The long-awaited $1 trillion plan to restore the toxic US banking system to health triggered a bout of frenzied buying on stock markets around the world, as investors bet that the Obama administration is now sketching a road map out of the credit crisis.
Tentative signs of stability in the US housing market, at the heart of the financial crisis, added to a rare sense of optimism that the long economic chill might be thawing. While plenty of sceptical voices were trying to be heard yesterday, buoyant investors said the rescue plan puts in place an essential building block for a recovery. By the end of the day the Dow Jones Industrial Average in New York had soared to close 6.84 per cent up, the fifth biggest day rise in its history.
Tim Geithner, Barack Obama's embattled Treasury Secretary, who had been derided for the lack of detail when he announced the outlines of his strategy to tackle the credit crisis last month, put flesh on the bones of his rescue plan yesterday. The US government put up matching funds and hundreds of billions of dollars in debt to help private investors buy the toxic loans that have been clogging bank balance sheets. In all, $1trn (£680bn) could be put to work to rid banks of these assets, freeing them up to start lending again. "This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically," said Bill Gross, the bond investor who heads Pimco, a California fund manager. Not only would the scheme relieve the doubts surrounding the solvency of the banking system, he said, but investors – and the US taxpayer – would make a tidy profit.
Most of the assets are bundles of mortgages written during the housing boom and whose value will keep going down as long as house prices are falling and foreclosures are rising. The Geithner plan is aimed at encouraging investors to buy the assets, pumping cash into the banks which decide to sell.
The plan is the latest piece in a jigsaw of initiatives to reboot the economy, and members of the administration have argued it is even more important that the $787bn economic stimulus package pushed through Congress last month. Struggling homeowners are getting subsidies to pay their mortgages and the credit markets have been flooded with trillions of dollars from the Federal Reserve, to bring down interest rates.
"We've already taken a bunch of actions to help get mortgage interest rates down, to help millions of Americans refinance their homes, to take advantage of lower interest rates," said Mr Geithner. "All these things are designed to help get credit flowing again at lower cost to businesses and families across the country."
Lower mortgage rates and much lower house prices appear to be stimulating the housing market. Sales of second-hand homes rose unexpectedly strongly last month, according to a report yesterday, rising 5 per cent. Investors said rising stock markets and a more stable housing market could encourage consumers to start spending again. That in turn would make businesses less likely to fire staff, and an end to the recession could come into view later this year. The US economy has been in recession since December 2007, and unemployment passed 8 per cent in February.
Stock markets in other countries, which have followed the US into recession, also surged yesterday. The FTSE 100 index of leading UK shares was up almost 3 per cent, but it had closed before the buying frenzy reached its peak in New York. Wags described the reaction as a bailout for Mr Geithner. Criticism of his performance "comes with the job", the Treasury Secretary said yesterday, adding that he was focused on restoring order to the financial system.