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Doubts rising over plan to fix banks

A fire hose of US funds hasn’t ended the credit crisis. So what’s Plan B?

By Staff writer of The Christian Science Monitor / March 9, 2009

Treasury Secretary Timothy Geithner’s ‘financial stability plan’ includes two elements to help banks survive a wave of loan defaults.

Gerald Herbert/AP/File

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Doubts are bubbling up about the current federal strategy for ending the credit crisis, even as the US government puts trillions of dollars on the line to shore up America’s shaky financial system.

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At the heart of the issue is this: Is all the public money being poured into financial firms helping, or is it delaying the private sector’s unavoidable reckoning with losses?

The question is arising in hearings on Capitol Hill. It’s surfacing within the Federal Reserve itself. It is showing up in financial markets. This doesn’t mean the White House faces immediate pressure to change course, but President Obama and his economic team will navigate some difficult choices in the weeks ahead.

The options, economists say, include asking Congress for a lot more money for banks, hoping that the money committed to date will be enough to fuel an economic recovery, or reshaping policies so that bank investors shoulder burdens instead of taxpayers.

“We talk about this as if we can forestall these [bank] losses” by deploying public money, says Joseph Mason, an economist who focuses on the financial industry. “It might make sense to stop and see if we even can ... address this situation in this particular manner.”

Costs up and up

Some symbols of the rising price tag for financial rescues include the following:

•Money committed to the rescue of insurance firm AIG has climbed from an initial $85 billion last fall to $180 billion. That figure could rise further.

•Mr. Obama provided in his proposed budget for as much as $750 billion in additional financial bailout money, on top of the $700 billion that Congress has already committed. Obama has not yet formally asked for any of that added money.

•The Senate is considering a bill, backed by the administration and the Federal Reserve, that would provide a $100 billion line of credit to the Federal Deposit Insurance Corp., the agency tasked with handling failed banks. The funds would help ensure that the FDIC has adequate money at a time when more small and mid-size banks are expected to become insolvent.

Members of Congress are getting complaints from voters, who, in a recent poll, mostly disapproved of bailouts for financial firms, and in turn the lawmakers expressed frustration in hearings last week.

Fed turns critical

One implication: In this political climate, getting approval for more money to help banks won’t be easy.
Some of the criticism is coming from within the Fed itself.

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