Federal Plan To Invest In Banks Met With Caution
RENEE MONTAGNE, host:
This is Morning Edition from NPR News. I'm Renee Montagne. The new financial bailout plan is the largest government intervention in banking since the Great Depression. The U.S. government will inject as much as $250 billion into the nation's banks and will take an ownership stake in the biggest of them. While some bankers and economists express concern about the plan, reaction has been largely favorable, as NPR's Wendy Kaufman reports.
WENDY KAUFMAN: The government's plan is aimed at recapitalizing banks and restoring confidence so banks will once again make loans and help get the economy moving. Treasury Secretary Henry Paulson calls the plan extensive, powerful and transformative. In addition to injecting money into banks, the government will guarantee new debt issued by banks for three years, and will offer an unlimited guarantee on non-interest-bearing deposits such as those used by businesses to make payroll.
But it's the infusion of capital, with the government taking an ownership stake in the banks, that's drawing most of the attention. Ed Yingling, president and CEO of the American Bankers Association, says it's not a plan bankers sought, but they're supporting it.
Mr. EDWARD YINGLING (President and CEO, American Bankers Association): It is a well-designed program. At this point, it looks like it is working, based on what we're seeing in the markets. We still have a long way to go, but so far in the last 48 hours, this has shown signs of finally turning things around.
KAUFMAN: Confidence, he says, is beginning to re-emerge in the banking system. As part of the U.S. government's plan, nine big banks - including Citigroup, JPMorgan Chase, Bank of America and Wells Fargo - will receive a total of $125 billion. Another $125 billion is allocated for small and midsized banks. Yingling says the government twisted arms to get the banks to take money from the Treasury Department. Some bankers worried that if they were to take the money, they might appear financially weaker than they actually are.
But according to a report in The Wall Street Journal, the bankers were not allowed to negotiate terms, and were told to sign on for their own good and for the good of the country. Economists of various political stripes generally agree that the government's latest bailout plan was the best option available given the circumstances. Economist Brad DeLong of the University of California, Berkeley, served as a senior Treasury official in the Clinton administration.
Professor BRAD DELONG (Economics, University of California, Berkeley): You don't want to repeat the mistakes of the Great Depression, and the big mistake of the Great Depression was letting the banking system collapse. And so there is this view the government needs to do something to keep the banks from collapsing.
KAUFMAN: Ragu Rajan of the University of Chicago's Graduate School of Business says while it's too early to tell if the government's plan will work, the early signs are encouraging. For example, interest rates banks are charging each other are beginning to come down.
Dr. Raghuram Rajan (Professor of Finance, Graduate School of Business, University of Chicago): It's doing the things that were necessary to get things started again to build confidence. And certainly, the stock market reaction was a vote of confidence, and it's been a vote of confidence around the world. Of course, we're still faced with fairly dramatic economic circumstances. We are going into a recession. And really, the issue is how deep will it be?
KAUFMAN: One element of the plan has sparked disagreement among economists. The Europeans are taking a relatively active role in the banks they've recapitalized. But the Bush administration is taking a different approach and will have only limited input in what a bank does. Ed Rice, who teaches at the Foster School of Business at the University of Washington, worries that a banker whose institution is in trouble, but who's backed up by the U.S. government, might take inappropriate risks.
Dr. EDWARD RICE (Associate Professor and Faculty Director, Foster School of Business, University of Washington): I can take a very large risk and basically be risking the Treasury's money where, if it pays off, I win, and if it doesn't pay off, the Treasury loses. That's a danger under this plan.
KAUFMAN: Despite that and other worries, most economists are keeping their fingers crossed, hoping the plan will work. Wendy Kaufman, NPR News.
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