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US plans to buy up 'toxic' assets
By ridding banks of soured loans, it is hoped that normal lending will be resumed.
Last Modified: 22 Mar 2009 14:43 GMT

 

Geithner's plan has been criticised for not addressing flaws in the US financial system [Reuters]

The United States plans to buy up billions of dollars of so-called toxic assets from banks in an attempt to contain the country's worst financial crisis in seven decades.

Expected to be announced as early as Monday by Timothy Geithner, the treasury secretary, the plan aims to ease borrowing for consumers and businesses.

Industry officials said they expected the plan to remove as much as $1 trillion from banks' books.

The officials said the plan would rely on both the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) to supplement the government's $700 billion bailout fund.

Congress is unlikely to provide any new bailout money following public outrage over millions of dollars in bonuses paid out to employees of insurer American International Group (AIG), which has received billions in government aid.

The officials, who spoke on condition of anonymity because the final details have not been announced, said Geithner's plan has three major parts.

A new government body, backed by the US banking regulator the FDIC, would need to be set up to buy and hold troubled assets that banks want to sell.

An expanded programme to make it easier for consumers to get small loans is also part of the plan, as are big subsidies for private investment firms that buy mortgage-backed securities, with the government matching those private funds dollar-for-dollar.

Plan questioned

Removing toxic assests is considered vital to getting banks to resume normal lending.

"The key is going to be if the government buys these assets quickly," Mark Zandi, chief economist at Moody's Economy.com, said.

"The question is: Who is providing the deep thinking about the economic architecture? He is not an economist; president Obama is not an economist."

Thomas Palley, Washington-based economist

"The sooner they get these assets off banks' balance sheets, the quicker the system will find its footing and get the economy moving again."

But other economists have expressed scepticism over Geithner's plan.

Paul Krugman, a recent winner of the Nobel prize for economics, said the plan failed to address fundamental flaws in the US financial system.

"The Obama administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system - that what we’re facing is the equivalent of a run on an essentially sound bank," he wrote in a column for The New York Times on Saturday.

"And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won't be able to come back to Congress for a plan that might actually work."

In addition to the as-yet unannounced plan to purchase toxic assets, Geithner came under criticism for failing to block the AIG bonuses.

Geithner 'pretty weak'

Barack Obama, the US president, defended his treasury secretary, saying in an interview with CBS television on Saturday that he would not accept Geithner's resignation, even if it was tendered.

While Obama has said Geithner's job is safe, some Washington pundits have noted it is not a good sign that the president has had to say it, and so often.

Thomas Palley, a Washington-based economist, told Al Jazeera that judging by the reception in the [US] media, Geithner's performance has been "pretty weak".

"He [Geithner] doesn't seem to have inspired. My own opinion is that Timothy Geithner is a very capable bureaucrat and he is carrying out the mission that he has set - that's president Obama's mission," Palley said.

"The question is: Who is providing the deep thinking about the economic architecture? He is not an economist; president Obama is not an economist."

Source:
Al Jazeera and agencies
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