The Bush administration is racing to rescue its rescue plan.
As Wall Street suffered its worst week ever, toxic debt is no longer the top priority of the $700 billion package that Congress passed two weeks ago.
Instead, President Bush and Treasury Secretary Henry Paulson have shifted their focus to thawing the credit freeze, answering the warnings of top world finance leaders who say it is at the heart of a potential global financial meltdown.
The threat of collapse among cash-strapped US and European financial institutions “have pushed the global financial system to the brink of systemic meltdown,” International Monetary Fund chief Dominique Strauss-Kahn said today.
He urged the United States and other leading nations to swiftly tackle the credit crunch.
While no new strategy for the rescue plan has been definitively hammered out, Paulson said injecting banks with capital is now his primary concern rather than buying up bad mortgages and other assets from financial companies.
The government would buy nonvoting stock in the banks but would not be involved in bank management. Theoretically, the shares could be sold for profit at a later date.
“It’s better than the initial plan, but in my view, it’s going from a 1 out of 10 to a 1.5 out of 10,” said Dr. Jeffrey Miron, a senior economist and Harvard professor.
“They may have been surprised – the market went down and down and down after the bailout was adopted, which I think surprised them. When it was clear their plan wasn’t going to calm the markets down, it was like, ‘Uh oh, what do we do now?’ ”
Miron said the new emphasis could work because giving banks more cash means they will do more lending.
“They have more equity. They’re worth more . . . So the perception is they have more of a cushion,” Miron said.
Paulson has not determined what percentage of the $700 billion would go directly into failing banks and how much will be used to buy toxic debt.
Neel Kashkari, the financial guru tapped by Paulson to steward the rescue plan, is scheduled to give a speech tomorrow on the Treasury’s new strategy.
The shift in focus came as the IMF warned that interest-rate cuts and other fiscal measures by the US and European nations have been ineffective.
“The measures have not yet achieved the goal of stabilizing markets and bolstering confidence,” Strauss-Kahn said.
His sobering words followed a half-hour White House meeting between Bush and finance officials from other Group of Seven industrial nations.
They left the meeting without announcing a clear strategy, but Bush pledged an international response and appealed for patience.
“We’re in this together, we will come through it together,” Bush said. “We will do what it takes to resolve the crisis, and the world’s economy will merge stronger as a result.”
He cautioned that individual steps by a nation may end up hurting it and others countries.
“We must ensure the actions of one country do not contradict or undermine the actions of another,” Bush said.
Calls for a concerted global effort come on the heels of one of Wall Street’s worst weeks ever, in which investors lost $2.4 trillion.
The Dow Jones Industrial Average suffered an eight-day loss of just under 2,400 points, or 22.1 percent. On the year, investors have seen $8.4 trillion in stock value disappear, with the Dow off 40.3 percent from its record-high close of 14,164.53 on Oct. 9, 2007.
The IMF’s chief economist predicted that without quick measures, stock shares could slump by another 20 percent before stabilizing. With Post Wire Services
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