RENEE MONTAGNE, host:
This is Morning Edition from NPR News. I'm Renee Montagne. President Bush announced earlier this morning that the government will pump billions of new capital into U.S. banks, money that's part of the $700 billion rescue plan. The aim is to make the banks stronger financially and - just as important - restore investor confidence. The U.S. plan is similar to what European governments announced yesterday. In both cases, the moves will expand government roles in the economy. In response, stock markets from Tokyo to London are soaring. From Frankfurt, Germany, NPR's Tom Gjelten reports.
TOM GJELTEN: The global financial crisis has sorely tested the faith of devoted free marketeers. In recent weeks, the stock and credit markets have appeared to be so irrational in their behavior that even conservative governments have concluded they have no choice but to intervene for the good of the world economy. German Chancellor Angela Merkel grew up in communist East Germany and is deeply suspicious of socialism. But in announcing her government's financial rescue plan yesterday, she hardly sounded doctrinaire.
Chancellor ANGELA MERKEL (Germany): (German spoken)
GJELTEN: We've had to deal with the excesses of the market, Merkel said. In a social market economy, the duty of the state is to have control. The state is the guardian of order. Germany and other European states are intervening in their economy in two ways, first by guaranteeing loans that banks make to each other. If one bank fails to repay another bank, their governments can step in to cover the loan. Across Europe, governments are pledging about a trillion dollars for those loan guarantees. But governments are also injecting billions of dollars in fresh capital directly into troubled banks. Thorsten Polleit is chief economist at Barclays Capital in Frankfurt.
Dr. THORSTEN POLLEIT (Chief Economist, Barclays Capital, Frankfurt): The problem is confidence is gone. And confidence is gone because many investors expect banks running into big losses which may even exceed their capital base.
GJELTEN: So the governments with cash infusions increase the banks' capital base and then...
Dr. POLLEIT: Investors might find some confidence in extending loans and deposits into banks again.
GJELTEN: The logic is sound, Polleit says, but he also worries that this unprecedented government action could carry some risk.
Dr. POLLEIT: Whenever we have government interference, we have to take into account the law of unintended consequences. I'm a bit concerned that all this interference into market processes could actually make the situation worse.
GJELTEN: In both the United States and Europe, governments are now taking responsibility for some bad debts and shaky banks. The assumption is that the governments can handle those obligations, but the cost is hard to calculate. Herman Brodie is a financial risk analyst at Cognitrend in Frankfurt.
Mr. HERMAN BRODIE (Managing Director, Cognitrend, Frankfurt): This is a step in the right direction. But of course the more risk the governments take on themselves and take it away from the financial system, the more their own creditworthiness is going to be called into difficulty. If you look in the financial markets this morning, you'll see bond prices are lower, and this is a reflection of the risks that governments are now taking onboard.
GJELTEN: Bond prices are lower in part because stocks are more popular at the moment, but it's also because government IOUs are a bit less attractive when a government is loading itself down with major financial obligations. Those obligations are also likely to mean higher interest rates down the road and less money to spend on other social and economic needs. Still, it's hard at the moment to see any alternative to the new government role. German Finance Minister Peer Steinbrueck, speaking with Chancellor Merkel yesterday, said his government is just looking out for the interests of its population.
Mr. PEER STEINBRUECK (German Finance Minister): (German spoken)
GJELTEN: A stable and functioning financial sector is important to the citizens and to this country, Steinbrueck said. It's important for the middle class saving for retirement and for those communities that need loans to finance infrastructure investments. We're talking about a public good which we need to protect. Tom Gjelten, NPR News, Frankfurt. Transcript provided by NPR, Copyright NPR.
NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.
