USA and G7 Global Stabilization efforts

Author: Dr. Rodolfo Sosa-Garcia
President Galilei Consulting

During the recent weeks, we have seen uncertainty and turbulence in the USA markets but also globally. President George W. Bush has sent a rescue package to the American Congress after the Chairman of the FED Ben Bernanke and USA Treasury Secretary Henry Paulson decided to buy some of the largest American banks such as AIG group but they decided to let others meltdown such as Lehman Brothers investment bank.

Although the economic package proposed by the President Bush Administration was important and was a clear signal of confidence for the American banking sector, the American Congress decided to oppose to it, basically by the initial opposition of the Democrats and then followed by Republicans.

One week later, the lobbying efforts promoted by the President Bush resulted in the approval of a rescue package for $700 billion USD in order to buy toxic financial assets originated in the American real state sector. The package was approved by Democrats and Republicans in the American Senate afterwards it was approved by the American congress and finally signed by President Bush; with some final social and overseen additions. It is important to mention that both USA presidential candidates: Senator Barack Obama and Senator John McCain supported the economic package. After it was approved, it would be implemented by Secretary of the Treasury Henry Paulson and supervised by the FED during the next coming weeks.

We are facing one of the major rescue packages for the banking sector in the USA economy since the 1930’s financial crisis. The Fed and the Secretary of the Treasury have done an excellent job to affront this banking crisis. The rescue package was delayed two weeks by the American congressmen that were claiming that it was a rescue package for the bankers of Wall Street; but I consider that in reality it was in favor of both Wall Street and Main Street, and in the long term it would be positive for the American financial sector and the American economy with positive future economic effects at global level.

First European Union leaders declared that it was a local American problem with no risk of contagion for Europe; but one week later the governments of Germany, France, Italy and Britain were pressed to offer quick rescue packages for their more important banks with strong investments in the real state sector. And the global financial markets reacted immediately to the financial news reported in the European markets.

These two economic problems caused during two weeks the decline from 5% to 20% in the indexes of many stock exchanges in: USA, Europe, Asia and emerging markets. Taking in consideration those problems, the heads of the G7 met with President Bush in Washington DC during this week end, and they decided to implement a global coordination program to address this global financial crisis. They decided to define a set of common objectives and principles so each country could define its own special local financial programs.

I do believe that the solution adopted by the British government of buying stocks from private banks was not necessary optimal for the USA economy. Instead of buying stocks from banks the FED has two alternatives: 1) Lending at premium-low rates to banks with specific conditions for banks performance, then the FED and the Treasury should have to create incentives for banks, and transform those incentives into government action programs. 2) They could have created a temporary government owned bank to offer special credits for big corporations and ad-hoc debtors, and then USA government could reduce current market interest rates.

My conclusion, the USA government and G7 governments have reacted quickly to affront seriously and effectively this global financial crisis. We forecast a 1.5% GDP growth rate for the USA economy during this year. After the USA presidential elections in November; the new elected president and his economic team will have to affront problems quickly and effectively in order to stabilize the American financial system, to reduce financial risks and to offer confidence for global investors.

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