NYTimes: It’s time to act

十月 11, 2008

Published: October 10, 2008

After a wild week of plunging world markets, it was welcome news on Friday night that the United States was working with other nations to stem the financial crisis and also moving ahead with plans to take equity stakes in struggling banks instead of just buying up their bad assets.

It is now clear that the leading nations must develop a clear, coherent and coordinated plan for this time of global financial peril. Treasury Secretary Henry Paulson promised after a day of meetings to do just that, and he said that the government was actively developing a plan to protect taxpayers by giving them a stake in banks that Washington is trying to rescue after years of reckless mortgage lending.

We hope that Mr. Paulson and the finance ministers of other industrialized nations will come up with a detailed joint plan this weekend.

Banks in Europe and the United States have virtually stopped lending to each other, mistrustful of the value of the bundles of American mortgages packaged into complex financial products on each other’s balance sheets. Efforts by the Federal Reserve and other central banks to flood the world with cheap money have failed to restart the engine of private credit.

So far, governments on both sides of the Atlantic have bungled their responses. The Bush administration’s $700 billion package to buy bad assets from banks failed to convince anybody that it would solve the problem. Meanwhile, leaders in the European Union pointed fingers, squabbled over burden-sharing and made matters worse with ad-hoc actions on a national level that just pushed the problem onto their neighbors.

Fortunately, a consensus is emerging on the immediate need to stabilize the financial system. With most of the world’s finance ministers and central bankers gathered in Washington this weekend for the annual meetings of the International Monetary Fund and the World Bank, there is an opportunity to convert this consensus into a concrete strategy.

The plan should offer some temporary government guarantee for deposits and loans to unlock interbank lending and gain some time to figure out which banks can be saved and which cannot. It should provide for governments to quickly inject equity capital into banks. It should be coordinated internationally, with burden-sharing provisions that specify which governments will provide capital to banks that do cross-border business.

The approach need not be identical in each country, but the bank rescue announced by the British government this week provides a useful template. It offers to insure up to about $425 billion worth of new bank debt, forces banks to raise new equity capital and makes government money available to buy equity.

The approach is not perfect. It does not eliminate the toxic assets. It will require a lot of government oversight and clear rules. For instance, banks that benefit from government guarantees should not be allowed to pay dividends. Regulators will have to quickly find which banks are insolvent and need to be shut down.

Some countries, like Switzerland, might not have the wherewithal to recapitalize their national banks on their own. So a mechanism might be necessary — perhaps through the I.M.F. — to provide funds to prop up their banking systems.

In the medium-term, many countries will need stimulus packages to mitigate the inevitable economic slowdown. Washington has to do more to help homeowners, as well as pensioners and near-retirees whose savings have been wiped out. And the regulatory regime governing the world’s financial system has to be rethought.

But at this crucial juncture, the task is to stop the panic that is unraveling the world’s financial system. This weekend is the time to do it.



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