Late this afternoon, the G7 leaders released a five-point action plan to “stabilize financial markets and restore the flow of credit to support global economic growth.” The G7 finance ministers and central bank governors agreed to:
- Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.
- Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.
- Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.
- Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.
- Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.
The G7 statement emphasizes that these actions need to be “taken in ways that protect taxpayers and avoid potentially damaging effects on other countries,” and expressed strong support for the “critical role” of the International Monetary Fund (IMF) “in assisting countries affected by this turmoil.” Tomorrow, the IMF’s steering committee, the International Financial and Monetary Committee, meets and is expected to discuss possible responses to the global financial crisis.
Earlier in the day, IMF Managing Director Dominique Strauss-Kahn proposed a four-point action plan to restore the world’s financial markets. The four pillars of his proposal were a temporary government guarantee of financial system liabilities (retail and wholesale deposits, inter-bank borrowings and money market accounts), government action to take out troubled assets and force the recognition of losses, government provision of capital to the financial system, and a high degree of international cooperation.
At a press conference after the meeting, Treasury Secretary Paulson emphasized the need for continued international cooperation. “Never has it been more essential to find collective solutions to ensure stable and efficient financial markets and restore the health of the world economy.” He also confirmed that Treasury is developing a plan to purchase equity in financial institutions, but provided few details:
“As we develop plans to purchase equity, as in the approach we are taking to broad mortgage asset purchases, we are working to develop a standardized program that is open to a broad array of financial institutions. Such a program would be designed to encourage the raising of new private capital to complement public capital. Consistent with the legislation, any equity the government purchases through a broadly available equity program would be on a non-voting basis, except with respect to the market standard terms to protect our rights as investors.”