4 Oct 2008

Bush warns of 'serious challenges' despite huge bailout

7:51 pm on 4 October 2008

United States President George Bush has warned the US economy continues to face "serious challenges" after signing a $US700 billion financial sector rescue plan.

The US government has signed into law the massive rescue package following a favourable vote in the House of Representatives.

Mr Bush signed the Emergency Economic Stabilisation Act of 2008 before leaving Washington for the weekend.

He said it would take "time and determined effort to get through this difficult period".

The House of Representatives had earlier passed the second version of the package, which aims to save troubled US banks and ease a credit crunch that threatened disaster for the American public, with knock-on effects globally.

The House voted 263 for and 171 against the revised set of proposals after it stunned global markets by rejecting the initial plan by 228 votes to 205 earlier in the week.

The Bush administration's $US700 billion package is aimed at buying up the bad debts of failing institutions.

The bill successfully passed through the Senate earlier in the week by 223-205 after it was amended to raise the government's guarantee on savings from $US100,000 to $US250,000.

Both the Democratic and Republican parties pressed their members in the House to swing behind the revised bill, with pressure applied particularly to the 133 House Republicans who went against party affiliation to reject the first version of the bill last week.

Many of the legislators told stories of the hardship being suffered by constituents but were divided on whether the bill would help ordinary Americans.

The Senate bill added $100bn in new tax breaks in the hope of gaining more support from House Republicans.

The changes include:

Increased protection for saving deposits

Increased child tax credits

More aid for hurricane victims

Tax breaks for renewable energy

Higher starting limits to alternative minimum tax

The additional cost of these unrelated tax breaks have worried some fiscally conservative Democrats in the House of Representatives.

Democrat Rahm Emanuel said addressing the balance sheets of banks was "only the first step" and his colleague Peter DeFazio said he was still against the bill.

"Do not [authorise] George Bush an unprecedented use of financial force under the threat of financial weapons of mass destruction."

Market falls as vote announced

The Dow Jones Industrial Average had been buoyant ahead of the vote, surging up 250 points, but those gains were pared back on profit taking after the expected vote was announced.

Earlier, worries grew that the massive rescue package would will not be enough to resolve deeper-rooted weakness.

However, US stock markets rose earlier on Friday after a $15.1 billion merger deal between Wells Fargo and the beleaguered Wachovia Corporation, overshadowing the biggest drop in US payrolls in more than five years.

The US economy lost 159,000 non-farm jobs last month.

Employment contracted for a ninth straight month, even before the labour market experienced the full shock from September's series of bank troubles.

"I think there are still a lot of questions as to whether or not this bill is going to save the economy anyway," said Tom Bentz, an analyst at BNP Paribas in New York.

A deteriorating financial backdrop in Europe is giving a sustained lift the US dollar even as America's economy is working its way through the financial turmoil and economic slowdown.

US stocks fall while Europe closes higher

US stocks fell heavily on Friday as investors remained nervous about a global credit squeeze and the weak economy.

Markets made a sharp reversal late in the day and the Dow Jones Industrial Average fell 157.47 points (1.5%) to end at 10,325.38, capping a dreadful week that saw blue chips slide more than 7%.

The tech-heavy Nasdaq slumped 29.33 points (1.48%) to 1,947.39 and the broad-market Standard & Poor's 500 index shed 15.05 points (1.35%) to 1,099.23.

However, European stock markets closed sharply higher as hopes the bank rescue package would pass offset the poor US employment report.

The London FTSE 100 index of leading shares jumped 2.26%to finish at 4,980.25 points.

European leaders were meeting in Paris on Saturday to consider their own response to global financial turmoil.

Stocks in the Asia-Pacific region dropped on Friday. The New Zealand share market was fell 81 points or 2.5% and Australia's benchmark index was 1.38% lower.

In Japan, the Nikkei dropped 1.5% percent while elsewhere in Asia they were off by 1.1%, despite optimism among US House Democratic leaders that legislation to mop up illiquid bank assets would win approval.