Bush, Paulson: Economic upturn will take time

Federal Reserve Chairman Ben Bernanke will provide an up-to-date assessment of the country’s economic and financial challenges in a speech in New York on Wednesday.

Big U.S. banks started falling in line Tuesday behind the rejiggered bailout plan.

British Prime Minister Gordon Brown is calling for global talks this year aimed at creating better international rules to guide financial markets.

But there was a mix of hope and skepticism on whether it would work. Unprecedented steps recently taken — including hefty interest rate reductions by the Federal Reserve and other major central banks in a coordinated assault just last week — have failed to break through the credit clog and the panicky mind-set gripping investors on Wall Street and around the globe.

Initially the U.S. government will pour $125 billion into nine major banks with the hope that they will use the money to rebuild their reserves and to increase lending to consumers and businesses. Another $125 billion will be made available this year to other banks — if they need it — for cash infusions.

In return, the government will get ownership stakes in the financial institutions. Banks, meanwhile, will have to accept limitations on executives’ compensation.

The government is counting on banks not to just clutch onto the cash, which aggravated the credit crisis to begin with.

“The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it,” Paulson said in announcing the initiative.

Treasury switched gears, deciding to first use a chunk of the $700 billion from the recently enacted financial bailout package to pay for taking partial ownership stakes in banks, rather than using the money to buy rotten debts from financial institutions. The government said it still intends to buy the bad mortgages and other toxic assets, another move aimed at getting credit flowing again.

Besides the $250 billion this year on the stock purchases, Bush said Tuesday that an additional $100 billion would be needed in connection with covering bad assets. That would leave $350 billion of the $700 billion program, presumably to be spent by the next president.

Economists as well as both Democratic and Republican lawmakers on Capitol Hill had urged Treasury to first move forward on the capital injection plan, arguing that was a more effective way to battle the financial crisis.

The first bank to take advantage of the program was Bank of New York Mellon which announced it would sell $3 billion in preferred shares to the Treasury. Other banks initially participating include Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase, Bank of America Corp., including the soon-to-acquired Merrill Lynch, Citigroup Inc., Wells Fargo & Co., and State Street Corp.

The government’s cash infusions are attractive to banks because they are having trouble getting money from elsewhere. Skittish investors have cut them off, moving their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have rather than lending it to each other or customers.

Also in msnbc.com business ConsumerMan: Gift of giving takes on whole new meaning ‘Reaching out’ and the other worst buzzwords of the year Your Career: Tips for job hunting during the holidays MotorHead: New Audi R8 is a refined land rocket   Video: Wall Street sees record-breaking profits

MORE FROM ECONOMY AT A CROSSROADS

Economy at a Crossroads Section Front

NYT: Taxpayers at risk with mortgage giants Senate panel approves Bernanke nomination Recession hits Rust Belt towns hard Latest data points to slow recovery in 2010 Economic survey points to growth in 2010 Construction of new homes rebounds Inflation stays in check as housing starts rise Homebuilder outlook dips despite tax credit Great Recession spawns biz buzzwords Industrial production rises more than expected Economy at a Crossroads Section Front   Add Economy at a Crossroads headlines to your news reader: