Will U.S. bailout work?
The Treasury's $700 billion rescue would push US into uncharted territory.
Behind congressional maneuvering over the shape of a banking-system bailout lies a crucial question: Will it work?Skip to next paragraph
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Doubts on that point, along with concerns over the price tag and competing rescue ideas, were a central factor in prompting a midweek slowdown in the rush toward handing the US Treasury $700 billion to buy up troubled mortgage investments.
The plan urged by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke would push the US government into all but uncharted territory – trying to tackle a systemic financial crisis with a system-wide purchase of problem assets. It might work, but there's no guarantee. And whatever plan is put in place is almost sure to evolve beyond a one-step crisis fixer.
At the same time, finance experts say such doubts aren't an argument for inaction. Billionaire Warren Buffett infused a measure of hope into roiled financial markets Tuesday, showing the confidence to buy a stake in investment bank Goldman Sachs. But the risk of continued chaos remains significant.
"We're dealing with a market that is right now panicked and riddled with uncertainty," says Carmen Reinhart, an economist at the University of Maryland. "What I think the current tactic does is it makes [government intervention] blanket. It is a more generalized market approach to the bailout, and that is to be preferred."
Some sort of blanket approach appears needed, many economists say, following a series of ad hoc responses by the Fed and Treasury to crises at specific firms.
An unprecedented crisis
Mr. Paulson's plan aims to restore confidence by moving the most troubled assets off the balance sheets of banks and into a TARP – troubled asset relief program.
At a Senate hearing Tuesday, Paulson expressed optimism that it would work. By removing uncertainty about impending mortgage-related losses, he said, the program could pave the way for banks to keep lending and get new infusions of private capital.
Joining Paulson to defend the plan, Mr. Bernanke said a novel approach to this crisis is warranted. "The situation we have now is unique and new," Bernanke said. "The firms we're dealing with now are not necessarily failing, but they are contracting…. And they will be unwilling to make credit available as long as these market conditions [persist]."
He asserted that past crises, from the Great Depression to Japan in the 1990s, were different in that they typically involved failed institutions – with government taking on bad loans in receivership, not by purchase.
The plan is controversial among those specializing in financial regulation. Some argue that it would be better – and cheaper for taxpayers – if officials waited to act until firms were entering bankruptcy.
But Bernanke argued that case-by-case intervention was not working. He cited concern on the part of other potential investors that if they invest in a bank, that the government's going to come in and take away their value."