Geithner says new plan is best option

UPDATED:

Treasury Secretary Timothy F. Geithner on Monday morning revealed some details about a new program to revive lending in the U.S. economy and said that the plan to use around $100 billion taxpayer dollars as leverage to unfreeze credit markets is the government’s best option.

“I am very confident this scheme dominates all the alternatives,” Mr. Geithner said during a press conference at the Treasury Department that was closed to TV cameras.

President Obama added his voice in support of the plan after a meeting later in the morning with Mr. Geithner, saying that “there is still great fragility in the financial system but we think we are moving in the right direction.”

U.S. and world markets responded enthusiastically to the plan, with the Dow Jones Industrial Average jumping 300 points within its first 90 minutes of trading.

Amid concerns that the American public will react angrily to more government spending to help financial institutions, following the furor over AIG bonuses last week, Mr. Geithner acknowledged “deep anger and outrage” across the country, and agreed that there is risk of backlash against the new plan.

“There is no doubt that government is taking risk. You cannot solve a financial crisis without the government taking risk. The only question is how best to do it,” he said.

To do nothing would lead to a “longer, deeper recession,” and to buy up bad assets entirely with taxpayer dollars would “leave the government more exposed” to losses, the secretary said.

“We are the United States of America. We are not Sweden,” Mr. Geithner said, responding to criticisms of the plan by liberal economists such as Paul Krugman.

But the Treasury is pointedly not asking for more funds from Congress and is choosing to use money already approved by lawmakers.

The Treasury’s plan is to form partnerships with private investors to purchase up to $1 trillion in toxic mortgage loan assets from ailing banks. The Treasury will spend $75 billion to $100 billion in money from the Troubled Asset Relief Program. Congress approved $700 billion for this fund last fall.

The programs are designed to entice private investors to purchase the souring loans and mortgage securities that have been stifling new lending activity at banks. The programs aim to kick-start the frozen markets for such loans, which have been largely dysfunctional since 2007.

Stock and bond markets have anxiously awaited the Treasury plan, which is considered critical to restore health to the banking sector and credit-starved economy. The Treasury’s previous vague outline of the plan in February greatly disappointed markets and helped spur a return of the severe bear market in stocks.

One program outlined by Treasury would be run by the Federal Deposit Insurance Corp. to absorb individual loans that are clogging up banks’ balance sheets. The FDIC would provide loans to investors to buy the bank loans, and would guarantee part of the investments. The Treasury would also contribute a small amount of capital for purchase of the loans. Both investors and the government could profit from the deals if the price of the loans increases in future years.

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