President Bush on Friday said the U.S. economy is facing a "pivotal moment" and defended his administration's decision to buy up billions of dollars in bad debts as "essential" to preventing a meltdown.
"We must act now to protect our nation's economic health from serious risk," Mr. Bush said in a statement to reporters at the White House.
The president said that despite the series of already blockbuster moves made by the Treasury and Fed this week, more action is needed. We must address the root cause behind much of the instability in our markets: mortgage assets that have lost value during the housing decline and are now restricting the flow of credit, he said. America's economy is facing unprecedented challenges, and we are responding with unprecedented action.
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Mr. Bush, standing with Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and Securities and Exchange Commission Chairman Christopher Cox, said that the nation will weather this challenge and we must do it together.
The president addressed growing concerns among some lawmakers and economists about the government's actions of the past week.
Our system of free enterprise rests on the conviction that the federal government should interfere in the marketplace only when necessary, he said. Given the precarious state of today's financial markets and their vital importance to the daily lives of the American people, government intervention is not only warranted, it is essential.
The president acknowledged that these measures will require us to put a significant amount of taxpayer dollars on the line.
This action does entail risk, but we expect that this money will eventually be paid back, he said. The risk is -- of not acting would be far higher.
Further stress on our financial markets would cause massive job losses, devastate retirement accounts and further erode housing values, as well as dry up loans for new homes and cars and college tuitions. These are risks that America cannot afford to take.
Mr. Bush said the time to debate the origins of this problem will be later.
Now is the time to solve it, he said.
Mr. Bush also tried to reassure average investors that their money in savings and checking accounts is insured and won't be lost.
The [Federal Deposit Insurance Corporation] has been in existence for 75 years, and no one has ever lost a penny on an insured deposit, and this will not change, he said.
Moments before the president's comments, Treasury Secretary Henry Paulson, Jr., announced his intention to propose a legislative plan this weekend to remove housing-related troubled assets from the financial system in order to restore confidence in the financial markets. He estimated the ultimate cost would be hundreds of billions of dollars.
Mr. Paulson insisted this bold approach will cost American families far less than the alternative.
Mr. Paulson said the illiquid assets had been blocking the system and clogging the financial markets. Many loans resulting from both irresponsible lending and irresponsible borrowing have been parked or frozen on balance sheets, reducing lending. What began as a subprime-mortgage problem has extended to other mortgage sectors, he said.
As a result, 5 million homeowners are now either delinquent or in foreclosure.
Mr. Paulson said Fannie Mae and Freddie Mac, the government-sponsored enterprises that the federal government took over earlier this month, would increase their purchase of mortgage-backed securities. In addition, the Treasury would expand its own program to purchase mortgage-backed securities. Both actions would make mortgages more available and affordable in the short term, he said.
To restore confidence in the system, he said, We must address the underlying problem.
Over the weekend, Mr. Paulson said he would be working with Congress on legislation to remove these troubled assets from the financial system.
Urgently acting on multiple fronts, the U.S. government and the Federal Reserve took other unprecedented steps early Friday morning to calm the financial markets, which have frozen this week in the wake of the Lehman Brothers bankruptcy and the effective government takeover of American Insurance Group.
With fits and starts, the mortgage-related credit and financial crises have been ongoing for more than a year, but they reached their peak this week. Senate Banking Committee Chairman Chris Dodd said Friday morning that the United States could be days away from a complete meltdown of our financial system.
To stem the outflow from money-market mutual funds, Mr. Bush authorized the Treasury Department to use as much as $50 billion from a Depression-era fund to insure the holdings of money-market mutual funds for a year.
At the same time, the Federal Reserve announced an expansion of its emergency-lending program to support the assets of the money-market mutual funds, which hold $3.4 trillion and are a major source of funding for corporations selling short-term debt.
These measure will act as grease for the gears of our financial system, which were at risk of grinding to a halt. They will support the flow of credit to households and businesses, Mr. Bush said.
The market for short-term corporate debt has frozen in recent days. Investors in money-market funds have been rushing to redeem their shares and pour the proceeds into Treasury bills, whose interest rates had plunged to near zero.
On Thursday, the Fed co-ordinated actions with other central banks to inject nearly $200 billion of liquidity into frozen lending markets. Today, European central banks injected an additional $90 billion into money markets in another co-ordinated move.
The Securities and Exchange Commission imposed a ban on short-selling the stocks of financial companies. Short-selling is a tactic in which investors essentially place bets that stocks will decline in value. Short-selling the stocks of investment banks in recent months contributed to the Federal Reserve-subsidized forced sale of Bear Stearns and the Lehman Brothers bankruptcy.
This week Morgan Stanley's shares plunged nearly 40 percent in part because of short-selling.
Mr. Paulson and Mr. Bernanke met with congressional leaders Thursday night seeking their support for a massive bailout effort. The root cause of the stress in the capital markets is the real-estate correction, Mr. Paulson said.
At a press conference following the Thursday night meeting with Messrs. Paulson and Bernanke, House Speaker Nancy Pelosi said, We hope to move very quickly. Time is of the essence.
House Financial Services Committee Chairman Barney Frank said legislation could be drafted by his committee as early as Wednesday, in time for Congress to act quickly before its recess.
After European and Asian stock markets soared overnight in anticipation of the bailout plan, the Dow Jones Industrial Average jumped 325 points in Friday morning trading.