Treasury's Efforts to Deal with the Financial Crisis

Treasury Begins to Release Details of Loan Plan
http://www.nytimes.com/2009/03/05/business/economy/05loan.html

Note the second word of the headline, begins.

Here’s the difficulty. For months, Treasury has made plans secretly, without public debate. The reason: if we let details out in advance, it could roil the panicked markets even more than they already are. How do the markets, as they’re called, react? They say, we don’t trust what you’re doing back there, because you did it in secret. Moreover, we’re skeptical about supporting it, because we had no input.

If you don’t trust your would be rescuer, you’re not going to have much cooperation between the government and the banking system. What is the result? Treasury pumps hundreds of billions of dollars into the banking system to get loans flowing again, but the financial system remains shut down. Trust has disappeared, and Treasury is not setting a good example by making plans in secret. If the main problem in the financial system is lack of confidence or trust among its parts, you need an open rescue process to make it work again.

No one makes a loan without knowing the net worth of the borrower. Banks won’t lend each other money because they don’t know the value of each other’s assets. They do not trust that borrowers can pay back loans. That’s why the financial system shut down. Forcing banks to accept bailout money doesn’t solve the problem of valuing assets. Banks won’t loan money again until doubts about solvency are resolved. No one has yet figured out a way to value banks’ assets accurately, fairly, and in a way that won’t cause political trouble in the short term.