New Plan to Inject Capital into Banks Can Stop Market Deterioration, Says Expert

By Anuradha Kher, Online News EditorWashington, D.C.–The Bush administration said Friday that there would be a change in the $700 billion bailout plan to help buy mortgage-related securities. In addition to purchasing bad assets from banks, the government now plans to inject capital directly into the nation’s banks. The move came amid the Dow Jones industrial average plummeting 18 percent last week, one of the worst in stock market history, and the crisis spreading quickly around the world as governments across Europe and Asia hurried to save their banks.While the Treasury says it still plans to buy distressed assets, the scope of that plan is unclear, according to a New York Times report. Officials said they hoped to make the first capital investments within the next two weeks, according to the paper.But Desmond Lachman, resident fellow at the American Enterprise Institute (AEI), isn’t much more hopeful with the change in plan. Lachman, who has served as deputy director in the International Monetary Fund’s (IMF) Policy and Review Department, tells MHN, “It’s not clear whether this new plan can stop the global economic crisis. It might stop matters from being a whole lot worse. The money being injected into the banks might stop the banks from deleveraging but it will take a long time to make a big impact.”Lachman warns that there is no way to avoid a deep recession for the next three quarters.“There has been a big impact on the housing market and the housing market feeds into the rest of the economy. I believe that solutions for the housing sector have to be part of the overall solution. We want to avoid the foreclosures and people losing their homes and all but, we also want to stop the housing market from contaminating the whole economy. I think the $700 billion bailout plan is ad hoc, and partial in that it does not address the problems of the housing sector.”He believes that there will be no dramatic policy changes in that regard till the next administration comes in. “We will have to wait till February or March to see that,” concludes Lachman.