Economy (The Third Horseman)

WASHINGTON (AP) — The Bush administration is asking Congress to let the government buy $700 billion in toxic mortgages in the largest financial bailout since the Great Depression, according to a draft of the plan obtained Saturday by The Associated Press. The plan would give the government broad power to buy the bad debt of any U.S. financial institution for the next two years. It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue. The proposal does not specify what the government would get in return from financial companies for the federal assistance. The White House and congressional leaders hoped the developing legislation could pass as early as next week. The plan is designed to let faltering financial institutions unload their bad debt on the government, and in turn the taxpayer, in a bid to avoid dire economic consequences.

To get the money to buy up the bad mortgage loans that have threatened to bring the financial system to its knees, the government will have to borrow. And that borrowing will come at a time when the federal budget deficit is already soaring. The deficit for this budget year, which ends Sept. 30, is expected to rise to $407 billion, more than double the $161.5 billion imbalance for 2007, reflecting what the economic slowdown and this year's $168 billion economic stimulus program are already doing to the government's books. Treasury Secretary Henry Paulson is resisting calls from Congress to add additional help for households to the $700 billion financial system rescue bill.

• JJ Commentary: More and more debt is not the solution. Debt is the problem, which is now growing worse and worse.

In their bold response to the deepening financial trauma, the Federal Reserve and U.S. Treasury Department appear to have tossed aside the playbook that guided official thinking on the economy for three decades. Throughout more than a decade of recurrent crises in nations such as Mexico, Russia and Thailand, the United States offered the same advice: Let the market solve the problem and get the government out of the way. Even when the consequences of such economic "tough love" included widespread joblessness, soaring poverty and domestic turmoil, Washington insisted on the rule that the market knew best. Now that it's the United States battling financial conflagration, it turns out there are exceptions to that rule. Such as Uncle Sam's takeover of AIG, the world's largest insurance company. Such as the quasi-nationalization of mortgage giants Fannie Mae and Freddie Mac. Such as putting $29 billion of taxpayer money at risk to facilitate JPMorgan Chase's acquisition of investment bank Bear Stearns "We're not doing what we preached," says economist Sung Won Sohn of California State University.

WASHINGTON — It is the end of an era on Wall Street, as the Federal Reserve granted permission for the last two major investment banks — Goldman Sachs and Morgan Stanley — to become bank holding companies in order to stay in business. And early Monday, Morgan said it will "pursue a strategic alliance" with Japan's Mitsubishi UFJ Financial Group in which Mitsubishi would own up to 20% of Morgan Stanley. The Fed announced late Sunday that it had approved the request, which will allow Goldman and Morgan Stanley to create commercial banks that can take federally insured deposits, bolstering the resources of both institutions. The change is the latest seismic shift on Wall Street. The change of status means both companies will come under the direct regulation of the Fed, which oversees the nation's bank holding companies.

• JJ Commentary: That’s just what the Fed wants, more control. By the way, the Federal Reserve is not really a federal institution. Its board of governors is privately appointed and run. Only the Chairman is appointed by the government.

Foundations and non-profit groups that invest in the stock market are getting battered by recent Wall Street volatility. Hardest hit are community groups that rely on both endowments and donations, which are also expected to decline. The survey showed that 52% of the community foundations that responded said they plan to distribute less grant money next year because of the economic downturn.

WASHINGTON — Finance officials from the globe's major economic powers pledged Monday to do all they can to fight a worsening credit crisis that threatens the world's economic health and stability. The Group of Seven said they welcomed the extraordinary steps by the United States to stem the crisis, including a plan where the Treasury Department would buy bad mortgages and other toxic assets held by banks and other financial institutions. Besides the United States, the Group of Seven is made up of Japan, Germany, France, Britain, Italy and Canada. The group didn't offer specifics about what actions they might take. But they sought to send a reassuring message that they are on top of the situation.