Tuesday, October 14, 2008
IN THE disorienting seesaw of the financial crisis, yesterday was an upswing -- one of those good days in which stock markets soared, inter-bank lending rates dipped and panic seemed that it might be giving way to concerted government intervention. It was not the first such day, to be sure, but both Wall Street and Main Street had to hope that the day represented more than a breather on the way down. That's because this time, intervention came in the form of massive and unprecedented coordinated action by U.S. and European governments. If the $2.3 trillion committed to backstopping European banks yesterday, and the emerging plans for the Bush administration to announce parallel measures today, do not restore confidence in markets, it's hard to imagine what will.
The relief brought about by the linked steps taken by Britain, Germany, France, Spain, the Netherlands and other governments was pronounced in part because it appeared as late as last Friday that such international cohesion might not be possible. British Prime Minister Gordon Brown, who first proposed the twin measures of injecting capital directly into banks and guaranteeing bank debts, was initially rebuffed when he proposed that the remedy be adopted by the Group of Seven nations. Yet on Sunday, the 15 nations in the euro currency zone essentially adopted Mr. Brown's plan, along with other measures, while allowing for differences in implementation. The Fed facilitated yesterday's massive commitment of funds to the European markets by agreeing to make dollars available in unlimited amounts.
More important, Treasury Secretary Henry M. Paulson Jr. yesterday appeared to be moving toward harmonizing the U.S. rescue strategy with Europe's. Mr. Paulson said last week that the Treasury would inject capital into banks in exchange for equity, and the administration reportedly was ready to use federal deposit insurance funds to back up bank debts. This marked yet another shift in strategy by an administration that has repeatedly whirled to embrace measures it rejected weeks or sometimes days earlier. But Mr. Paulson is to be commended for showing the flexibility and pragmatism to help fashion what amounts to a global bailout -- a necessary response to globalized markets that nevertheless was all but inconceivable a few weeks ago.
There will be wrinkles in implementing the global solution from country to country, and the United States has no shortage of them. In comparison with the British market, for example, the U.S. banking sector is far larger and more diverse. While the British government yesterday announced a partial takeover of three huge banks, Treasury may need to fashion different solutions for the largest American banks, which are linked to the global problem of toxic mortgage-based securities, and regional banks that still hold many conventional mortgages. Treasury will still buy some of the bad paper, as Mr. Paulson originally proposed, and it is working on the insurance program sought by congressional Republicans. The challenge certainly justifies using a range of tools. But what's most vital is that the United States fully support and subscribe to the global rescue effort. It had a good first day; whether yesterday's upturn continues will depend in part on whether that international alliance remains solid.