U.S. Treasury Secretary Timothy Geithner on Monday unveiled the Obama administration's plan for getting so-called toxic or bad loans off the books of US financial institutions.
At the heart of the Geithner plan is a public-private partnership for buying the bad loans that have crippled U.S. banks and disrupted normal lending.
Speaking at a financial conference sponsored by The Wall Street Journal newspaper, Geithner said the government will provide all of the money that is necessary to make the program work.
"As a critical part of this program, we are making it clear that we are willing to provide capital to the system," said Secretary Geithner.
No one knows how much government money might be needed. But during the past six months, more than $700 billion has been committed to cleaning up the bad loans in the banking system. The stock market gave a resounding vote of confidence to the Geithner plan as stocks rallied by nearly seven percent, their biggest one-day gain since October.
Analysts say that if the Geithner plan fails to revive the financial system, there will be no alternative but short-term nationalization of distressed banks.
Treasury Secretary Geithner alluded to that possibility, saying his plan attempts to steer a path between doing nothing and having the government take over the banks.
"I am very confident that that [nationalization] would leave us in the position where the government is taking risks it does not understand, cannot manage effectively, highly vulnerable to overpaying for those assets, and charges that we are giving a disguised subsidy [to banks] that is unjustified," he said.
Geithner said it will take several weeks for his plan to be properly evaluated by financial markets.
The deep global economic slowdown began in August 2007 when defaults in the U.S. home mortgage market caused financial markets to curtail lending. As first the U.S. and then the world economy slipped into recession, several efforts to unlock credit have failed.
In the aftermath of the crisis, Geithner says it will be essential to reform the financial system.
"It [the financial system] was too fragile, too vulnerable to shocks," said Geithner. "It did not adequately put in place a set of checks and balances on risk-taking that had systemic consequences."
Geithner himself is under pressure for allowing large financial bonuses at American International Group insurance that is now under government control. President Barack Obama strongly defends his treasury secretary.