The US bailout package and subsequent Fed policy actions this week must be followed by urgent steps, including the recapitalization of the banking system, to restore confidence in battered markets, experts have warned.
“The TARP [troubled asset relief program] is necessary but not sufficient,” Pimco co-CEO Mohamed El Erian told Emerging Markets. “If policy makers are to counter this self feeding dynamics of global deleveraging they’re going to have to move fast.” El Erian said that US authorities must now “implement what has been approved – the purchase of mortgages, the purchase of troubled assets – and the injection of capital into banks.” Former IMF chief economist Raghuram Rajan said: “one of the problems with [TARP] is that is treats the problem as illiquidity. But the problem now is insolvency. This requires concerted action across the board,” he said.
Their comments come as US administration officials confirmed that Treasury secretary Paulson is “actively considering” capital injections into troubled US banks.“Secretary Paulson is looking at all the different tools to figure out which ones should be used at what time and how robustly, and how much money to put into each,” a White House spokesperson
said yesterday.
Former US Treasury undersecretary Tim Adams told Emerging Markets yesterday government recapitalization of US banks was a possibility. He said the Treasury “certainly has the authority to [recapitalize US banks]. I suspect that they are currently crafting a mechanism to do that – a set of protocols under which they would actually do it [although]. I’m not sure that they yet know what the triggering event would be.”
He added that the bailout plan is likely to be just the first of a series of official initiatives aimed at softening the impact of the global financial and economic crisis. He also forecast a further US fiscal stimulus package, as well as further interest rate cuts around the world.
Adams called on world leaders to reaffirm their commitment to free trade and liberal capital flows and not to give way to protectionist pressures. He also rejected the idea that the dollar could face its own crisis as a result of current events.
“These are extraordinary times and the Paulson package is an extraordinary response but it remains to be seen whether it will be sufficient,” said Adams.
“We may see [the US] Congress come back in a lame-duck session, or certainly early next year, and do more from a
legislative standpoint. We could see another stimulus package, with emphasis on infrastructure-like spending rather than sending cheques out. We could see a more bottom-up approach – mortgage adjustments, buying mortgages or helping individuals and minimizing foreclosures.”
This week’ coordinated rate cuts by a number of the world’s leading central banks is “just a beginning,” Adams suggested. “I don’t know that the Fed is going to have much room to do additional cuts, but there are a lot of central banks that do have room and I suspect that they will use it.”