WASHINGTON -- Six weeks ago, U.S. Treasury Secretary Timothy Geithner scheduled what had been promoted as an important statement on the economy, raising expectations that the administration of U.S. President Barack Obama was ready to take quick action to restore health to the country's banking system.
But the resulting speech dashed expectations, because he only said that he was still working on a plan to enlist the help of private investors to buy up billions of dollars' worth of what are known as "toxic assets" owned by banks.
On March 23, Geithner finally announced a concrete plan, and this time, it had specifics. And while the new White House program has its critics, it also has supporters, including the U.S. stock market.
The new Public-Private Investment Program -- as the bank-rescue plan is called -- includes a government offer of low-interest loans to help private investors buy as much as $1 trillion worth of toxic assets from banks so the banks can get back to their prime activity: making loans to keep the economy running.
It is one of several economic recovery programs Obama has launched in his first two months in office. Others include a $787 billion plan to create jobs and otherwise stimulate the economy, and a federal budget that begins on October 1, 2009, which includes an additional $750 billion in stimulus spending. 'Absolutely Critical'
"We believe that [the Public-Private Investment Program] is one more element that is going to be absolutely critical in getting credit flowing again," Obama said. "It's not going to happen overnight. There is still great fragility in the financial system, but we think that we are moving in the right direction."
In a brief exchange with reporters at the White House, Obama explained that Geithner's bank-rescue plan will rely heavily on the Federal Reserve and the Federal Deposit Insurance Corporation, or FDIC, which was created to guarantee people’s savings accounts.
The only hope of turning the economy around is to get the financial sector functioning again, and to say, 'Just let the banks fail' is [the same as saying], 'We don't mind having a very deep and prolonged recession.' So that's not an option.
Both the Federal Reserve and the FDIC will now provide the low-interest loans that Obama says are needed to encourage private investors to buy up the toxic assets.
"We are very confident that in coordination with the Federal Reserve, and the FDIC, other relevant institutions, that we are going to be able to not only start unlocking these credit markets," Obama said, "but we're also going to be in a position to design the regulatory authorities that are necessary to prevent this kind of systematic crisis from happening again."
The assets in question include the home mortgage loans and similar lending that are at the heart of the global financial crisis. After the loans were issued, they were gathered into large bundles, then sold as assets that would pay investors dividends for years to come, as homeowners paid off their mortgages. Determine Realistic Values
What was overlooked at the time the loans were made, bundled, and sold was that the mortgages were given to applicants who couldn't possibly have paid them back. These assets are now worth only a small fraction of their original value.
The White House hopes that private investors' expertise will be able to determine more realistic values for the assets.
The White House plan was leaked to reporters on March 22 and Geithner himself gave a detailed description of it in an interview published on March 23 in "The Wall Street Journal."
It has already attracted critics.
Allan Meltzer -- an economist at Carnegie Mellon University and the American Enterprise Institute, a Washington think tank -- says Obama should let insolvent banks fail.
Paul Krugman -- a Nobel Prize-winning economist at Princeton University, who also writes commentary for "The New York Times" -- says the Obama administration should take the bolder step of temporarily taking over insolvent banks to rid them of the toxic assets.
Instead, Obama and Geithner have decided to maintain deep government involvement in the process of restoring the banks' health.
"I think it's quite a good plan and stands a good chance of working," Alice Rivlin, a former director of both the White House Office of Management and Budget and the Congressional Budget Office, tells RFE/RL.
"The important thing is to find a way to get the troubled assets off the books of the banks. This is a way of leveraging the government money by bringing in the private sector so it won't be quite as expensive for the government, and leveraging private sector expertise, and I think that's a good idea," Rivlin says. 'That's Not An Option'
Critics also say the plan offers no risk to the private investors, who are basically indemnified from loss by the government incentives. Any loss, they argue, will be at taxpayers' expense. Rivlin acknowledges this, but says she can't see any other way to persuade the private sector to invest in the assets.
She rejects the idea of letting insolvent banks fail, and also doesn't like the idea of temporarily taking them over.
"The only hope of turning the economy around is to get the financial sector functioning again, and to say, 'Just let the banks fail' is [the same as saying], 'We don't mind having a very deep and prolonged recession.' So that's not an option," she says.
"Nationalizing the banks would have been a possibility. It might have been a simpler thing to do," she continues. "But what the administration wanted was to bring the private sector in so it wouldn't take so much government money."
U.S. stock traders clearly liked the plan.
European and Asian stocks surged even before the plan was formally released, and the Dow Jones Industrial Average, the most-watched index, closed up by almost 500 points, or just under 7 percent.