"WORLD doomed" was the running story from Wall Street this week as bank shares plummeted and markets reeled. But by early yesterday, the story had undergone a dramatic revision: "World Saved".
Markets across the world have soared on news of a plan by the United States government to buy in the toxic assets of America's stricken banks.
The astonishing move, confirmed yesterday by Hank Paulson, the US treasury secretary, is set to set t
o saddle the US taxpayer with hundreds of billions of dollars of debt.
Some estimates put the total as high as $1 trillion. And the UK Treasury could well follow with a scheme of its own.
How on earth can the US government – already saddled with the debts of the country's two biggest mortgage providers, Fannie Mae and Freddie Mac, and committed to support AIG, the world's biggest insurer – provide such a gargantuan amount? The answer is this: it cannot afford not to.
This week, America's financial system was brought to the brink of an epochal collapse. Shares in the two largest remaining investment banks – Goldman Sachs and Morgan Stanley – were in free fall.
In a concerted move on Thursday, the world's top central banks pumped in an unprecedented $180 billion of emergency liquidity. But even that failed to halt the panic.
US money market funds – where millions of Americans put their retirement savings – were starting to topple.
The administration's worst fear was that the credit contagion would hit the retail banks, prompting a desperate scramble by depositors to get their money out before they, too, collapsed.
It was this prospect that moved the US administration to take unprecedented action.
Whatever the final cost – and we may not even know the figure when further details are announced next week – it will be the biggest intervention ever undertaken by the US government to save the financial heart of the nation. Here in Britain, the Treasury is thought to be working on a similar contingency plan.
Shares on both sides of the Atlantic soared in relief. While it does not mean the end of the credit crisis, the move should buy desperately needed time for America's banks, regulators and government to get their house in order.
The scheme is likely to take the form of a vehicle similar to the Financial Resolution Corporation devised in the Great Depression to rescue America's country and mortgage banks.
It was wheeled back out in the mid-1980s to buy property assets from the stricken savings and loans associations. After seven years, the properties were sold off and the corporation was wound up – showing a modest profit.
However, the scale this time around is much larger.
A recovery in the US housing market is now crucially required. More immediately, what the markets now need is a sharp fall in interbank lending rate.
The full article contains 483 words and appears in The Scotsman newspaper.
