WASHINGTON - Treasury Secretary Timothy Geithner this morning unveiled the Obama administration's $1.5-trillion-to-$2-trillion plan for stabilizing the nation's malfunctioning financial markets, including a public-private partnership to boost lending, warning that the new strategy "will cost money, involve risk and take time."
"As costly as this effort may be, we know that the cost of a complete collapse of our financial system would be incalculable for families, for businesses and for our nation," he said in detailing the administration's Financial Stability Plan. "We will make mistakes. We will go through periods in which things get worse and progress is uneven or interrupted."
The new plan involves spending $500 billion to $1 trillion in a new public-private partnership to leverage federal money to try to buy up toxic mortgage-backed securities and up to $1 trillion to expand an existing Federal Reserve plan to spur consumer and business lending. Those expenditures come on top of using the second half of the $700-billion Troubled Asset Relief Program, or TARP, to continue injecting money into struggling banks -- but this time with tighter oversight and more accountability, Geithner said.
The Obama administration also plans to launch a comprehensive plan to address the housing crisis, focusing on reducing mortgage payments and lowering mortgage interest rates. Congress demanded such a plan as a condition for authorizing use of the second half of the bailout fund. But Geithner did not announce that plan, saying the economic team still was working on it and planned to detail it in the next few weeks.
Giethner stressed that the new administration was "fundamentally reshaping" the government's financial rescue program in a way that will be both bold and comprehensive.
"We believe that the policy response has to be comprehensive and forceful. There is more risk and greater cost in gradualism than in aggressive action," he said.
Geithner, who helped engineer the Bush administration's financial rescue plan last fall -- the centerpiece of which was the $700-billion bailout fund designed to buy mortgage backed securities -- said those efforts helped "pull the financial system back from the edge of catastrophic failure."
But he admitted the actions ultimately were "inadequate." They failed to halt the rapid deterioration of the economy and fueled public disenchantment as the Bush administration shifted its original strategy and used most of the first half of the $700-billion fund to inject money directly into banks.
With lawmakers angry about the lack of transparency in how banks used the first portion of the fund, the Obama administration is trying to tighten oversight and accountability as it prepares to start distributing the second $350 billion. As a prelude to today's announcement, Obama last week unveiled new restrictions on compensation to senior executives of institutions that receive new bailout checks.
"The spectacle of huge amounts of taxpayer money being provided to the same institutions that help caused the crisis added to public distrust," Geithner said. "Our challenge is much greater today because the American people have lost faith in the leaders of some of our financial institutions, and they are skeptical that their government has used taxpayers' money in ways that will benefit them."
As part of the new transparency, Geithner said people would be able to track where the money was going and how it was being used on a new website, FinancialStability.gov.
Government agencies overseeing banks will subject them to "a carefully designed comprehensive stress test" to better assess the risks on their balance sheets. Institutions that need additional capital will get access to government money under a new mechanism that tries to use federal funds "as a bridge to private capital."
As Congress works to finalize an $827-billion stimulus plan to jolt the spending side of the economy, Geithner stressed the importance of repairing the financial system so it can provide the credit and loans necessary to back that spending and pull the nation out of its deep recession.
"Without credit, economies cannot grow, and right now, critical parts of our financial system are damaged," he said.
The problems in the financial system -- particularly the lack of lending to consumers and businesses as troubled banks fear overextending themselves -- is hindering economic recovery and must be addressed.
"It is essential for every American to understand that the battle for economic recovery must be fought on two fronts," he said. "We have to both jump-start job creation and private investment, and we must get credit flowing again to businesses and families."
Geithner said the Federal Reserve and Federal Deposit Insurance Corp. will work with the private sector to create a "Public-Private Investment Fund" that seeks to use government money and financing to lure private capital to get the markets functioning properly again. The target of the fund will be the toxic mortgage-backed securities clogging the balance sheets of banks and financial institutions.
"By providing the financing the private markets cannot now provide, this will help start a market for the real-estate-related assets that are at the center of this crisis," Geithner said. "Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets."
But he said the administration was still "exploring a range of different options" for the program and would seek the input of the public and market participants. The plan ultimately should provide as much as $1 trillion in financing but will start at $500 billion and grow "based on what works," Geithner said.