Finance Globe

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Treasury Secretary Announces Financial Stability Plan

Treasury Secretary Timothy Geithner on Tuesday unveiled the government's plan to attack the ongoing credit crisis and stabilizing the nation's banking system.

But before outlining the Financial Stability Plan, he explained how economic growth was dependant on the flow of credit, and how access to credit was essential for people to own a home, buy a car, or pay for higher education.

"Without credit, economies cannot grow at their potential, and right now, critical parts of our financial system are damaged. The credit markets that are essential for small businesses and consumers are not working," Geithner said. "Borrowing costs have risen sharply for state and local governments, for students trying to pay for college, and for businesses large and small. Many banks are reducing lending, and across the country they are tightening the terms of loans."

"Instead of catalyzing recovery, the financial system is working against recovery. And at the same time, the recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it. It is essential for every American to understand that the battle for economic recovery must be fought on two fronts. We have to both jumpstart job creation and private investment, and we must get credit flowing again to businesses and families," he said.

He said that governments around the world were too slow to act when the crisis began and that actions taken, while necessary, were too little too late.

"The force of government support was not comprehensive or quick enough to withstand the deepening pressure brought on by the weakening economy," Geithner said. "The spectacle of huge amounts of taxpayer assistance being provided to the same institutions that help caused the crisis, with limited transparency and oversight, added to public distrust. This distrust turned to anger as Boards of Directors at some institutions continued to award rich compensation packages and lavish perks to their senior executives."

"Our challenge is much greater today because the American people have lost faith in the leaders of our financial institutions, and are skeptical that their government has – to this point -- used taxpayers' money in ways that will benefit them. This has to change."

"To get credit flowing again, to restore confidence in our markets, and restore the faith of the American people, we are fundamentally reshaping the government's program to repair the financial system."

The Financial Stability Plan announced by Geithner is aimed at improving transparency and accountability to protect taxpayers, improving banks' balance sheets after assessing their ability to survive, promoting lending to get the economy moving again, and reducing the number of preventable foreclosures.

Federal banking regulatory agencies will come together to improve disclosure and initiate a more consistent, realistic, and forward looking assessment about the risk on bank balance sheets. Big banks - those with assets of $100 billion - will be given a comprehensive stress test to ensure they are stable enough to weather the tough economic conditions.

Banks that need additional capital will have access to funds from the Treasury as a bridge until they can attain private capital. Funding will come with conditions to ensure that the level of lending will be greater than it would have been without assistance, as well as conditions to encourage banks to replace public funding with private capital as soon as they can. The government's investments in these banks will be put into the Financial Stability Trust.

A Public-Private Investment Fund will be established to provide government capital and government financing to help leverage private capital to help get the private markets working again. The fund will be targeted at buying the bad mortgage assets that are clogging banks' balance sheets. Geithner said that the program will start with $500 billion, but that it will be expanded based on what works, up to one trillion dollars.

Up to a trillion dollars will be committed to the Consumer and Business Lending Initiative, to support lending for small businesses, auto loans, credit cards, and other consumer loans.

$50 billion will be used to help prevent foreclosures. The focus will be on "using the full resources of the government to help bring down mortgage payments and to reduce mortgage interest rates." Funding for this will come from the resources already authorized by the Congress under the Emergency Economic Stabilization Act. Obama's economic team is still working on the details of the plan to address the housing crisis, and further details will be announced within the next few weeks.

Mr. Geithner said "Let me add that as we go forward, President Obama is committed to moving quickly to reform our entire system of financial regulation so that we never again face a crisis of this severity."

The Secretary acknowledged that the dollar amounts in the plans are huge, but said that the figures represent "loans, guarantees, and investments with terms and conditions that protect taxpayers and help compensate the government for risk. Because of these terms and conditions, the risk to taxpayers will be less than the headline."
He also admitted that "this strategy will cost money, involve risk, and take time. As costly as this effort may be, we know that the cost of a complete collapse of our financial system would be incalculable for families, for businesses and for our nation."

He said that the program will have to adapt as conditions change and that we'll have to try things we've never tried before. "We will make mistakes. We will go through periods in which things get worse and progress is uneven or interrupted."

Geithner closed his speech with, "This is a challenge more complex than any our financial system has ever faced, requiring new programs and persistent attention to solve. But the President, the Treasury and the entire Administration are committed to see it through because we know how directly the future of our economy depends on it."

The American public can see where their tax dollars are going, whether the conditions placed on banks and institutions are being met and enforced, whether the boards of directors are spending taxpayer money responsibly and how executives are being paid, and how the program is impacting the flow of lending and the cost of borrowing at the newly created website

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Saturday, 19 June 2021

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