Failure to agree plan 'would create financial Armageddon'

The United States will face “complete financial Armageddon and a great depression” if a financial rescue package to overcome the economic crisis cannot be agreed, a former Federal Reserve official said.

But other experts warn that such talk “doesn’t reflect clear thinking” and added that while the US is facing a crisis, the troubles do not represent a disaster just yet.

The nation’s political leaders have so far failed to agree on the details of a $700bn (€478bn) rescue plan which the president and US Treasury Secretary Hank Paulson have said is vital if the US is to avoid a “long and painful recession”.

A former official at the Federal Reserve, the US central bank, told the political website Politico.com that failing to reach a deal was not an option.

“The alternative is complete financial Armageddon and a great depression,” the official said.

“Where do they go after this? Well, the US government could nationalise the banking system outright.”

But Geoff Colvin, senior editor-at-large of the US business magazine Fortune said bluntly: “This isn’t Armageddon.

“Here’s what’s wrong with most of what we’re hearing and reading on the financial crisis: It forgets that people aren’t potted plants,” he wrote on the magazine’s website.

“I don’t claim special powers to know what how today’s crisis will turn out-or what the consequences will be of the actions that attempt to solve that crisis.

“But I know for sure that some of what we’re reading and hearing doesn’t reflect clear thinking.”

He went on: “The error is in forgetting that all real-world situations are dynamic.

“The Depression itself was a dynamic sequence.

“It wouldn’t have happened if the Fed hadn’t insanely tightened credit in response to the stock market crash, rather than the correct policy of easing interest rates.”

Mr Colvin added that it was “a crisis, yes; a disaster, no”.

“Of course, it could still become one,” he said.

“But for now, calling it a disaster is a dramatic overreaction.”

But President George Bush left Americans in no doubt as to the dire consequences if the US Congress failed to act “immediately” when he addressed the nation on Wednesday.

“More banks could fail, including some in your community,” he said.

“The stock market would drop even more, which would reduce the value of your retirement account.

“The value of your home could plummet. Foreclosures would rise dramatically.

And if you own a business or a farm, you would find it harder and more expensive to get credit.“

He went on: “More businesses would close their doors, and millions of Americans could lose their jobs.

“Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college.

“And ultimately, our country could experience a long and painful recession.”

The president acknowledged that the complex rescue package would “present a tough vote for many members of Congress” because it would commit “so much of the taxpayers’ hard-earned money”.

But he added: “Given the situation we are facing, not passing a bill now would cost these Americans much more later.”