Tim Geithner, the new treasury secretary, outlined his vision of the new banking rescue plan today. While the press conference was a little short on details, it appears that Geithner is actually approaching the problem correctly.

The plan looks to apply a two pronged approach. First, he is working to create a public private partnership to buy upto a $1 Trillion in bad assets from the banks. It is unclear how much public money will eventually be part of this joint program, or even if there are any private firms left that will be willing to take on the toxic assets. Another problem would be to price the toxic assets. This is what Paulson found so hard to do. But assuming Geithner is able to execute this plan well, it should help take away a lot of stress from the banks’ books.

The second part of the plan involves committing upto $1 Trillion in public funds to jump start commercial lending, consumer lending and small business credit. Some of these funds may also be used to help homeowners avoid foreclosures. This is the part of the plan that has the real potential to be a stimulant to the economy. This economy is hemorrhaging jobs because the credit has dried up. Helping small businesses regain access to credit will help bring some of the lost jobs back as well as start the economy on the growth path.

There are still two issues that are troubling. One, we do not know yet whether the Treasury will be able to execute this plan well, and Two, the price tag is too high and at some point we will have to pay the piper in terms of high inflation and spiraling deficits. This may be a trade off where some short term pain is mitigated but in return it may take a longer time for the economy to recover.

Alternative of course is to do nothing, take our lumps, let the economy restructure itself and move on. There will be lot of pain and suffering in the short term, but in the long term the economy will be stronger for it.