Bank job.(THE ECONOMY II)(Secretary of the Treasury Timothy Geithner)

TREASURY SECRETARY TIMOTHY GEITHNER announced his plan to save the banking system--or, rather, announced that he has a plan. Geithner hinted at new financial commitments on the order of $2 trillion, but he declined to describe his plan in any detail. What specifics he did provide failed to inspire any confidence in the man or his plan. Investors reacted by deserting bank stocks, and the market dropped by 300 points that day.

No doubt Geithner has a difficult task on his hands. There is no consensus, to say the least, among economists or policymakers on the proper government response to the banking crisis. Nevertheless, we have a pretty clear idea at this point of what doesn't work. Injecting capital into the banks--former Treasury secretary Henry Paulson's fallback when his plan to purchase troubled assets proved unworkable--turned out to be rife with unintended consequences. Banks' balance sheets continue to deteriorate as their CEOs are hauled before Congress to take marching orders from the likes of Barney Frank. Stock values have plunged as investors have abandoned these sinking ships.

Against this backdrop, Geithner proposed stress-testing banks and injecting more capital into "those institutions which need it." Does that mean directing more capital toward healthy banks? Propping up moribund banks? Either way, it means more banks working for two masters: their shareholders and Congress. Remind us: How did that work out for Fannie Mae and Freddie Mac? Also, the government is the first in line for repayment, increasing the likelihood that shareholders would be totally wiped out in the event of a bankruptcy or federal takeover. Is it any wonder that the market reacted to this proposal with a huge sell-off?

Geithner's other pronouncements raised more questions than they answered. For instance, he proposed new spending on foreclosure-prevention programs that could total up to $100 billion. How would these efforts succeed where others, such as last summer's HOPE for Homeowners program, have failed? How would the administration deal with the stubborn reality that 30 to 40 percent of loan modifications end in foreclosure, regardless of the ...