The tragic history of financial crises is a history of failures by governments to act with the speed and force commensurate with the severity of the crisis. If our policy response is tentative and incrementalist, if we do not demonstrate by our actions a clear and consistent commitment to do what is necessary to solve the problem, then we risk greater damage to living standards, to the economy's productive potential and to the fabric of our financial system. ... The ultimate costs of this crisis will be greater, if we do not act with sufficient strength now. In a crisis of this magnitude, the most prudent course is the most forceful course.

Who said that? Alan Greenspan? Jim Cramer? Actually, it was Tim Geithner, in his Jan. 21 Senate confirmation hearing. Despite that strong rhetoric, it is obvious to everyone that the policy response so far has been vague, inept and incremental. It is hard to imagine anyone thinking that we are pursuing "the most forceful course."

Policymakers need to stop splitting hairs to explain what a wonderful job they have done and join us in the real world.

What follows are some steps that government must take to avert a global depression and to live up to Geithner's discourse:
  • 1. Face facts. We are in the most challenging economic environment since the Great Depression. Policies must be realistically sized to address the problems head-on. Instead, the government plans have disappointed again and again with their insufficiency and incrementalism.
  • 2. Use the Fed's balance sheet to fix the credit markets. A few months ago, Ben Bernanke testified before Congress that certain toxic assets were trading at fire-sale prices, when the held-to-maturity values were much higher, and he asked for a $700 billion authorization so that the government could bolster these assets by purchasing them at closer to the held-to-maturity value.

    Ironically, the Federal Reserve has an unlimited balance sheet and does not need congressional approval to use it. It's long past time for the Fed to start buying the ever increasing list of toxic assets to help bring spreads down to reasonable levels. Mr. Bernanke needs to understand that while he may think that bank failure "caused" the Great Depression, it isn't the only cause of depression. Fixing the banks is necessary but not sufficient.

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