Friday, September 19, 2008

The Mother of all bailouts

Even after committing $285 billion over the past couple of weeks to bail out mortgage lenders Fannie Mae and Freddie Mac and insurer AIG, the Federal Government is now looking to fork over more — much more.

The Treasury Department and Federal Reserve now are making plans to buy troubled mortgage securities en masse from banks and other financial firms. This would amount to moving from ad hoc loans and bailouts to a more systematic approach to resolving the bad-debt problems at the heart of the current financial crisis. Systematic apparently sounds good — the Dow jumped 400 points after CNBC first reported Thursday that such an effort was in the works, and on Friday, markets around the world opened sharply higher. But the price tag could be steep. "We're talking hundreds of billions," Treasury Secretary Hank Paulson said at a press conference Friday morning. "This needs to be big enough to make a real difference and get at the heart of the problem." The more alarmist economists are saying the cost of resolving the current crisis will exceed $1 trillion. To put that in context, total U.S. government spending in 2007 was $2.7 trillion.

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Speaking in Green Bay, Wisc., Republican presidential candidate Sen. John McCain said Friday that the Federal Reserve should stop bailing out failed financial institutions.

The Republican presidential hopeful said the U.S. central bank must get back to "its core business of responsibly managing our money supply and inflation." He laid out several recommendations for stabilizing markets in the financial crisis that has rocked Wall Street and taken over the presidential campaign.

McCain renewed his call for tighter regulation of financial markets, even though he has generally championed deregulation throughout his career in the Senate and as chairman of the influential Commerce Committee.

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