How far will World Governments go to save their economies and industry when we see the US Democratic Party working on a $25 billion (£17 billion) car industry rescue plan.

The democratic party are discussing a rescue plan for US car-makers at a time when US Treasury Secretary Henry Paulson is re-thinking his $700 billion (£476 billion) bank bail-out plan. Mr Paulson has said that instead of buying up the banks’ toxic mortgage debts, the US Treasury will instead focus on taking stakes in banks, which is similar to the route taken by the UK government’s rescue package.

Car-makers Ford (Sales down 30%, $2.98 billion third-quarter loss), General Motors (Sales down by 45%, $4.2 billion third-quarter loss, plus 5,400 job cuts) and Chrysler (Sales down by 35%) are companies that have seen huge falls in sales over recent months amid the credit crisis. These falls in sales have prompted this plan with a vote to be made as early as next week on a bill to introduce the rescue.

Pressure has come from many directions, one of which being the union leaders, warning of the dire consequences for the US economy if one of the big three car manufacturers goes broke.

So where will these rescues end? With both the banking and insurance sectors already having benefited from rescue deals and now the car industry presently being considered. All of this renders the whole “capital market” system obsolete and it makes a mockery of the “Free Market” system.

Europe does not need a US-style bail-out of banks, but must introduce stricter financial supervision, a top EU official has said.

Economy commissioner Joaquin Almunia said mimicking the $700bn US plan to unfreeze credit markets was unnecessary because the situation was “less acute”.

Bolstering supervision rules would help boost confidence and stabilise volatile markets, Mr Almunia added.

The US Treasury and Federal Reserve are seeking rescue fund approval.

It could buy bad debt from financial institutions with “significant operations in the US”.

The fund would aim to sell off these mortgage-related debts in the future when, the Treasury says, their value might have risen.

‘Confidence fall’

France’s state secretary for European affairs, Jean-Pierre Jouyet, said the European financial system was “still stable and doesn’t need this kind of measure”.

“The latest events in financial markets have made it clear that the current model of regulation and supervision needs to be revamped” Joaquin Almunia

“We have to be prepared to intervene where necessary,” he said.

Mr Jouyet, speaking on behalf of the French EU presidency, said increased financial regulation was crucial.

“This laissez-faire attitude will not benefit anyone. It’s too late for that. We now need to consider the extent of the risk, the power of the regulatory authorities and the type of intervention.”

Mr Almunia said the “dramatic fall in confidence” had been created by banks’ lack of transparency and regulators inability to see what was going on.

Banks have been reluctant to lend to each other – prompting central banks to inject billions into global markets to increase liquidity.

“The latest events in financial markets have made it clear that the current model of regulation and supervision needs to be revamped,” Mr Almunia said.

‘Urgent’

In October the European Commission will propose new rules governing how much banks must keep in reserves, and set rule son how regulators should act if a bank is in danger of collapse.

Credit agencies – which have been partly blamed for the credit crisis for the way they have listed risky debts as safe – are also likely to become an EU target.

Better financial rules were “more urgent than ever before” and “could go a long way to restore confidence quicker than expected and limit the damage to our economies,” Mr Almunia said.

News reported by The BBC

The US Treasury’s rescue plan for Fannie Mae and Freddie Mac could cost taxpayers $25bn, congressional researchers said on Tuesday as evidence mounted that turmoil at the two companies is helping push up interest rates for homebuyers.

US mortgage rates have hit their highest levels in about a year amid rising Treasury yields and growing fears among investors that Fannie and Freddie will cut back their purchases of home loans and mortgage securities.

Freddie Mac secures SEC registration – Jul-18Hank Paulson, Treasury secretary, on Tuesday said he was “confident” Congress would complete work on approving his plan to give the Treasury authority to increase its credit line to Fannie and Freddie and invest in their equity, if necessary.

The plan has faced criticism on Capitol Hill for exposing taxpayers to potentially huge losses, but is seen by most lawmakers and administration officials as necessary to prevent mortgage rates from climbing even higher.

“I would rather not be in the position of asking for extraordinary authorities to support the GSEs, but I am playing the hand that I have been dealt,” Mr Paulson said in New York.

“Turning the corner on the housing correction requires homebuyers to return to the market, and homebuyers need available and affordable mortgage financing.”

The $25bn estimate of the fiscal impact of the Treasury’s proposed rescue plan for the two ailing mortgage giants was prepared by the non-partisan Congressional Budget Office.

It said there was more than a 50 per cent chance the US would not have to intervene to save Fannie Mae and Freddie Mac over the next 18 months. But it said there was a 5 per cent chance the Treasury would have to make up about $100bn in additional losses if housing market conditions worsen. On the basis of these estimates, and other factors, it put the cost at $25bn.

The CBO estimate was generally well received by lawmakers. “A lot of people thought it would be much higher,’’ said Richard Shelby, top Republican on the Senate banking committee.

Meanwhile, Barney Frank, Democratic chairman of the House financial services committee, was pushing for a vote on the legislation as early as Wednesday in the House.

Policymakers’ hopes of reviving the US housing market have been complicated by rising mortgage rates, which prevent homeowners from being able to refinance home loans at lower levels.

Keith Gumbinger, vice-president at HSH Associates, said the rate on 30-year “conforming” mortgages – those that Fannie or Freddie buy – is now at 6.71 per cent, essentially a 52-week high. He also said the historical relationship between mortgage rates and government bond yield was changing, meaning home buyers were paying far more relative to Treasuries than they did before the crisis.

News reported by The FT