Published: October 07, 2008 08:38 am            

Pressure grows on US to take bold steps on economy

WASHINGTON — With panic tightening its grip on investors here and abroad, pressure was growing on the United States Tuesday to take further aggressive steps to stem the economic crisis and swiftly implement a $700 billion financial bailout.

On that front, the government is weighing a bold plan to buy massive amounts of unsecured short-term debts in a dramatic effort to break through a credit clog that is imperiling the economy.

The Federal Reserve is working with the Treasury Department on the plan to buy "commercial paper," a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as purchasing supplies or making payrolls, according to a person with knowledge of the plan. The person spoke on condition of anonymity because the plan is still being put together.

The market for this crucial financing, which relies on investors rather than banks, has virtually dried up. That has made it increasingly difficult and expensive for companies to raise money to fund their operations. Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.

The unstable situation has left many companies vulnerable. The notion under the plan is for the government to come up with a backstop that would provide companies with a new place to get cash. Depending on the ultimate shape of the plan, the Fed could become a source of credit for nonfinancial businesses in addition to commercial banks and investment firms.

Pressure also is growing on the Fed to reverse course and order a deep reduction in its key interest rate, now at 2 percent. Such a move would be aimed at reviving the moribund economy by encouraging consumers and businesses to boost their spending. Many predict the Fed will act on or before its next meeting on Oct. 28-29. And, some believe it could be part of a broader coordinated move with central banks in other countries.

Fed Chairman Ben Bernanke may offer clues on the Fed's next move when he speaks Tuesday afternoon on the economic outlook and developments in financial markets.

On Wall Street, early signs pointed to a recovery Tuesday after markets nose-dived on Monday. Investors were hopeful the Fed and other central banks would lower rates.

Investors in others parts of the world were more skeptical. European stocks shed early gains Tuesday as ongoing fears about the health of the banking system, particularly in Britain, offset hopes that the world's leading central banks will follow Australia's lead and cut interest rates aggressively.

On this side of the Atlantic, President Bush also was set to talk about the government's bailout effort, which lets the government buy rotten mortgages and other bad debts from banks and other financial institutions. By getting these bad debts off bank's balance sheets, they might be in a better position to raise capital and more willing to lend to each other and to customers.

The Fed made an opaque reference on Monday that it was exploring "ways to provide additional support" to "unsecured funding markets."

The creation of a separate legal entity was being examined as one way for the Fed to get into the commercial paper market, the person with familiar with the plan said.

The Fed pledged Monday to take "additional measures as necessary" to battle the worst credit crisis in decades. Wall Street took a nosedive, with the Dow Jones industrials plunging more than 800 points at one point during the day before finishing down 370. Fears spread around the globe about the ability of policymakers in the United States and abroad to turn around the situation.

Treasury Secretary Henry Paulson has tapped a former Goldman Sachs executive to be director of the government's bailout program. Neel Kashkari, who has worked with Paulson at the department since July 2006, was chosen Monday as the interim head of the government's unprecedented effort to unclog the credit markets.

Kashkari, who was a vice president in Goldman's San Francisco office before joining the department, is one of four former executives from the firm now working feverishly to resolve the financial crisis.

The lending lockup is a key reason why the U.S. economy is faltering. Unable to borrow money freely or forced to pay a high cost to borrow, employers are cutting jobs and reducing capital investments. Consumers have retrenched.

        

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