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Bail-out marks first step in long road back for US economy

Business Materials 4 October 2008 08:24 (UTC +04:00)

While US President George W Bush signed a much- awaited 700-billion-dollar rescue package deemed critical to keep the US economy afloat, it appeared Wall Street had already turned the next dark corner, reported dpa.

The Dow Jones Industrial Average lost 1.5 per cent of its value on Friday, a surprise to those who expected that the bail-out's approval would buy at least one day of goodwill.

But the passage of the rescue plan was accompanied by more depressing economic news. Employers cut 159,000 jobs in September - the most in five years - bringing the total to about 750,000 this year, according to the US Labour Department.

"The US is clearly heading into, at best, a fairly severe recession," said Simon Johnson, former chief economist of the International Monetary Fund and now a senior fellow at the Peterson Institute for International Economics, a Washington-based think tank.

"For 700 billion dollars you get a band-aid, but you don't get a solution," Johnson told Deutsche Presse-Agentur dpa.

Even politicians on Friday readily acknowledged the rescue package was only the first step - a measure designed to prevent the availability of credit from completing seizing up.

Banks had stopped lending money to each other and to consumers out of fear for their own capital positions. The crisis has already led to a wave of government takeovers and bankruptcies across the financial industry.

The rescue package allows the government to acquire up to 700- billion-dollars worth of mortgage-related assets, whose plunging value has so decimated the balance sheets of financial institutions.

In the immediate future, all eyes will be on Treasury Secretary Henry Paulson, the original architect of the bail-out plan and the man tasked with implementing it.

Paulson promised to move "rapidly" but "methodically" with his new powers, and congressional leaders vowed to keep an eye on the Treasury to ensure it uses taxpayer dollars wisely.

Auctions for those soured mortgage securities may only begin in four weeks, part of the reason stocks reacted poorly on Friday, according to Johnson.

But beyond the rescue package, efforts to combat the country's economic downturn will have to be much broader.

"Now that we've dealt with the immediate emergency, it's time to bring our economy back to full health," Democratic Majority Leader Steny Hoyer told reporters, after the House of Representatives approved the bail-out plan.

At the core of the current turmoil is a housing crisis. To restore confidence and keep credit flowing, Johnson said homeowners will need more help refinancing their mortgages to put an end to the record rate of foreclosures that has so damaged banks' confidence in doling out loans.

Congress has promised hearings in the coming weeks to begin figuring out just how and what went wrong with the financial system and how to fix it.

Also on the horizon is a meeting next week of the Group of Seven (G7) industrialized nations and members of the International Monetary Fund in Washington.

World leaders will likely unveil some new cooperative measures to keep a recession from striking the rest of the globe and cushion the fall for the United States and Europe. The IMF will be unveiling its annual economic and financial outlook reports before the gathering.

The financial crisis has not only changed the face of the US economy, it also altered the dynamics of the presidential race. Democratic presidential candidate Barack Obama has been gaining momentum on his Republican rival John McCain, as voters appear to trust him more to manage the economy.

Both Obama and McCain - one of whom will be saddled with the crisis after the November 4 general election - sounded cautious about the future on Friday and called for more measures to help the struggling middle class.

The two candidates have also called for greater regulation to manage Wall Street "greed" and will likely lay out more detailed plans on how to bring the economy back to health in the coming weeks. Obama has already called for a second fiscal stimulus package to boost consumer spending.

Wall Street investors are also eying a Federal Reserve meeting at the end of this month. Some economists believe the US central bank could even cut interest rates - already at 2 per cent - before its regularly scheduled meeting, to help kick-start the economy.

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