Oct 13, 2008 6:23 am US/Eastern
Depression-Era Tactic: U.S. To Buy Bank Stocks
Uncle Sam Would Buy Stakes In Banks To Stimulate Credit Market
NEW YORK (CBS) ―
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The Europeans approved a bank rescue plan and Washington is eyeing the same blueprint, hoping to move the needle.
CBS
Whether you play the market or are just worried about your retirement fund, you're probably concerned about what will happen on Wall Street Monday morning.
On Sunday, some moves were made that have hopeful signs emerging.
The Europeans approved a bank rescue plan and Washington is eyeing the same blueprint, hoping to move the needle.
The plan: have Uncle Sam buy bank stocks. The plan is designed as a shot in the arm before the lack of credit freezes everything.
Investing in banks is supposed to restore confidence so those banks lend money to each other and the public at large.
"We did this during the Depression – we are in that kind of crisis," economist Peter Morici said. "So in my mind, we should first of all recognize that the government is not nationalizing the banks and, second of all, that this is a required step to unlock credit markets."
The Euro group agreed to guarantee bank refinancing through the end of the year at meetings this weekend. Economic experts from around the world gathered in Washington, D.C. and Paris.
"The eyes of the world are looking to their governments to help restore confidence in the financial markets," UK Prime Minister Gordon Brown said.
It appears that most US lawmakers support a Bush administration plan to use part of the $700 billion bailout to let the government take ownership stakes in banks.
If you buy preferred shares, you can put money in very quickly," Morici said. "You leave the process of working out the loans to the banks and, frankly, they understand much better than the government of anyone the government would hire in New York City to do it."
No one can be sure the European gamble or its American counterpart will actually work.
Experts say history shows investors go through an emotional cycle: hope, greed, skepticism, panic, despondence, and rock bottom. But then it moves back to hope again.
"Now, when everyone is telling you how bad they feel, chances are we're at a bottom and it's time to buy," economic psychologist Sam Stovall said.
(© MMIX, CBS Broadcasting Inc. All Rights Reserved.)
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