- The Washington Times - Sunday, October 12, 2008

UPDATED:

Leaders of 15 European countries on Sunday announced a joint plan to put new money into their banks and guarantee their lending in the face of a global credit crunch, as international policymakers nervously awaited the reopening of battered world stock markets on Monday.

In Washington, Treasury Secretary Henry M. Paulson Jr. urged developing nations not to be tempted by “isolationism and protectionism,” while top Democratic lawmakers said they were preparing a major new stimulus spending package for the reeling U.S. economy.

Related article:Paulson: Protectionist policies won’t solve crisis

At a summit in Paris, the European leaders said they had reached a deal of a specific series of measures to aid their banks, including a guarantee of interbank loans through 2009 that Mr. Paulson has opposed for U.S. lenders. The collapse of such lending has frozen credit markets generally and bankrupted some major international banks and investment houses.

“The crisis over the past days had entered into a phase that makes it intolerable to opt for procrastination and a go-it-alone approach,” said French President Nicolas Sarkozy, who hosted the summit. The failure of previous attempts to coordinate policies in Europe drove down stock markets across the Continent in recent days.

Key details of the accord — including the price tag — were not detailed in the leaders’ statement.

Related article:Draft statement: Europe would guarantee bank debt

Market analysts said a summit of G-7 finance ministers hosted by Mr. Paulson on Friday had offered few concrete proposals to reassure nervous investors. The gathering was held on the sidelines of the annual meetings of the World Bank and International Monetary Fund (IMF), which continue this week. Mr. Paulson on Sunday warned nations against trying to shut up their borders in the face the mounting economic bad news.

“Isolationism and protectionism will not offer a way out,” he said. “Although we in the United States are taking many extraordinary measures to ease the crisis, we are not pursuing policies that would limit the flows of goods, service or capital.”

Democratic lawmakers used Sunday’s talk shows to urge the Treasury Department to move quickly under the just-passed $700 billion Wall Street rescue plan to make direct purchases of bank stocks and provide banks fresh capital to make new loans. They also made clear they will push ahead with a planned stimulus package in a lame-duck session tentatively planned for mid-November.

“We are going to do a stimulus,” House Financial Services Chairman Rep. Barney Frank, Massachusetts Democrat, told ABC’s “This Week.” “I think the stimulus package is to give the middle class and the average citizen the same kind of relief that we tried to give to the financial sector.”

House Speaker Nancy Pelosi and the Democratic leadership in Congress are reportedly eyeing a $150 billion package, designed to give the economy a boost in the face of job layoffs and plunging stock values.

House Minority Whip Rep. Roy Blunt, Missouri Republican, said he was open to a stimulus program “that made sense.”

“But let’s not use the stimulus package as an excuse to do what Democrats have wanted to do from Day One of this Congress, which is a huge public works plan,” he added.

Coordinated international action to date — including last week’s synchronized move by the Federal Reserve, the European Central Bank and four other central banks to slash interest rates — has failed to reverse the market slide or thaw frozen credit markets.

Since the beginning of the month, all three leading U.S. stock indexes — the Dow Jones index of industrial stocks, the Nasdaq and the Standard & Poor’s 500 — have lost at least 20 percent of their value. The S&P 500 was off 18.2 percent last week alone, its worst weekly loss ever. U.S. stocks staged a late rally Friday afternoon, ahead of the meeting of G-7 finance ministers. But some analysts saw the weekend G-7 meetings, including a Saturday afternoon White House summit with President Bush, as a disappointment that produced a lot of rhetoric but few concrete proposals.

“The markets wanted maybe more assurance that there would be a unified global backstopping of the banks, and it doesn’t sound like that’s in there,” Kim Rupert, managing director of global fixed income for San Francisco-based Action Economics LLC, said.

French Foreign Minister Christine Lagarde said of the G-7 joint statement, “Some of us hoped [the communique] had had more teeth or more muscles to it, but at least it was endorsed.”

U.S. officials are reportedly reluctant to match the European guarantee on interbank lending because of the size of the American market and because far more of such lending in the United States is between financial firms that are not commercial banks.

Democratic members of Congress pressed Mr. Paulson on Sunday to embrace a plan under which the Treasury would use taxpayer dollars to directly recapitalize U.S. banks, giving the government an equity share in troubled lenders. Mr. Paulson’s original blueprint called simply for purchasing the banks’ bad loans in hopes that that would get them lending again.

“I am hopeful that tomorrow, the Treasury will announced that they’re doing it,” said Sen. Charles Schumer, New York Democrat and chairman of the Joint Economic Committee. “And they have to do it quickly. Markets are waiting.”

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said the U.S. central bank stood ready to consider any policy options to ease the banking crisis and restore confidence among lenders. Mr. Fisher said the Federal Reserve’s governors were even ready to drop their traditional secretive ways in order to reassure the markets.

“This morning I am casting convention aside,” Mr. Fisher said in a panel discussion at the Institute of International Finance in Washington. “I speak for all of us when I say that the Federal Reserve will continue to explore every avenue and consider every option to see the credit markets through the crisis.”

The markets may get a clearer signal of the U.S. government’s intentions Monday morning when Neel Kashkari, the Treasury official in charge of the bailout effort, gives his first major public address to a gathering of international bankers in Washington.

In Iceland, one of the countries hardest hit by the economic meltdown, officials said Sunday they were considering asking for IMF aid in the wake of the collapse of the country’s three biggest banks.

As Icelandic officials prepared to depart for Moscow this week to begin negotiations for a multibillion-dollar emergency loan from Russia, a top minister said Iceland was strongly considering asking the IMF for help.

This article was based in part on wire service reports.

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