The FT presents the US Government’s considered response to the post-July 23 world, in the form of an op-ed by David McCormick, under-secretary (international affairs) and Robert Steel under-secretary (domestic finance) at the US Treasury:

First, President George W. Bush and Treasury secretary Hank Paulson remain steadfast in their commitment to the core policies – low taxes, free trade, open investment and fiscal restraint – that have contributed to the strong US economy.

Second, the US is addressing short-term challenges. This includes ongoing actions and monitoring by the independent Federal Reserve to restore orderly conditions in financial markets and improve market liquidity. Additionally, President Bush recently announced a series of proposals to help troubled homeowners remain in their homes while also ensuring that predatory lenders bear full responsibility for their actions.

The third part of our framework includes working closely with our international economic counterparts to evaluate the contributing factors of this uncertainty and determine appropriate actions. Consistent with this objective, Mr Paulson and his counterparts in the Group of Seven leading industrial nations will ask the Financial Stability Forum (FSF) – a body of finance ministries, central banks and regulatory bodies from leading financial centres created after the Asian financial crisis – for a timely examination of four issues.

– First is financial institutions’ liquidity, market and credit risk practices, including treatment of complex credit products and conduits.
– The second is accounting and valuation procedures for financial derivative instruments, particularly for complex, narrowly traded products that become difficult to price in times of stress.
– Third is basic supervisory oversight principles for regulated financial entities, especially given exposures to off-balance sheet, contingent claims.
– And fourth is the role of credit rating agencies in evaluating structured finance products.

The FSF’s initial report will be provided to the G7 finance ministers at their October meeting. This report’s recommendations will be an important input towards targeted, balanced, multilateral action.

These actions are important and timely — even overdue. We shall see how effective they are in the next few years, since this cycle of asset bubbles would not appear to be at its peak yet.

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