Leading article: A bold and risky plan to reverse the credit crunch

Anyone with ambitions for a long and comfortable political career would probably do well to give the present economic crisis a wide berth. The US Treasury Secretary, Tim Geithner, has barely been in his post two months but already finds his job hanging by a thread.

After a torrid few weeks in which he has been castigated for everything from his personal tax arrangements to his failure to stop bonuses being awarded to employees of AIG, Mr Geithner's political future now depends on his plan to rescue the crippled American banking sector

Yesterday we got some details of that plan. The US Treasury will use taxpayers' money to create a market for up to £1 trillion of the banks' "toxic" assets. These are the asset-backed securities which private investors will not touch with a barge pole in the present fearful climate. The hope is to remove these assets from the balance sheets of troubled US banks, reduce the uncertainty about the scale of the losses facing them, and enable them to begin lending properly to the wider economy again.

Global stock markets responded reasonably positively to the plan, but there are two major risks. The first is that these assets really are as toxic as many pessimists believe and that the US taxpayer will end up bearing the brunt of the losses on them. The second, and still more significant, risk is that the plan will not work in unfreezing credit markets because the banks are in worse shape than the Obama administration is willing to admit.

Mr Geithner's plan is constructed on the premise that the major US banks are in a sound condition and that what they need is a helping hand from the state to restore confidence. Yet some eminent economists believe these banks are essentially insolvent and will not start lending properly until nationalised and forced into a fundamental restructuring.

We must hope that Mr Geithner's analysis is nearer the mark and that this complex scheme will succeed in luring private investors back to the securities market place. For there will be no sustained economic recovery until the international finance system – of which the US banks are a crucial part – start functioning again. And this means dealing, somehow, with the dead weight of toxic assets. The world's most successful investor, Warren Buffett, believes that these securities are a good investment. If the Sage of Omaha is right, there is some cause to believe that Mr Geithner's "public-private investment programme" might indeed do the trick.

But while hoping for the best, policymakers would be acting irresponsibly if they failed to plan for the worst. The Obama administration must be prepared to take radical action if the plan fails to attract sufficient private investors, or if the banks fail to increase their lending. This means direct public control of the banks, a blanket guarantee of their liabilities, and a ruthless separation of their good assets from their bad ones.

Our own government ought to be prepared to take similar action if the insurance scheme for the questionable assets of the Royal Bank of Scotland and Lloyds Banking Group fails to increase the flow of credit to the UK economy.

This economic crisis began with a sudden evaporation of confidence in the global financial system and we will not begin to emerge from this downturn until we have solved this central problem. The road to recovery leads through a reversal of the credit crunch.