There has been a change of plans. $250 billion of the $700 billion set aside for the US banking bailout plan will now be invested directly into banks. In other words, America (yes, America) is partially nationalizing their banks. This new plan was created by England. Many other countries, including the US, have adopted it. There has been opposition to the plan but no one can deny that on Monday the Dow Jones industrial average gained 936 points (11%) and 300 more points on Tuesday morning. This is the largest single-day gain in American stock market history since the 1930s and it happened only days after the greatest decline yet. This inconsistency seems unsettling to me. Along with the government putting money into the banks, it includes guaranteeing new debt issued by banks for three years (to encourage interbank and costumer lending) and an unlimited guarantee by the F.D.I.C on bank deposits in accounts with no interests and the Federal Reserve would begin a program to become the buyer of last resort for commercial paper (to help businesses get money for basic everyday needs). President Bush says that all of these programs are “limited and temporary” and protects taxpayers.
On Monday, the major banks Citigroup Inc., JP Morgan Chase & Comp., Bank of America (which is obtaining Merrill Lynch), Wells Fargo (which is acquiring the Wachovia Corporation), Goldman Sachs, Morgan Stanley, and Bank of New York agreed to take $125 billion worth of investments. These ranged from $25 billion to $2 billion for each bank. The banks agreement to accept the governments investments was the only option they were given. As Treasury Secretary Henry Paulson put it, it was for the good of the American financial system. The last $125 billion dollars in the plan is to be distributed to thousands of smaller banks.
It is ironic the quick change that has occurred. The Treasury had opposed taking equity stakes in banks just weeks ago. Now that is what we are doing. The US is trying to catch up to Europe and keep our investors from bailing out. We will have to see where this new road, lined with bricks of socialism, will lead.
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