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Obama’s bind over aid to banks

More US money won’t be easy to win, complicating his efforts to restore the system to health.

By Staff writer of The Christian Science Monitor / February 5, 2009

Treasury Secretary Timothy Geithner (left) and President Obama, along with others in the administration, are weighing how to help the struggling banking system.

Charles Dharapak/AP


The Obama administration faces a difficult test as it prepares a plan for restoring America’s banking system to health: The cost estimates keep rising even as public mood is skeptical of anything with the word “bailout” attached.

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This political bind, at a time when President Obama is stretching to win support for a large stimulus package, could affect the shape of his comprehensive plan for ailing banks.

The stakes for the economy are high. No fix for the financial system will be simple or cheap, but a plan that fails to work could prolong the recession. And some experts worry that efforts to keep costs low in the short run could end up making taxpayers foot a higher bill down the road.

“The cost of any kind of government action is going to be huge whatever way you slice it,” says Desmond Lachman, a finance expert at the conservative American Enterprise Institute in Washington. “The cost will be all the greater if they don’t do the right things.”

Already, about $350 billion has been allocated by the US Treasury to rescue financial firms.

Most Americans oppose more aid
In a Diageo/Hotline poll late last month, 56 percent of Americans said they thought Congress was making a bad move by granting authority for Mr. Obama to spend another $350 billion – the second half of that financial superfund created by Congress last fall. Fewer than one-third thought it was a good idea.

Obama, while not yet calling for additional funds, appeared to open the door to that possibility in an interview earlier this week.

“We can expect that we’re going to have to do more to shore up the financial system,” he told NBC’s “Today” show. But he rejected one rumor of the potential cost, saying, “we’re not going to be spending $4 trillion worth of taxpayer money.”

The International Monetary Fund has recently boosted its estimate of credit losses tied to mortgage loans and other US debts at $2.2 trillion, up from $1.4 trillion last fall – which represented a jump from an earlier estimate of $1 trillion.

One key reason the numbers have risen is the feedback between credit markets and the economy. A worsening economy has raised the likelihood of loans going into default. The resulting turmoil in credit markets, in turn, contributed to a sharp drop in consumer spending and business confidence – deepening the recession last fall.

The ongoing risk for the economy also creates a political risk that Obama has acknowledged.

“I do have confidence that we’re going to be able to get it right,” and restore trust in credit markets, he said in the NBC interview. But “I will be held accountable. I’ve got four years.”

New plan expected next week