World Leaders Vow Concerted Action
Saturday, October 11, 2008
U.S. stock markets gyrated wildly yesterday as the world's top finance ministers met in Washington to hammer out a joint set of principles aimed at containing the financial crisis and restoring badly damaged confidence.
The Dow Jones industrial average fell 128 points, or 1.49 percent, to 8451, but during the day it had lurched from 7883 to 8901 -- a roller-coaster ride of more than 1,000 points and an indicator of the uncertainty gripping investors as they try to figure out the severity of the economic downturn and whether various companies will survive.
Over the past five days, the Dow Jones industrial average has registered the biggest weekly percentage decline in its 112-year history, surpassing the record decline set during the Depression, in the week ending July 22, 1933.
Finance ministers from the world's seven biggest industrialized economies, in Washington for a regularly scheduled meeting, issued a communique last night vowing to "take all necessary steps to unfreeze credit and money markets" and to "use all available tools" to prop up and prevent the failure of institutions critical to the financial system.
U.S. Treasury Secretary Henry M. Paulson Jr. confirmed earlier reports that the United States is drawing up plans to buy equity stakes in financial firms. He said federal money would be offered on a "standardized" basis to all banks in a way that would attract new private capital, as well.
The finance ministers' communique was designed to assure investors that world leaders would work in concert rather than at cross-purposes in forging measures to aid besieged financial institutions. It laid out common guidelines that endorsed the injection of capital into the banking system, the purchase of troubled assets from banks and broader guarantees of deposits. Europeans were also pressing for guarantees of interbank lending, though the Bush administration was reluctant to embrace the measure.
"The moral hazards have to be dealt with at a later stage. That's my sense," Christine Lagarde, France's minister of economy, industry and employment, said before the meeting of the Group of Seven, setting aside concerns about governments assuming private-sector risks. Lagarde added that the "functioning of the basic principles of our markets" has to be restored. "That is the main and first and top priority," she said.
Speaking in the Rose Garden yesterday morning, President Bush said the "startling drop in the stock market" was largely "driven by uncertainty and fear." But stocks continued to slide even after he pledged to "continue to act to resolve this crisis and restore stability to our markets." Bush tried to strike a balance between optimism that the administration's efforts would begin to show results and an acknowledgment of the economic stress in the country. "We all share a determination to solve this problem -- and that is exactly what we're going to do," he said.
Financial markets indicated that the world leaders were having little success so far.
While some of the world's biggest and most solid companies, such as General Electric and Toyota, have still been able to borrow money on an overnight basis for day-to-day operations at relatively low rates, for the most part short-term credit markets remained frozen.
Banks remained unwilling to lend money to one another and unable to raise money from investors, undercutting their ability to lend to customers. In a key indication of banks' difficulty raising money, the difference between the rate at which banks can borrow on credit markets and Treasury's borrowing rate was higher than it has been in at least a quarter-century.
The credit crunch has threatened to topple more banks. Regulators yesterday seized two small banks, Main Street Bank in Michigan and Meridian Bank in Illinois, bringing the year's tally of failed banks to 15.