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Obama says bank bailout may cost more than expected

world Updated: Feb 25, 2009 09:43 IST

US President Barack Obama said more money might have to be pumped into troubled banks and promised not to let ailing auto companies fail, as he unveiled plans on Tuesday to steer the country out of prolonged recession.

Giving his maiden speech to Congress Obama also announced a new lending fund in the "largest effort ever" to help small businesses and consumers and unclog credit lines, assuring nervous Americans their bank savings deposits were safe.

As concerns over the health of US banks gripped markets, Obama acknowledged a recent plan to shore up financial institutions choked with bad assets "will require significant resources from the federal government -- and yes, probably more than we've already set aside."

Trillions of dollars have already been set aside to rehabilitate the critical financial sector, which is reeling from a home mortgage meltdown a subsequent global financial turmoil that has slammed the brakes on growth.

The Treasury unveiled a special financial stability plan two weeks ago, aimed at keeping banks afloat, which could total some two trillion dollars.

A separate 700-billion-dollar Troubled Asset Relief Program was approved by Congress last year, also targeting financial institutions.

"But while the cost of action will be great, I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade," Obama said.

"That would be worse for our deficit, worse for business, worse for you, and worse for the next generation. And I refuse to let that happen," Obama told lawmakers, many of whom are skeptical of approving further bailout funding.

With market capitalization of banks rapidly eroding as their stocks get hammered and their balance sheets continue to be tainted by "toxic assets," Obama assured Americans their savings will be protected.

"You should also know that the money you've deposited in banks across the country is safe; your insurance is secure; and you can rely on the continued operation of our financial system. That is not the source of concern," he said.

He asked lawmakers to move quickly on legislation that he said would finally reform the "outdated" US financial regulatory system, seeking "tough, new common-sense rules that rewarded drive and innovation, and punished "short-cuts and abuse."

Obama also said he would not allow the near bankrupt US auto industry to collapse, saying millions of jobs and scores of communities depended on it.

"I believe the nation that invented the automobile cannot walk away from it," he said to a roar of applause.

General Motors and Chrysler have asked the US government for a further 21.6 billion dollars in loans to stave off bankruptcy -- on top of the 17.4 billion dollars approved in December -- to weather a global collapse in auto sales.

Both companies insisted they can return to long-term viability in detailed plans submitted to the Treasury last week, and they warned that the cost of doing nothing would be far higher.

In a bid to boost consumer confidence further, Obama announced a wide-ranging lending fund to help small businesses and students and others.

"We are creating a new lending fund that represents the largest effort ever to help provide auto loans, college loans, and small business loans to the consumers and entrepreneurs who keep this economy running." He did not provide details of the plan.

Obama said that his administration was concerned that if it did not re-start lending, "our recovery will be choked off before it even begins.

"You see, the flow of credit is the lifeblood of our economy," he told lawmakers.