US Government Plan to Buy Bad Mortgage-Loans Boosts Shares

Shares have recovered sharply after a proposed US government plan to buy billions of dollars of bad mortgage-related loans was announced. The Dow Jones index increased 3.8% in early trading, while London’s FTSE 100 index jumped 8.6%. In Paris, the Cac 40 was 7.6% higher. Japan’s Nikkei increased by 3.8%, while the Shanghai Composite jumped 9.5% and Hong Kong’s Hang Seng rose even higher at 10%.

Financial providers have gained the most. In London, the Royal Bank of Scotland and HBOS shares rose by as much as 50%.

Moves to restrict “short-selling” in the US and UK have also helped to boost shares. Short-selling occurs when a trader borrows shares from another trader to sell on with the view of buying them back at a lower price – thereby profiting from the difference. This practice has been blamed for the recent falls in some banking shares.

Mixed reaction

Some analysts welcomed the news. Others, however, cautioned against central banks flooding the financial system with too much liquidity. But an even bigger risk could be a loss of confidence in the American economy, due to the Government’s underwriting of the huge mortgage debt. This could devalue the dollar, and push inflation even higher.