New Plan Announced to Get Economys Clogged Arteries Pumping

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by Lisette Livingston

In an effort to shore up the economy,President Bush announced aprogram early Tuesday morning tounfreeze stagnant credit markets.According to the plan, the governmentwill use its authority under the$700 billion Wall Street bailoutpackage to pump billions of dollarsinto banks, expand deposits andguarantee loans. Following GreatBritain lead, which took the samesteps recently, the United States ishoping the measure will unclog thenations financial markets and promotelending among banks.

The measure goes one step furtherto intervene as the government hassought ways over the last month todeal with the nations pressing economiccrisis. When an announcementto simply buy toxic assets heldby major banks and Wall Streetfailed to unfreeze markets, the governmentmoved one step furtherTuesday to directly intervene byinvesting a reported $250 billioninto the nations banking system,putting taxpayers in a position tobecome preferred stockholdersunder the plan. The move comes onthe heels of a historically bad periodlast week in the U.S. stock market.Joined by Treasury Secretary HenryPaulson, Federal Reserve ChairmanBen Bernanke and FDIC ChairmanSheila Bair, President Bush outlinedfour major aspects of the plan in atelevised statement released fromthe White House.

This weekend, I met with thefinance ministers from the G7 andG20, organizations representingsome of the worlds largest andfastest-growing economies. Weagreed on a coordinated plan foraction to provide new liquidity,strengthen financial institutions,protect our citizens savings, andensure fairness and integrity in themarkets. Yesterday, leaders inEurope moved forward with thisplan. They announced significantsteps to inject capital into theirfinancial systems by purchasingequity in major banks. And theyannounced a new effort to jump startlending by providing temporary government guarantees for bankloans. These are wise and timelyactions, and they have the full supportof the United States.

First, the federal government willuse a portion of the $700 billionfinancial rescue plan to inject capitalinto banks by purchasing equityshares. This new capital will help healthy banks continue makingloans to businesses and consumers.And this new capital will help strugglingbanks fill the hole created bylosses during the financial crisis, sothey can resume lending and helpspur job creation and economicgrowth.

This is an essential short-termmeasure to ensure the viability ofAmericas banking system. And theprogram is carefully designed toencourage banks to buy these sharesback from the government whenmarkets stabilize and they can raisecapital from private investors.Second, and effective immediately,the FDIC will temporarily guaranteemost new debt issued by insuredbanks. This will address one of thecentral problems plaguing our financialsystembanks have beenunable to borrow money, and thathas restricted their ability to lend toconsumers and businesses. Whenmoney flows more freely betweenbanks, it will make it easier forAmericans to borrow for cars, andhomes, and for small businesses toexpand. Third, the FDIC will immediatelyand temporarily expand governmentinsurance to cover all noninterestbearing transactionaccounts. These accounts are usedprimarily by small businesses tocover day-to-day operations. Byinsuring every dollar in theseaccounts, we will give small businessowners peace of mind, he said.

Currently, the Federal Reserve istaking steps to finalize work on anew program where it will serve as abuyer of last resort for commercialpaper, President Bush added. This isa key source of short-term financingfor American businesses and financialinstitutions. And by unfreezingthe market for commercial paper, theFederal Reserve will help Americanbusinesses meet payroll, and purchaseinventory, and invest to createjobs.

While each of these new programscontain safeguards to protect taxpayers,President Bush described thegovernments role as limited andtemporary and are not intendedto take over the free markets, but topreserve it, he stated. Experts predictthe result of the plan could significantlyimpact on small businesses,the backbone of Americas economy.

According to the U.S. SmallBusiness Administration, small businessesmake up 99.9 percent of the27.2 million businesses nationwideand provide about 50 percent of allprivate-sector jobs. Moreover, smallbusinesses generate about 80 percentof new jobs each year and createmore than 50 percent of the nonfarmgross domestic product.

When businesses cant get credit,Robert Korajczyk, finance professorat Northwestern Universitys KellogSchool of Management agreed that itmakes it difficult for small businessesto meet financial obligations. Theinability to secure credit has theeffect of putting the squeeze onprofitability, he said.

A National Small BusinessAssociation survey taken in August,reported that 67 percent of businessowners surveyed reported that theyhave felt the effects of the creditcrunch, more than double theamount who were surveyed lastyear. In a PNC Economic Outlooksurvey taken at the same time, about25 percent of business owners saidthey found it harder to obtain credit.As an incentive to help small businesses,Democratic Presidentialnominee U.S. Senator BarackObama has outlined a plan thatwould give companies a $3,000 taxcredit per new worker for jobs createdin the United States through2010. While his Republican opponentU.S. Senator John McCainsplan did not highlight tax incentivesfor jobs in the U.S, McCain hascalled for cutting spending, providinga $5,000 tax credit to help familiesbuy health insurance andincrease domestic oil drilling to helpstimulate the economy.

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