Initial reaction favorable to Treasury’s credit plan

Initial reaction favorable to Treasury’s credit plan

Polls show Americans are clearly fed up with bailouts. And it is little wonder, given the mind-numbing dollar amounts that are being bandied about and, more recently, the contretemps involving millions of dollars in bonuses given to AIG executives, many of whom worked in the very division that was responsible for the company’s near collapse.

Against that backdrop, the Obama administration released on Monday its plan to finance the purchase of as much as $1 trillion in toxic assets from banks that are virtually paralyzed by the bad debt that they hold.

This is a job that was supposed to be done with the first installment of the $700 billion bailout program approved by Congress at the request of the Bush administration last fall. Questions about where all that money went — questions that haven’t been adequately answered by either administration — have contributed to the public’s antipathy toward bailout programs in general.

But getting angry about past bank practices or wishing ill on banks and bankers isn’t going to do anything to get the economy back on the right track.

The problem has been that private investors were reluctant to bid on the loan packages the banks are saddled with, the banks themselves didn’t want to let them go at prices that could cause an institution’s collapse and the government didn’t want to price them on its own.

Searching for answers

The Treasury now believes it has found a way, but at considerable risk to the taxpayer. As the administration described it, for every $100 of toxic assets bought up, private investors would put up $7; the federal government $7 and the remaining $86 would be in the form of federal loan guarantees.

The program will be financed by the Treasury Department’s bailout fund, the Federal Reserve and the Federal Deposit Insurance Corp. It is obviously not without risk to the taxpayer, But, the greater risk remains in the alternative: doing nothing.

Until some modicum of normalcy returns to the credit markets, the economy will remain stagnant. Businesses can’t get adequate financing for expansion or even restocking inventory. Consumer financing, especially for big-ticket items, is hard to come by.

It’s dangerous to put too much stock in Wall Street numbers on any given day (up or down), but Monday’s reaction to Treasury Secretary Timothy Geithner’s announcement of his plan was enthusiastic and encouraging. It was in marked contrast to Geithner’s earlier unveiling of a broad outline that did nothing more than raise questions and sent the market plummeting.

At this point, restoring confidence plays a huge role in restoring the economy. But the success of Geithner’s plan won’t be known for months, and only then if banks, investors and the government can work together to clear hundreds of billions in bad debts from the banks’ books.