His trillion-dollar pledge has a substantial sum allocated to buying up legacy assets, or in other words loans that are considered toxic.
Once the banks offload these assets they will be a lot more confident about their ability to ride out further downsides in the economy and as a result will be more willing to lend money – at least that is the theory.
If this bold move works then the effects should boost confidence on both sides of the Atlantic.
The stock markets certainly liked the sound of the package and markets across the globe rallied, although it is far from clear whether this rally will hold or retreat.
One glaringly obvious difference between the US and UK is that financial institutions of any size can participate, whereas in the UK non-bank lenders have been excluded.
These non-bank lenders were together responsible for a significant level of lending and it is highly questionable as to whether the banks by themselves can fill the lending gap.
The government should consider the valuable role that mothballed lenders could play in ensuring the billions of taxpayers’ money being pumped into the system actually ends up increasing the flow of loans to homeowners, rather that just being used to improve banks’ capital ratios.