The Obama administration program to address the fragility of the banking system is based on a two major initiatives. First, it has proposed the Geithner- Summers Plan to buy subprime securitized assets from the banks. The toxic assets plan deals with less that 40 percent of the balance sheet of the banks that is in marketable securities. It does not deal with the 60 percent of the balance sheets of US banks that are loans and are not marked to market. Further, it will take six months to get the program in motion. The plan elicited deserved criticism from reputable analysts, including Paul Krugman in his NYT column. As Krugman points out in his column this plan is the third variant of an old plan to lift the value of toxic assets. The plan meets Einstein’s definition of madness: continuing to do the same thing, hoping for a different outcome. Jeff Sachs (FT, March 23), Joseph Stiglitz (NYT, April 1) and Peyton Young (FT, April 1) added their concerns that the plan nationalizes losses and privatizes profits.

The second part of the administration program is the now famous stress test of the nation’s largest banks. The other dimensions of the Geithner plan are the loan-purchase program run by the FDIC, the Treasury securities-purchase component of the PPIP is supplemented by the expanded Fed TALF program, and the various programs aimed at lowering rates in the conforming mortgage market.

To much fanfare, the International Monetary Fund Tuesday announced its latest attempt to revamp its lending instruments to better serve the post-financial crisis world. The new “flexible credit lines” are intended to speed bailouts, cut down on conditionality, and improve countries’ payback terms -- in theory, pleasing both donor countries and recipients.

IMF Managing Director Dominique Strauss-Kahn claimed:

In a Mar. 4, 2009 article, "Promising signs of progress in the ‘Bad Bank' Plan," I wrote that the approach sketched by the U.S. Secretary of the Treasury deserves consideration and support from the policy making and financial communities for the following reasons:

1. This design ensures that troubled assets are worked out in the private sector. The government bureaucracy does not have the expertise or the motivation to make decisive decisions in the resolution of troubled assets.
2. The proposed approach secures private equity capital, while providing government working capital. The program further ensures that the incentives of the managers are aligned with the public interest since the managers' own money is at risk.
3. The program creates capacity and competition in the private sector to deal with the mammoth impaired assets problem.

I wanted the US Treasury to succeed and was prepared to support the program. However, that program presented by the Treasury today is a disappointment. The program is exceedingly generous to the private sector. The Treasury is acting as a rock bottom "discount" hedge fund; it offers assets to the private sector for a minimal amount of equity capital (the private sector is asked to contribute 3-5 percent equity, with the FDIC and US Treasury shouldering the rest), and non-recourse financing at subsidized government interest rates.

We are witnessing the widespread use of guarantees, which suggests that policymakers consider them a “free lunch” permitting them to bypass budgetary scrutiny. I advocate that guarantees should be transparent, judicious and temporary and applied only in specific circumstances.

Previous financial crises have seen the use of government blanket guarantees, which are blunt instruments. Such measures for depositors and creditors were introduced in East Asia to protect banking system stability.