The U.S. government launched an “extensive, powerful and transformative” package of aggressive actions to do no less than save the American, and indeed the world’s, financial system.

On Tuesday, October 14, after an early morning meeting with his financial advisers, President Bush outlined four steps the government is taking to implement the G-7 action plan unveiled over the weekend.

First, the government will use part of the $700 billion financial rescue plan authorized by the Emergency Economic Stabilization Act (EESA), to inject capital into banks by purchasing equity shares. Bush said the new capital will both “help healthy banks continue making loans to businesses and consumers” and “help struggling banks fill the hole created by losses during the financial crisis, so they can resume lending and help spur job creation and economic growth.”

Second, the FDIC will temporarily guarantee most new debt issued by insured banks. “This will address one of the central problems plaguing our financial system — banks have been unable to borrow money, and that has restricted their ability to lend to consumers and businesses,” Bush said.

Third, the FDIC will immediately and temporarily expand government insurance to cover all non-interest bearing transaction accounts, which are used primarily by small businesses to cover day-to-day operations. “By insuring every dollar in these accounts, we will give small business owners peace of mind and bring greater stability to the banking system,” Bush said.

Fourth, the Federal Reserve will complete work on a new program to serve as a buyer of last resort for commercial paper.

Program Seeks to Stabilize Banking System

Bush said the measures are the latest steps in his Administration’s systematic approach to the crisis. “I know Americans are deeply concerned about the stress in our financial markets, and the impact it is having on their retirement accounts, and 401(k)s, and college savings, and other investments,” he said. “I recognize that the action leaders are taking here in Washington and in European capitals can seem distant from those concerns. But these efforts are designed to directly benefit the American people by stabilizing our overall financial system and helping our economy recover.”

The new program signaled a fundamental shift in the government’s plans to implement the EESA rescue package. Although plans to use reverse auctions to purchase troubled mortgage-backed securities are still in the works, the Administration clearly has changed its focus to direct investments in banks, a concept Treasury Secretary Henry Paulson had rejected earlier.

“We are developing strategies to use the authority to purchase and insure mortgage assets and to purchase equity in financial institutions, as deemed necessary to promote financial market stability,” Paulson said. “As we develop plans to purchase equity, as in the approach we are taking to broad mortgage asset purchases, we are working to develop a standardized program that is open to a broad array of financial institutions.”

The Treasury Secretary also said the equity purchase program would be designed to encourage the raising of new private capital to complement public capital. He noted that, consistent with the EESA, “any equity the government purchases through a broadly available equity program would be on a non-voting basis, except with respect to the market standard terms to protect our rights as investors.”