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A Times Editorial

No easy answers, but this is a start

President Barack Obama's new plan to unclog the banks by partnering the federal government with private investors to buy billions of dollars in bad assets is a reasonable approach. But there should be no illusions about how well and how quickly it may work. This is an economic crisis with no easy solution, and it will take more time, public money and policy changes to come out of it.

The programs unveiled this week by Treasury Secretary Tim Geithner will provide government loans and guarantees to help finance purchases by private investors of up to $1 trillion in bad home loans and mortgage securities. In a typical sale, the private investor would put up just 7 percent of the purchase price in cash and the government essentially would cover the rest. The government has the most to lose if the assets significantly fall in value, but the loans could be repaid and taxpayers could share in any profits if the assets wind up having good value over time. The idea is to get most of the toxic assets off the shoulders of the banks, which would stop hoarding cash and start lending again to consumers and businesses.

In theory, the administration's plan holds promise. It creates an opportunity for the marketplace rather than the government to establish a price for the banks' toxic assets. Taxpayers do not take on the entire risk, and they share in any returns. The private partners will manage the assets, and for now the Obama administration should not have to go back to a skittish Congress for more money.

In practice, the plan faces considerable hurdles. The banks still may be unwilling to part with the bad assets that have frozen credit if they calculate the prices are too low. Or the government's private partners could overpay, secure that taxpayers are shouldering most of the risk. Even if the plan achieves some success, it may not take enough of the bad assets off backs of the banks to get the financial system working again. The only sure bet is that the administration will have to make adjustments as the plan moves forward.

As difficult as the details of the bank rescue are to work out, the public and political expectations are equally daunting for the Obama administration. The public's anger over the AIG bonuses is justified. But the president was slow to clearly respond to that frustration and put it into a broader context. That resulted in the House's reactionary vote to slap a 90 percent tax on most such bonuses. A House committee knocked Geithner and Federal Reserve Chairman Ben Bernanke around some more on Tuesday about the bonuses as they made a compelling case for regulatory authority. Obama, in his news conference Tuesday night, repeated that he is "as angry as anybody'' about the bonuses but warned against "demonizing'' the investors and the financial community that have to work with the government to revive the economy.

Meanwhile, some members of Congress complain Obama is risking too much public money to revive the economy and pursue his goals regarding health care, education and energy. Some financial experts argue he is too timid and should move quickly to have the government directly take over banks that are essentially insolvent. It may come to that, but the scare tactics about nationalizing banks makes such a direct move politically impractical at the moment.

Obama, who plans to meet Friday with about a dozen top banking officials, has chosen a pragmatic course toward unclogging the financial system. His bank rescue plan deserves an opportunity to grow — with the understanding that if it does not take hold, the next attempt to thaw the financial system is likely to be more direct and more expensive for taxpayers.

No easy answers, but this is a start 03/24/09 [Last modified: Wednesday, March 25, 2009 2:16pm]
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