World leaders seek a global solution

The United States and Britain have similar approaches

WASHINGTON -- The United States and Britain appear to be converging on a common solution for the financial chaos sweeping the world, one day before a crucial meeting of financial leaders begins in Washington that the White House hopes will result in a more unified response.

The British and American plans, though far from identical, have two common elements: injection of government money into banks in return for ownership stakes and guarantees of repayment for various types of loans.

Both remedies will be center stage Saturday, when President Bush meets with finance ministers from the world's richest countries at an unusual White House meeting to swap ideas.

Bush's invitation to finance ministers from Britain, Italy, Germany, France, Canada and Japan came on a day of phone calls and letters between European leaders and with Washington. Officials struggled to fashion a coordinated response to the ailing global banking system before going to Washington for annual meetings of the International Monetary Fund and World Bank.

"As this thing has spread, the opportunities for cooperation have risen," said David H. McCormick, the undersecretary of the Treasury for international affairs. "We need to promote and highlight these common areas."

With credit markets still frozen and stock markets around the world in a deep swoon, there is a growing consensus that the crisis is now so fast-moving and so harmful to the global economy that it demands an unprecedented degree of worldwide coordination.

The Treasury's openness to direct infusions of cash is a remarkable change in tone from a few weeks ago, when the Treasury secretary, Henry M. Paulson Jr., and the Federal Reserve chairman, Ben S. Bernanke, discouraged such actions in testimony before Congress.

"Putting capital in institutions is about failure," Paulson declared on Sept. 23. "This is about success."

Treasury officials, however, said the emphasis changed in the last week, largely because stock markets kept spiraling down.

Prime Minister Gordon Brown of Britain made the case, in a letter to President Nicolas Sarkozy of France, for another option gaining favor among economists -- guaranteeing short- and medium-term loans between banks. By persuading banks to resume lending to each other, the plan aims to shake loose the paralyzed credit market. "This is an area where a concerted international approach could have a very powerful effect," Brown said Thursday in the two-page letter.

Recapitalizing the banks and jump-starting their lending are at the top of the list of remedies that many economists are now suggesting. By acting in concert, countries can maximize the punch of their actions, these experts said, while avoiding distortions that occur when countries go different ways.

"At a minimum, you want to curtail damage," said Carmen M. Reinhart, a professor of economics at the University of Maryland. "You don't want the beggar-thy-neighbor policies that characterized the Great Depression."

"At a maximum," she continued, "you can get general principles -- the need for a swift recapitalization of the banks, the need for liquidity -- so we don't get an even bigger credit crunch."

The White House confirmed that the Treasury Department was considering taking ownership positions in banks as part of its $700 billion rescue package. But officials said the idea was less developed than the plan to buy distressed assets from banks through "reverse auctions."

The goal, Treasury officials said, is a plan that would be broadly available to all banks, rather than through specific rescue packages negotiated on a case-by-case basis. That makes it likely that the government could afford to take only a small stake in any single institution.

But it is far from clear that other countries will accept the need for wholesale recapitalization of the banks. Even if they did, neither the British nor the American plan would necessarily be a template.

"You have lots of people skinning the cat in lots of different ways," McCormick, the Treasury's point person in organizing the meetings of finance ministers, said in an interview. "It's clear that one size does not fit all."