After a tumultuous few weeks in the credit and equity markets, it seems that the US Treasury and Federal Reserve are finally on the right track. After some ridiculous jawboning about buying toxic mortgage securities above market prices, they have decided to use the Swedish playbook from the 1990s banking crisis in Scandinavia. This involves several steps:

1. Injection of equity capital into the banking system

2. Providing confidence in the banking system to investors by providing transparent marks to illiquid securities

3. Taking equity stakes in firms that are strong enough to survive and liquidating those that aren’t – this helps to remove moral hazard because there is a serious price to pay if you want to remain in business and you are a financial company

4. Providing incentives to banks to lend their newfound capital

For more information, I will point you in the direction of the Fed’s paper located at this link: Cleveland Fed Policy Paper

I think that investors, and the public in general, should breathe a sigh of relief. We have yet to deal with the recession that is coming but our policy makers are, for once, doing the right things to keep the foundation of our economy strong.