Equities investors have so far offered a bad response to the new plan introduced Tuesday morning by the Treasury Secretary Timothy Geithner. The plan is the latest attempt by the government to shore up the financial system and prevent further economic contraction.
Treasury Geithner before outlining the key elements of the new program, explained the causes of the current crisis, which according to him, “are many and complex”. The Treasury Secretary emphasized the fact that many governments and central banks around the world had pursued policies and taken risks they did not understand. Individuals, businesses, and governments borrowed beyond their means without realistically evaluating risk. As a result, a massive global boom in credit occurred, pushing up housing prices and financial markets to unreasonable levels ; ones that defied gravity. Because of systematic failures in the checks and balances in the system, and because of the lack of inadequate response by regulators, even though their actions were essential in avoiding system failure ; the world’s financial and economic system now faces its worst crisis in generations.
To reverse the situation Mr. Geithner said the current administration is fundamentally reshaping the government’s TARP program, initially introduced in October, which simply injected capital into major US banks and hoped for an amelioration of the situation. The Treasury secretary unveiled a new plan called: Financial Stability Plan- which according to him, will apply a comprehensive approach to stabilize and repair the financial system, and support the flow of credit necessary for a recovery. This plan, said Geithner, will allow Americans to see where their tax dollars are going and the return on their government’s investment. Geithner also said he hoped to “use taxpayers’ money in ways that will benefit them.”
Some key points in the plan included:
– To increase lending and make credit more available to consumers and businesses. The Treasury will provide $100 billion in seed money to expand the Federal Reserve’s Term Asset-Backed Securities Loan Facility.
– To inject more capital into banks – but only after each undergoes a “carefully designed comprehensive stress-test”. The Treasury chief said the “stress-test” will apply to banking institutions with more than $100 billion in assets.
– To create a public-private “bad bank” program to remove assets from the balance sheets of ailing banks. Geithner said the program should ultimately provide up to one trillion in financing capacity, but he planned on starting it on a scale of $500 billion, and expand it based on what works.
– Addressing the housing crisis: The Fed and Treasury will focus on using the full resources of the government to help bring down mortgage payments and to reduce mortgage interest rates by committing $50 billion and establish loan modification guidelines.
Treasury Geithner concluded by saying the US was committed to reform its own financial regulation system but candidly added that the new strategy will cost money, involve risk, and take time. As costly as this effort may be, Geithner said “we know that the cost of a complete collapse of our financial system would be incalculable for families, for businesses and for our nation.”