WASHINGTON -- The Bush administration changed course on the $700 billion financial rescue package Wednesday, saying it would scrap plans to buy troubled assets and focus on directly injecting money into the nation's banking system.
Treasury Secretary Henry Paulson said the government's shifting plans reflect an economy that is in far worse shape than it was just a few weeks ago. The unemployment rate jumped in October to 6.5%, the highest since March 1994.
Reacting to the news, the Dow Jones industrial average fell 411 points to 8282.66 Wednesday.
The Treasury Department has already started buying $250 billion in bank stock to infuse money into the troubled financial sector, but it previously said it was working simultaneously on a plan to buy troubled assets, such as bad mortgage loans, from bank balance sheets. That was the original intent of the legislation passed in early October.
But Paulson, in an interview with USA TODAY, said, "You need to be able to change strategies as the facts change." He reiterated that he expects that taxpayers will eventually make money from the rescue plan. "By putting capital in, that is much more powerful and it goes a lot further."
Still, some criticized the herky-jerky approach, noting such changes were leading to reduced confidence that the government would help thaw frozen credit markets and prop up the economy.
Congress and the administration "don't seem to have a grasp of what works and what doesn't," says Axel Merk, president of Merk Investments, a mutual fund management company in Palo Alto, Calif. "If the government changes the rules every day, how are you supposed to make an investment decision?"
Paulson suggested that money in the rescue fund would not be used to help automakers, despite requests from auto company CEOs and some congressional leaders. But he said money could flow to "non-banks" in the financial system, suggesting that auto-financing arms, such as GMAC, could be eligible for a cash injection.
The administration is also considering establishing a way to encourage financial institutions that get cash from the government to raise money from the private sector, perhaps through a matching program. And Treasury is working with the Federal Reserve on a plan to help investors buy asset-backed securities, which funnel interest payments from loans, such as mortgages, to investors. As loans are paid off, investors split the principal payments.
Paulson said such securities have played a "critical role" in lowering the cost and increasing the availability of money for consumer borrowing, such as car and student loans and credit cards. A lack of liquidity in the sector "is creating a heavy burden on the American people and reducing the number of jobs in our economy," he said.
Paulson said the administration continues to work on a plan to prevent home foreclosures.