Bush's Bailout-Will it Work?

Today, the daddy is feeling the new consensus that is developing in the financial markets, which is for governments to buy up stakes in banks to stabilize their economies. This idea is spearheaded by Gordon Brown, Prime Minister of Britain. You may recall that Brown was Finance Minister for former Prime Minister Tony Blair for 10 years.

As a part of its rescue plan, Brown has moved swiftly to take stake in three of Britain's biggest banks. Though the plan has not completely developed, the essential idea is to stabilize the economy by the government putting stakes in the major banks. This, in turn, would, they hope, restore confidence in the economy.

In addition, under the plan, the major executives and directors in these banks will step down and new government executives will oversee those three banks. They will oversee recapitalization and loans and ensure that banks work closely in terms of loaning to each other.

While insisting that the government is not in the business of running banks and that this rescue plan is only temporary, Brown stated that banks must be a ``rock of stability'' during this global economic crisis and help citizens to gain more confidence in its financial institutions.

Other governments are beginning to copy Brown's plan, including the Bush administration. Yesterday, Bush announced his plan to put $250 billion of equity stakes in major banks to shore up its financial system. This 250 billion would be a part of the 700 billion package that was authorized by Congress to address the financial crisis of U.S. institutions.

Like Brown, Bush claims that this greater involvement of his government in financial institutions is temporary but very necessary. As he put it, "This is an essential short term measure to ensure the viability of America's banking system."

Mr Bush said that the Federal Deposit Insurance Corp will insure most new debt issued by banks and expand insurance to cover non-interest bearing accounts, as used by small businesses for day-to-day operations.

While the stock market is up globally, it is anybody's guess as to whether this measure by Bush will stabilize the U.S. economy. For example, will it address the pressures on the economy as a result of the housing crisis marked by foreclosures? Will it address the continuing decline in real incomes of the middle-income Americans or the increase in unemployment in the economy?

It should also be noted that, even though Paul Krugman, an economist who has just received the Nobel Prize, numerous congressional leaders like Byron Dorgan (D-North Dakota), Dennis Kucinich (Democrat-Ohio) and Jessie Jackson Jr. (D-Illinois) have made more comprehensive recommendations to get the economy going (putting monies in the hands of middle and low-income citizens as well as bank recapitalization), the Bush administration is following Brown's lead.

The question is this: Will Bush's rescue plan, borrowed from Britain's Prime Minister Brown, lead to long-term stability for the U.S. or only a temporary one at best?