U.S. Response to Financial Crisis

Posted By: Allison Franklin

Is US response to financial crisis strong enough?
Government action to save major financial firms has yet to show clear, positive results.
Reporter Mark Trumbull discusses some of the options available to the Obama administration when dealing with underperforming banks.
Reporter Mark Trumbull
In the history of financial crises, one lesson stands out: It’s important to match the scale of the remedy to the scale of the problem – and to do so quickly.
That doesn’t mean every corporate bailout is a good idea. But what’s needed is a forceful approach, whether the costs fall on investors or taxpayers. Governments that try to cut corners or take a wait-and-see approach often end up making recessions deeper and taxpayer costs higher, say financial historians.
The Obama administration is well aware of that trap, yet many economists see a high risk that the United States will go down that path in 2009.
Some signs that efforts to date haven’t been adequate to the task:
• Insurance giant AIG, now largely government-owned and supported, is expected to report the largest quarterly loss in corporate history Monday – plus a newly restructured bailout that will amount to the third rescue of a company that has already tapped $150 in federal funding.
• The Treasury on Friday announced its third rescue in six months of the bank Citigroup, which has received $45 billion in capital infusions plus billions more to insure against losses.
• The overall economy has declined more sharply than economists expected, with gross domestic product shrinking at a 6.2 percent annual pace in the final quarter of 2008.
“As long as they don’t fix the banking system, the economy is going to get worse,” says Pete Kyle, a professor of finance at the University of Maryland. “Death by a thousand cuts is not going to work.”

To read the for story click here