The US authorities followed the UK and Europe by announcing an extraordinary plan to buy stakes in its biggest banks using taxpayers' money. Although stock market volatility may continue over the next few weeks, City experts are hopeful that the co-ordinated bail-out will finally put a stop to the catastrophic stock market slump which threatened to bring down the financial system.
Stock-markets around the world rose sharply on Tuesday.
The FTSE-100 index has risen by almost twelve per cent in just two days following Gordon Brown's emergency bank nationalisation scheme. It rallied again on Tuesday closing up 3.2 per cent at 4,394. The Japanese stock market posted its biggest ever one-day rise and the American Dow Jones index also saw gains after opening.
However, the huge cost to taxpayers of bailing out the financial system is likely to be felt for many years -and possibly decades - into the future.
Hank Paulson, the US Treasury Secretary, admitted that the US's latest $250 billion scheme - which will see the state take stakes in nine banks including including Morgan Stanley and Goldman Sachs - would prove hard for taxpayers to stomach.
"Government owning a stake in any private U.S. company is objectionable to most Americans - me included," he said. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.''
However, fears are now growing that although the financial crisis may be in its final phase, the impact on the so-called "real economy" is only just beginning. Financial experts predict that Britain will "lead the way" into the widely-forecast global recession.
In addition, there are concerns the bail-outs may have to be paid by tax rises or cuts in public spending.
So far Britain has pledged £500bn to bail-out British banks, the EU states have committed £1.16 trillion and the US has invested £457 bn in their efforts to bring a halt to the crisis.
The total £2.1 trillion cost of the bail-outs is a third bigger than the entire British economy. It would fund the NHS for more than 20 years.
Talks on an international crackdown on the excesses of the global financial world will now begin today in Brussels to help prevent a similar crisis developing for at least a generation.
But fears are growing that the initial relief of apparently averting the banking collapse may be quickly overshadowed by wider problems in the economy.
Britain's high exposure to debt means that consumers are ill-prepared for an economic slowdown, say experts. The head of the City regulator warned yesterday that credit would not be as easily available in future despite the Government's unprecedented intervention.
Today (Wed), a sharp rise in unemployment is expected to be announced. At least an extra 30,000 people are thought to have claimed unemployment benefits in September, according to trade unions.
Unemployment is poised to increase above one million before the end of the year and could reach two million in 2009. Amid signs of growing Government concern over rising unemployment, ministers will today unveil a £100m fund to retrain workers who lose their jobs.
It was announced that inflation has hit a 16-year high of 5.2 per cent following sharp rises in fuel and food prices.
Leading economists also warned that house prices are expected to fall by another 10 percent over the next year.
Michael Saunders, the chief UK economist at Citigroup, the world's biggest bank, said: "In the UK, some might say that the country is leading the way in terms of the appropriate policy responses to the crisis. But, any sense of self-congratulation among UK policymakers must be tempered by acknowledgement that the UK is more vulnerable than most countries to the financial crisis, as the result of the massive debt-fuelled boom of recent years. The UK is among those leading the way into recession, housing collapse and soaring unemployment."
Capital Economics, a City forecaster, said: "Measures announced by the UK Government and other world policymakers to support the banking sector may have avoided the unthinkable scenario of a full-scale meltdown in the financial system and a 1930s-style depression.
"But they are unlikely to prevent a 1990s-style recession which will see unemployment rise sharply, public borrowing soar and inflation plummet."
Paul Volcker, the former chairman of the US Federal Reserve, said that several other financial crises had occurred over the past 25 years and they were always overcome without great damage to the real economy but this time was different.
"This crisis is an exception to that. I don't think we can escape damage to the real economy,'' Mr Volcker said. "I've seen a lot of crises but I've never seen anything quite like this."
The Prime Minister will today travel to Brussels to discuss EU-wide bailouts with other European leaders.
Much of the money has been provided to the banks for the bail-outs take the form of taxpayer-backed loans which will only be repaid in full if the banking industry recovers and bank shares rise.
However, in this country, Goldman Sachs, an investment bank, has predicted it could be at least 2011 before banks begin to repay money.
A Parliamentary Committee yesterday announced an inquiry into the banking bailout. The Treasury select committee is asking the public to submit questions for Mr Darling and senior Bank of England and Financial Services Authority (FSA) officials.
source: The Telegraph
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