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Major US Government Intervention in Private Banks

  • VOA News

The U.S. government is buying up to 250 billion dollars in the stock of private banks and increasing government guarantees of loans and deposits, in the latest effort to rescue the financial industry.

Speaking at the White House Tuesday, U.S. President George Bush said he hopes the plan will restore confidence in the system and encourage banks to resume lending. Economists say the stalled credit market threatens to push the global economy into recession.

Mr. Bush says the major government intervention in banks is "not intended to take over the free market, but to preserve it." U.S. Treasury Secretary Henry Paulson says the government is taking action reluctantly, but that the alternative of leaving consumers and businesses without financing is unacceptable.

The U.S. plan follows similar moves by European governments, which have pledged about two trillion dollars to rescue their own banks. The announcement also follows crisis talks with world economic leaders over the past few days. Talks on economic issues will continue, as President Bush is set to meet with French President Nicolas Sarkozy and EU Commission chief Jose Manuel Barroso on Saturday.

The U.S. effort is part of the 700 billion-dollar market rescue plan Congress approved earlier this month.

The coordinated global efforts are having some effect, as the interest rate banks charge each other for loans declined for the second day in a row. A lower rate is an indicator that banks are more willing to make loans.

Treasury Secretary Paulson urged banks to put the new government money to work in the market and not "hoard" it. He also said banks should help reduce the number of foreclosures in which lenders take over homes from buyers who can not pay off their loans.

It was a wave of home loan defaults that sparked the current financial crisis, which included the collapse of several major financial institutions and a plunge in world stock markets. The crisis spread because mortgages were gathered into securities and sold to investors around the world.

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