U.S. Considers Ownership Stake in Banks

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WASHINGTON - Global investors believe Wall Street is getting closer to bottoming out which sent Asian and European markets higher.

They're also encouraged by governments' extraordinary measures, which now include the possibility of a bank takeover here in the U.S.

Desperate to prop up the sagging economy and dried up credit market, the Bush administration may be on the verge of another drastic measure -- taking ownership stakes in American banks to help jumpstart lending, a move some European nations have already taken.

"It's all fear, everybody is just plain scared to do anything, they're just plain scared to make any loans because they are not sure they are going to get paid back," said David Wyss, a senior economist at Standard & Poor's.

The idea comes on the heels of a report by the International Monetary Fund and its bleak assessment for the future -- forecasting a global economic recession that government rescue plans and coordinated interest rate cuts can't stop.

According the IMF's revised outlook, "the world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s."

"It is clearly too late for responses to avoid the slowdown, but they can be used to head off the risk of even more dire outcomes," said Olivier Blanchard with the International Monetary Fund.

The report also predicted the U.S., the epicenter of the financial meltdown, would slide into recession.

The market turmoil has prompted administration officials to move at record speed in what Treasury Secretary Henry Paulson describes as the "largest government rescue effort in history."

Still, he warned that some banks may fail.

"The turmoil will not end quickly and significant challenges remain ahead," Paulson said.

Looking for ways to jumpstart the economy, House Speaker Nancy Pelosi wants Congress to pass another $150 billion economic stimulus package to put money back into the hands of taxpayers.

But President Bush promised a veto if the bill passes.

At the root of the market meltdown, the credit crisis - brought on by a tide of home mortgage defaults that started last year.

With home prices falling, the Wall Street journal reports one in every six homeowners now pays more on their mortgage than their home is actually worth.

"There may never have been a time even during the great depression when so many people are underwater on their homes," said Mark Zandi with Moody's Economy.com.

That adds more pressure to an already ailing economy in need of a turnaround.

 

 

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