations including the UK, France, Germany and Italy, to firm up banking systems. Walden Bello, a senior analyst and former director of Focus on the Global South, said that a complete overhaul of the global financial system was needed to restore people's trust in it. "I think we are talking about drastic overhauling and the reinstitution of capital controls. The lifting of those controls between countries and financial sectors has been one of the causes of this financial mobility that has brought us 100 crises over the past 25 years," he said. "I think we are going to be talking about severe regulation of the banking sector. Among this will be the banning of trading in derivatives, which Warren Buffet [an American investor and businessman] has called a financial means of mass destruction. "I think we need to bring a whole new social criteria, in terms of lending and financial operations, [which] will mean channelling money into health and things like that."
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