Obama plays his $1 trillion card
The US stock market took it's first tentative flicker towards recovery yesterday as Barack Obama, at last, revealed his plan to reverse the decline in US finances.
This whole crisis has, unlike other financial crisis, never been solely about confidence, it's also been about the billions of dollars in toxic stocks at the centre of the financial system. The value of those stocks have been falling like a stone as the housing market has been free falling. Obama has set about reversing that trend:The long-awaited $1 trillion plan to restore the toxic US banking system to health triggered a bout of frenzied buying on stock markets around the world, as investors bet that the Obama administration is now sketching a road map out of the credit crisis.
Tentative signs of stability in the US housing market, at the heart of the financial crisis, added to a rare sense of optimism that the long economic chill might be thawing. While plenty of sceptical voices were trying to be heard yesterday, buoyant investors said the rescue plan puts in place an essential building block for a recovery. By the end of the day the Dow Jones Industrial Average in New York had soared to close 6.84 per cent up, the fifth biggest day rise in its history.
The US government put up matching funds and hundreds of billions of dollars in debt to help private investors buy the toxic loans that have been clogging bank balance sheets. In all, $1trn (£680bn) could be put to work to rid banks of these assets, freeing them up to start lending again. "This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically," said Bill Gross, the bond investor who heads Pimco, a California fund manager. Not only would the scheme relieve the doubts surrounding the solvency of the banking system, he said, but investors – and the US taxpayer – would make a tidy profit.The FTSE 100 in London rose by 3% yesterday for the first time in God knows how long and that was only because it had closed before the frenzy hit it's peak in New York. This, coupled with the rise in Dow Jones, appears to signal that Obama - and the much maligned Tim Geithner - really do know what they are doing.
Most of the assets are bundles of mortgages written during the housing boom and whose value will keep going down as long as house prices are falling and foreclosures are rising. The Geithner plan is aimed at encouraging investors to buy the assets, pumping cash into the banks which decide to sell.
Let's hope so, for all of our sakes.
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