Geithner details new bank bailout plan; taxpayer vigilance still needed

February 10, 12:04 PMPolitical Issues ExaminerJudah Freed

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Treasury Secretary Timothy Geithner today unveiled details of the Obama administration's plans to address the worst U.S. financial crisis since the Great Depression more than seven decades ago.

Initially dealing with the second half of the $700 billion banking bailout approved under the Bush administration, the new Obama administration program could eventually channel up to $2 trillion of public and private money to unfreeze the credit markets and get the economy moving again.

Treasury Secretary Timothy Geithner speaks
at the Treasury Department in Washington,
Tuesday, Feb. 10, 2009, detailing the Obama
administrations economic recovery plans.
(AP Photo/Lawrence Jackson)

"We have to both jump-start job creation and private investment," Geithner said, "and we must get credit flowing again to businesses and families."Speaking at the Treasury Department in Washington, DC, Geithner declared, "Right now critical parts of our financial system are damaged. Instead of catalyzing recovery, the financial system is working against recovery, and that's the dangerous dynamic we need to change.

Beyond placing a previously announced $500,000 salary cap on the top executives of participating banks and other financial institutions, according to an Associated Press report, the Obama plan would "impose tough new standards on future payments to banks. It is also greatly expanding an effort to unclog credit markets to provide loans to consumers and businesses." 

A key focus, AP reported, will be funding to loosen banking limits on credit card debt, auto loans and student loans from $20 billion to $100 billion. In combination with a program operated by the Federal Reserve, the effort "would be enough to support an additional $1 trillion of lending in this area. Officials said the program would also be expanded beyond consumer and small business loans to cover loans for commercial real estate projects."

Geithner added that at least $50 billion of the remaining $350 billion will go toward helping homeowners cope with looming foreclosures, and these details will be forthcoming within about two weeks. Direct support of homebuyers to prevent foreclosures  was touted by the Bush administration, but the promises never moved beyond talk into action.

The mortgage support would be a major policy shift from the Bush administration, which relied on voluntary, industry-led measures and did not want to commit taxpayer dollars to foreclosure prevention. The administration was still reviewing various proposals on exactly how the new anti-foreclosure efforts would be implemented.

Geithner further said the bailout program would continue government purchases of stock in banks, accompanied tighter oversight than under the Bush regime, which as been accused of passing out tax dollars to banks with few strings attached.

Critics like me have charged that little if any of the $350 billion in the first half of the $700 billion bailout (approved October 3, 2008) has actually gone into lending, as intended, and instead has been capriciously misused for things buying other banks, issuing stock dividends, or paying extravagant bonuses to undeserving executives.

Under Geithner, in contrast, major banks will have to pass a "stress test" of their balance sheets to ensure they are sound enough to merit receiving additional government support.

Such a worthiness test is necessary, in my view, because former Treasury Secretary Henry Paulson seemed to make arbitrary choices on who did and did not receive funding.

Interestingly, because of the political blowback from the Bush administration's mismanagement of the bailout funds, the Obama administration decided not to seeking any money beyond the $350 billion remaining in the initial $700 billion bailout package. More accurately, Obama has decided to prove the banking bailout money can be used widely before he asks for any more.

My assessment from Geithner's announcement today, quite frankly, is best summed up by the phrase "cautious optimism." Seems to me the Obama administration is on the right track, but talk is cheap. As I've said before, if we want to see genuine and lasting change in Washington, we taxpayers still need to stay vigilant and keep the administration's feet to the fire.

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