Quick action needed to avoid "Great Depression 2.0"

Congressional leaders — especially those who oppose the package — are being asked whether they want to be responsible for even greater economic harm than has occurred so far, the CBC's Henry Champ reported from Washington.

"And the whispers always include references to Oct. 29, 1929, the Great Depression and things of that nature," he said.

Although no one can be certain what would happen if the package is not passed, the threat is likely to carry the day, Champ said.

In the dark of night over the weekend when most people were snoozing, the Treasury dramatically expanded its bailout plan to include buying student loans, car loans, credit card debt and any other "troubled" assets held by banks.

The changes, which were included in draft language that also opened the bailout program to foreign banks with extensive loan operations in the United States, potentially added tens of billions of dollars to the cost of the program.

Although it was a major addition to what was already the nation's largest-ever bailout, it did not become part of the debate between Democrats and the Treasury over details of the program. A Monday counterproposal by Senate Banking Committee Chairman Christopher J. Dodd included such consumer loans as well as mortgages, just as the Treasury's draft did Saturday night.

"The costs of the bailout will be significantly higher than originally considered or acknowledged," said Joshua Rosner, managing director of Graham Fisher & Co., who charged that the Treasury and Federal Reserve have not been "forthright" about the ultimate cost to the public. The plan gives Treasury the discretion to buy the non-mortgage loans and securities in consultation with the Fed.

The NBC Nightly News reported officials said "Thursday was a very bad day, where the financial system got really close to the abyss and we almost fell in. There were people withdrawing money from money markets, money markets withdrawing from the commercial paper markets. From what I'm told, the financial market came very close to freezing up, and a lot of people in very high places were scared, and what I understand is that the Federal Reserve Chairman (Bernanke), who is, by the way, one of the leading experts on the Great Depression said - he didn't say this, was suggesting -- we were close to bank lines in this country."

He added: "When the financial system doesn't work as it should, Americans' personal savings, and the ability of consumers and businesses to finance spending, investment and job creation are threatened."

Ben Bernanke's testimony followed Mr Paulson's.

He has defend the Federal Reserve's action to save insurer AIG from collapse.

"A disorderly failure of AIG would have severely threatened global financial stability and, consequently, the performance of the US economy," he said.

He then said that despite the efforts of the Federal Reserve, the Treasury, and other agencies, that global financial markets remain under extraordinary stress.

"Action by the Congress is urgently required to stabilise the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy," Mr Bernanke added.

Bush administration plan:

•  Give the Treasury secretary broad authority to buy up to $700 billion in troubled assets from any financial institution if he decides, in consultation with the chairman of the Federal Reserve, that it's necessary for market stability.
•  Raise the $10.6 trillion statutory limit on the national debt to $11.3 trillion.
•  Allow the Treasury secretary to buy, hold, and sell the assets in any way he sees fit. That includes the ability to go outside normal government contracting practices to hire private companies to manage them.
•  Require the government to report to congressional budget, tax-writing, and financial services committees within three months of using the authority and every six months thereafter.
•  Shield rescue program from judicial review.
•  Expire two years after enactment.

House Democrats' proposed changes:

•  Require that companies benefiting from the bailout don't give so-called "golden parachutes" to executives and have rules to revoke bonuses awarded based on bogus claims.
•  Allow the government to take an equity stake in participating companies to share in future profits.
•  Require that the government draft a plan to renegotiate the mortgages it purchases to help homeowners avoid foreclosure.
•  Allow judges to rewrite the terms of bankrupt homeowners' mortgages so they can afford to stay in their homes.
•  Create a congressional oversight panel to scrutinize the rescue program and subject it to court review.
•  Limit the program to financial institutions with "significant operations" in the United States and exclude foreign central banks and companies owned by foreign governments.

Foreign banks, which were originally excluded from the plan, lobbied successfully over the weekend to be able to sell the toxic American mortgage debt owned by their American branches to the U.S. Treasury, getting the same treatment as U.S. banks.

Treasury Secretary Henry Paulson blanketed the Sunday talk shows to promote the Bush administration's $700 billion bailout package, emphasizing that it was needed not just for Wall Street, but for all Americans.

He also indicated that the original proposal had been widened to include other banks.

The original text included only financial institutions in the United States.

Foreign banks such as Barclays and UBS with significant business in the U.S. began calling the Treasury, arguing that foreign institutions were both big employers and major players in the American capital markets. By Saturday evening, the language had been changed to include any financial institution "having significant operations" in the United States.

Goldman Sachs and Morgan Stanley, the two big survivors of Wall Street’s recent turmoil, have given up their status as investment banks and are becoming bank holding companies. It means they will gain easier access to financing, but will also be more tightly regulated.

Economist Dr Paola Subacchi said this is part of a much bigger upheaval in the financial world: “We are seeing something which is probably an historical moment and we think there is a total restructuring, re-thinking of the international banking and financial system as a result of the crisis.”

The worst financial crisis since the Great Depression has created 500 billion euros of toxic – that is potentially worthless – investments.

The US authorities rescue measures this year total 1.3 trillion euros. It is forecast that 85,000 thousand jobs will be cut from the financial sector.