US POLITICAL REACTION:AS US president George W Bush insisted yesterday that the US economy was strong enough to weather the storm on Wall Street, Democratic presidential candidate Barack Obama blamed White House policies and Republican John McCain called for better regulation of financial institutions.
Mr Bush said that, while he sympathised with employees of fallen financial institutions such as Lehman Brothers, his government was focused on the health of the financial system as a whole.
"Adjustments in the financial markets can be painful, both for people concerned about their investments and for the employees of the affected firms," he said.
"But in the long run I am confident that our capital markets are flexible and resilient and can deal with these adjustments."
Neither presidential candidate criticised US treasury secretary Hank Paulson's decision to refuse to bail out Lehman but Mr Obama said the turmoil on Wall Street was a product of eight years of failed Republican policies.
"The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren't minding the store," Mr Obama said in a statement.
"Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression."
Mr McCain said he believed the fundamentals of the US economy remained strong but promised to "clean up Wall Street" if he and his running mate, Sarah Palin, win November's election.
"The McCain-Palin administration will replace an outdated, patchwork quilt of regulatory oversight and bring transparency and accountability to Wall Street. We will have transparency and accountability and we will reform the regulatory bodies of government," he told a rally in Florida.
Mr McCain rejected Mr Obama's claim that Republican policies were responsible for this week's meltdown in the financial world, arguing that the failure to keep Wall Street in check was shared by both parties in Washington. "I think it's a failure of government and I think it's a failure of regulatory agencies," he said.
"I would point out that the Democrats have been in control of Congress for the last two years - both houses - so I think there's plenty of blame to go around."
The US treasury's refusal to use public money to bail out Lehman followed last week's government takeover of mortgage giants Freddie Mac and Fannie Mae and federal help in JP Morgan's takeover of Bear Stearns last March. Treasury officials insist each case is different, arguing that the financial markets knew for months that Lehman was in trouble and had time to prepare for its collapse.
Mr Paulson yesterday identified the US housing market as the key to the crisis, suggesting that further turbulence was likely until the worst of the housing slump was past. In that context, the bailout of Freddie Mac and Fannie Mae was essential to ensure mortgages would be available to potential homebuyers.
The US Federal Reserve meets today amid speculation that it could cut interest rates in response to the crisis on Wall Street. In recent months, Fed chairman Ben Bernanke has indicated that the bank could increase rates to combat inflation.
The bank on Sunday eased the terms under which it lends to banks and other financial institutions, allowing borrowers to use equities as collateral for cash loans at one of its special credit facilities.
