Resolving “toxic assets”

The approach taken by Tim Geithner is probably a smart way to circumvent what would have been a tedious, if not impossible work by the federal government to “stress-test” the financial system. As everyone knows, Geithner’s department is grossly understaffed and who can be better value these assets than the market itself, albeit through some strong incentives courtesy of government and taxpayers “sweeteners.”

At any rate, addressing these toxic assets is a step in the right direction, especially for solvent institutions whose asset values are subject to a substantial liquidity discount. However, insolvent institutions might not find as much relief from the plan and will probably need further government intervention. The end result is that the impact of Geithner’s plan may not be enough to pull the economy out of a contraction for a good part of this year and may spell sluggish growth thereafter…