The U.S. plan to buy billions of dollars worth of so-called toxic assets from banks is a step in the right direction for economic recovery, and Europe needs to follow suit, says Finance Minister Jim Flaherty.
U.S. Treasury Secretary Timothy Geithner announced on Monday the long-awaited plan to buy stimulate lending to consumers and businesses by clearing the banks of the bad debt.
Following the news, the Dow Jones Industrial Average closed up 497.48 points, and Toronto's TSX soared 452.16 points before closing.
"The most important thing that had to happen internationally and in the United States is to fix the banks, to cleanse the banks of these bad debts, so called toxic assets," Flaherty told CTV's Canada AM.
"That has to happen, so the provision of details yesterday by President (Barack) Obama and Secretary Geithner is very important moving forward. More needs to be done in Europe on cleansing the banks. That's what had to happen for stimulus to be effective, for economies globally to start to recover."
At the same time, Flaherty warned that the recession is causing job losses around the world, and those numbers will continue to get worse before they get better.
To deal with that, he said, the federal government is extending the length of employment insurance coverage by five weeks, implementing a "work-share" program, boosting training support and putting more into EI administration, so more applicants can be processed faster.
"We have to pull together on this. This is a difficult time for Canadians. Some Canadians are losing their jobs. We have to help them retrain and get through this difficult time."
Don Drummond, chief economist for TD Bank, said the news from the U.S. is an important step towards finding a way out of the global recession.
He said U.S. housing resale numbers are also up for the first time in months -- another sign there may be hope on the horizon.
"That's a key variable because we've always said you're not going to get a U.S. recovery until housing bottoms out. It's still at visibly low levels but at least it's moving up," Drummond said.
He noted that when the economic numbers were sinking, investors over-reacted. Yesterday, with a glimmer of good news from the U.S., they likely over-reacted, since it will be several months before the plan to buy bad bank debt can kick in -- and it remains to be seen whether the strategy will work.
However, Drummond said progress is being made.
"We've got interest rates down near the floor, the Federal Reserve Board is buying the long-term debt, we've got a huge fiscal stimulus package and now we have a plan for the assets. So the building blocks are getting put in place for a recovery."
Details of the plan
The purchases could grow to US$1 trillion, Geithner told reporters Monday, in yet another attempt to ease the credit crunch, stem the tide of mortgage foreclosures and boost lending to consumers and small businesses.
The plan will use between $75 billion and $100 billion from the previously announced $700 billion bailout program. The funds will be supported by loans from the Federal Deposit Insurance Corp. and a loan initiative operated by the Federal Reserve.
In a typical transaction, for every $100 in bad mortgages purchased from the banks, the private sector would put up $7, which will be matched by the government. The remaining $86 would come from a government loan that would, in many instances, be provided by the Federal Deposit Insurance Corp.
Geithner said it is necessary for the government to accrue so much of the risk, because the alternative is to let the market rectify itself and risk a prolonged recession.
