Too cautious at Treasury

WHEN markets began plunging during Treasury Secretary Timothy Geithner's much-anticipated speech earlier this week, it was the sound of countless traders saying "Huh?" at the same time. The plan he announced Tuesday was in most ways too vague, and in some ways too cautious, to calm anxieties about the financial sector and the US economy as a whole.

The financial sector is paralyzed because banks that once gorged on securities backed by iffy mortgages - millions of which have now gone sour - cannot say how many toxic assets they are holding. The $700 billion bailout program that Congress passed last fall has not succeeded in banishing those bad assets.

Geithner unveiled a few helpful ideas: He would "stress test" the health of large financial institutions and demand that those receiving government bailouts show how the money is contributing to new lending. But the plan falls short in other ways. The Obama administration is committing to a $50 billion plan to contain the foreclosure epidemic - which would help families and slow the slide in housing prices - but has not settled on the details of that plan.

Furthermore, the Treasury has laid out only the vaguest outlines of another of Geithner's central initiatives, a "public-private investment fund" of $500 billion to $1 trillion. The goal is to involve private capital as well as taxpayer money in buying up toxic assets from troubled banks. But Geithner offered little detail on how such a mechanism might work. Besides, estimates of the amount of toxic assets in the financial system start at around $2 trillion, so the Treasury proposal may address only part of the problem.

Other Obama aides reportedly wanted to wipe out existing managers and shareholders; Geithner's more conciliatory approach toward Wall Street won out. But in the end, the government may have to take more aggressive steps - including taking direct control of troubled banks that turn out to be insolvent and then getting rid of their toxic assets. Neither Congress nor the White House shows any appetite for steps that smack of Sweden or Venezuela. Yet if the collapse of the financial sector has become the government's problem, then the government needs the tools to address it.

If stock traders hoped that the new administration would roll out some massive, crisis-banishing new bailout plan, then they've misread President Obama's economic team, which seems cautious by instinct. But the underlying sentiment - that someone needs to do something to get banks lending again - is well founded. Treasury shouldn't settle for half-measures when bold strokes are badly needed.