Effort to help homeowners shows limits of persuasion approach

In late October 1907, the American financial system appeared to be on the verge of collapse. The trouble had begun with a seemingly minor event—a failed attempt at stock-market speculation by a bank owner named F. A. Heinze—but it spread quickly after news of Heinze’s losses prompted a run on his banks by worried depositors.

In a matter of days, financial institutions with connections to Heinze were facing similar withdrawal frenzies, and the stock market was falling precipitously. Amid the turmoil, the financier J.P. Morgan stepped in. Consulting with the Treasury Department, which committed millions in deposits to weak banks, Morgan browbeat bankers into bailing out struggling institutions, funnelled money to cash-starved brokers and even convinced clergymen in New York City to dedicate their Sunday sermons to the need for “calmness and confidence.”

Within a few weeks, the fear and chaos had subsided, and the “panic of 1907” left only a small dent in the U.S. economy. A hundred years later, in the midst of what you might call the panic of 2007, many investors are hoping that a Morgan-style rescue plan will have similarly beneficial effects. The plan, which was unveiled last Thursday, after weeks of orchestration by Treasury Secretary Henry Paulson, seeks to stabilize the chaotic subprime-loan market by freezing the interest rates of some borrowers.

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Source: msnbc.msn.com