US Economic Crisis Bulletin: World Urges Americans to Get a Grip on Banking Crisis; House Prices Decline; Bailout Doomed

Detroit demonstration in the financial district on Sept. 25, 2008. The march opposed the trillion dollar bailout of Wall Street. (Photo: Alan Pollock).
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World urges US to get a grip on banking crisis

BERLIN (AFP) - - Europe led a chorus of demands Tuesday that the United States get a grip on its financial crisis, as governments scrambled to shore up fragile banks and restore confidence in nervous markets.

The failure of the US Congress to approve a 700-billion-dollar plan to bail out tottering Wall Street banks rattled European leaders struggling to protect their own institutions from the global storm.

In Berlin, German Chancellor Angela Merkel said: "I expect that the rescue package in the United States will be approved this week, because it is needed so that new confidence can be established in the markets."

French Finance Minister Christine Lagarde said: "It's obvious that there is a lot of hope in various financial markets riding on the success of this plan."

In Brussels, European Commission spokesman Johannes Laitenberger said: "The US must take its responsibility in this situation, must show statemanship for the sake of their own companies and for the sake of the world."

US President George W. Bush has thus far proved unable to persuade lawmakers from his own Republican Party to back the Wall Street rescue plan, but echoed European calls for action.

"The reality is that we are in an urgent situation, and the consequences will grow worse each day if we do not act," he warned at the White House, vowing that efforts to secure a rescue package would continue.

In Asia, the Japanese government has been battling to pass its own 17-billion-dollar supplemental budget to kick-start the economy and, while India insists its stock market is sound, Delhi called for US action.

"It's agreed by everyone a bail-out is necessary. How the US Congress will reconcile the views of two major political parities, it's not for me to comment," said Finance Minister Palaniappan Chidambaram.

In Paris, President Nicolas Sarkozy met bankers to urge them to maintain a supply of credit to business, after France, Belgium and Luxembourg pumped 6.4 billion euros (9.2 billion dollars) into the beleaguered bank Dexia.

"Our ambition was to have very strong political involvement in order to send a signal to the markets," Belgian Prime Minister Yves Leterme told journalists in Brussels after the Dexia deal was reached.

With commercial banks reluctant to risk loaning money to each other, the European Central Bank attempted to release liquidity into the credit market by auctioning off 50 billion dollars (35 billion euros) in one-day loans.

An earlier auction of 30 billion dollars was massively oversubscribed.

Despite government intervention, the failure of US lawmakers to agree on a rescue for failing US banks spread confusion in Europe's markets, in the wake of a rout across Asian markets and on Wall Street overnight.

London's FTSE was up 0.22 percent in late morning deals after falling by three percent shortly after the open. Paris also plunged while Frankfurt was down 0.75 percent.

Outside the European Union, in Russia's emerging economy, trading was suspended on its two main markets, the RTS and the MICEX, a day after they fell 7.11 percent and 5.50 percent respectively.

"Investors everywhere are suffering an almost complete loss of confidence in governments' ability to prevent a systemic failure of the financial system," Moscow-based analyst Chris Weafer wrote in a note before trading was to start.

Following a pre-dawn crisis meeting with Prime Minister Francois Fillon and Lagarde, Sarkozy held talks with France's leading bankers in order to identify weak links in the sector.

The French leader promised in a speech last week that no French depositor will lose so much as a euro in savings and gave an undertaking that the state would rescue failing institutions.

"The French banking system is better protected than the others, but the situation has changed," a senior official in Sarkozy's office said. "Banks are in trouble in Germany, Belgium and Great Britain. We feel a bit surrounded."

Ireland, the only country in the eurozone single-currency bloc to have officially entered a recession, also issued a guarantee. The finance ministry promised to protect savers' deposits in six major banks for two years.

The move came after a record share slump in Dublin on Monday which saw the Irish Stock Exchange Index fall 13 percent.

Irish Finance Minister Brian Lenihan criticised the US government for failing to prevent the collapse of investment bank Lehman Brothers.

"My personal view is that the United States authorities were mistaken in permitting that bank to go to the wall," Lenihan said, defending Ireland's decision to provide state support to the banks.

"Were liquidity to dry up in the Irish banking system in the weeks ahead, the inevitable result would be economic catastrophe for this country," he said.


Why the bailout bill went down

By Gail Russell Chaddock

Washington – A sweeping rescue plan for US financial markets foundered in the US House Monday on a combination of doubts about the plan, reelection concerns, disdain for bailing out Wall Street bankers, and a deep philosophical distaste for massive government intervention in the private sector among conservatives.

The Dow Jones stock index plunged a record 777.68 points on the day ­a reaction that Democrats say could pave the way for a new vote, as early as Thursday.

Despite opinion polls showing that the public was warming to the idea of a rescue plan – and efforts by congressional leaders on both sides of the aisle to round up support – the measure failed 205 to 228, with 95 Democrats and 133 Republicans voting to scuttle the proposed $700 billion bailout. Most lawmakers had been deluged with calls and e-mail from voters angry that, as they see it, taxpayer dollars would be used to bail out Wall Street fat cats.

It was clear from lawmakers’ post-vote comments, especially among conservative Republicans, that the bill represented nothing short of a repudiation of values – such as faith in small government and market mechanisms – that they have cherished since the days of Ronald Reagan.

“Inaction has never been an option, but [Treasury chief Henry] Paulson’s plan should never have been our only option,” said Rep. Jeb Hensarling (R) of Texas, who heads the conservative Republican Study Group. “I fear that under this plan ultimately the federal government will become the guarantor of last resort, and that does put us on the slippery slope to socialism.”

Despite Monday’s loss, major players in the effort to prevent the credit crisis from worsening vowed to have another try at it later this week.

“The legislation has failed. The crisis is still with us,” said House Speaker Nancy Pelosi, in a briefing after the vote. “The lines of communication remain open.”

Secretary Paulson reaffirmed the need for a rescue plan for the US financial system, pledging to keep talking to lawmakers to come up with “a plan that works.”

“We’ve got much work to do and this is much too important to simply let fail,” Paulson told reporters after meeting President Bush to discuss the bill’s rejection. “We need to work as quickly as possible.”

House conservatives had clashed last week with the White House over the shape of the proposed rescue plan, which proposed that the Treasury Department buy up “troubled assets” from financial institutions, including foreign banks. They favored charging Wall Street to fund its own bailout through a government-backed insurance program – elements of which were included in the final rescue plan.

But for most GOP conservatives, the plan would still leave the Treasury secretary picking winners and losers in the US economy.

“I’m resolute in my opposition,” said Rep. Darrell Issa (R) of California. “Today we are ending the Reagan era if we vote for this, and we can’t come back and fix it next year.” The bill was also a tough call for Democrats, who resented being seen as lining up to bail out Wall Street just before an election, as their GOP challengers claimed to side with Main Street.

“We could lose seats over this,” said Rep. Carolyn Maloney (D) of New York, who nonetheless voted for the plan.

Some Democrats on the left wing of the party repudiated the plan. “What we are considering today is still built on the Paulson-Bush premise that buying up Wall Street’s bad bets will solve the liquidity problem. I don’t buy it,” said Rep. Peter DeFazio (D) of Oregon.

There are less expensive, less risky ways to solve the problem, he said. “We can do better. We should start again on a new package.”

Rep. Emanuel Cleaver (D) of Missouri, a member of the House Finance Committee, delayed his vote until the last minute to see if GOP leaders could deliver a majority of their own caucus. They did not, and he voted against the bill. “There’s no reason for us to go in and bail Bush out if his own party rejects him,” he said.

Monday’s vote marked the sharpest repudiation ever of the Bush White House by House Republicans, who voted against the plan by a margin of 2 to 1.

In a press briefing after the bill failed, House GOP leader John Boehner said Speaker Pelosi’s floor speech before the vote “poisoned” the GOP caucus and cost as many as a dozen Republican votes that had previously been committed to the rescue plan. In her speech, Pelosi blamed America’s financial woes on eight years of the Bush administration’s “reckless economic policies.”

Responding to the bill’s failure, Mr. Bush said: “Our strategy is to continue to address this economic situation head on, and we will be working to develop a strategy that will enable us to continue to move forward.”

Meanwhile, Monday’s vote sent the US Senate back to intraparty and interparty discussions on how to proceed.

“We need to have conversations. We don’t know what the next steps are,” says Jim Manley, a spokesman for Senate majority leader Harry Reid. The Senate had planned to vote on the bill on Thursday.

“The problem is not going away. We’re going to stay here until we find a solution,” said Senate Republican leader Mitch McConnell. “It’s time to fix the problem, not the fix the blame.”

Associated Press material was used in this report.


US home prices fall at record rate

By James Politi in Washington
September 30 2008 16:55

US home prices posted a record annual decline of 16.3 per cent in July, disappointing economists and delivering the latest setback to the search for signs of recovery in the US housing market.

According to the closely watched Case-Shiller index, produced by Standard & Poor’s and released on Tuesday, home prices in 20 large US cities fell faster than both the 16 per cent drop expected by most economists and the previous record of 15.9 per cent in June.

On a monthly basis, the readings were mixed. Although the pace of the home price drop accelerated in July to 0.9 per cent from 0.5 per cent in the previous month, declines over three months have eased significantly from earlier in the year.

“House prices are tumbling down a hill but the slope is elevating,” said Patrick Newport, US economist at Global Insight in Massachusetts.

The steepest drops in home prices continued to be concentrated in sunbelt cities such as Las Vegas and Phoenix, which have been at the heart of the US housing bust. They respectively recorded monthly drops of 2.8 per cent and 2.7 per cent and annual drops of 29.9 per cent and 29.3 per cent.

Some cities did report improvements, with Minneapolis recording a 1.3 per cent gain on a monthly basis, compared with a 0.9 per cent rise in June, while the Tampa, Florida area posted flat house prices, compared with a 1.1 per cent decline in the previous report.

Meanwhile, a measure of US consumer confidence showed its highest reading since September, moving up to 59.8 from 58.5 in August, according to the Conference Board. However, the data was discounted by some economists given that it was expected to fall as the dispiriting impact of the financial crisis offset a brighter outlook deriving from lower energy prices.

Copyright The Financial Times Limited 2008


Atlanta Fed’s Lockhart Assumes Bailout Plan Is Dead

Federal Reserve Bank of Atlanta President Dennis Lockhart on Tuesday put low odds of success on congressional efforts to pass a government program aimed at stabilizing financial markets.

“I’m working under the assumption that it is most realistic at this stage that there will be no comprehensive program as was envisioned in the Treasury proposal,” Lockhart said at a luncheon for regional economic alliance Greater New Orleans Inc. “The most realist approach is to assume we are moving forward dealing with whatever developments come up on a one-by-one basis.”

The $700 billion plan, in which the government would buy distressed mortgage securities to restore markets’ health, suffered a spectacular defeat in the House on Monday. Congress is expected to vote again later this week on a modified version of the legislation, which is supported by the Fed.

In his prepared remarks, Lockhart said he expects the financial-market turmoil will likely weigh heavily on the economy, although he added he was less worried about the outlook for price pressures.

“We’re in the midst of very stressed financial markets with the potential of doing serious damage to the broad economy - Main Street in the current jargon — both here in the United States and abroad,” Lockhart said. “I believe problems in our financial system add significant risk to the downside for the economy,” he said.

Market troubles are constraining borrowing and “Main Street is being affected” by Wall Street’s troubles, Lockhart said. He continues to expect “a very weak second half” of 2008 for the U.S. economy, with “contracting” consumer spending, “weaker” business investment and reduced export-sector gains.

The central banker devoted considerable attention to developments in financial markets. He described credit markets as “quite strained” and said “there has been a widespread withdrawal of confidence” between financial-market participants. While the troubles in the financial system have been around for some time, “the situation in September has been one of accelerating deterioration of the institutional and market landscape of our financial system,” Lockhart said. He added “these conditions are still with us and, as of yesterday, show no signs of relenting.”

If markets stay impaired “they will surely evoke public policy responses in an effort to restore confidence in financial markets,” he said. Then, “confidence will return with improved liquidity, more clarity on the value of troubled assets, and the recapitalization of financial institutions.”

Any prospective response to the financial sector trouble should be done “pragmatically and as a national community,” Lockhart said. –Michael S. Derby
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Article printed from Real Time Economics: http://blogs.wsj.com/economics
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