The new deal for our toxic economy.

Finally, the Treasury Department detailed a plan Monday to clear out approximately $1 trillion in toxic assets from the financial sector in a desperate effort to strengthen and encourage the banking sector to get them to lend again.

The hybrid public/private plan would have private investors and the Treasury put in equal amounts of money that would then be backed by a loan guarantee from the Federal Deposit Insurance Corp. to purchase toxic loans and mortgage-backed securities from the banks that hold them on their balance sheets.

Both the private investors and the taxpayers would supposedly gain from any profits if the assets eventually gain value which would only really happen if the mortgages are continued to be paid on. The taxpayer, of course, would take most of the downside risk. The private investors may be shielded a bit more.

The plan is considered the focal point in the government's strategy to get the US defunct financial system working on par again to provide the credit the economy needs. Since the credit crunch intensified in September, even more local jobs have been lost and the economy has contracted at the fastest pace in decades. In fact the toxic fallout from the U.S. banking crisis has spread around the globe.

The reason why the loans and mortgage-backed securities "assets" are considered "toxic" is because the market for them has dried up as home prices have plunged. The banking sector is adamantly unwilling to sell the loans and securities for pennies on the dollar, and investors, now poorer and wiser are very skittish about overpaying for assets that might become even more worthless than before.

Banks have raised the bar of lending and subsequently reduced their lending because their required capital is worth less than their creative accountants thought.

The Treasury plan is an attempt to give both the banks and potential buyers an incentive to come to a arrangement and make a deal.

The Treasury program has been eagerly anticipated for the past six weeks after Treasury Secretary Timothy Geithner's initial roll-out in early February was panned by the market.

The reaction was seemingly favourable since on Monday, Stocks jumped on Wall Street on optimism that Treasury Secretary Timothy Geithner's plan would work. Banks stocks in particular gained, go figure.

The plan offers "the best prospect for a financial recovery," said Lawrence Summers, top economic adviser to President Barack Obama. So when prospects are few and far between the best is subjective.

"The goal of this program is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit," the Treasury said in a news release. The plan was designed "to make the most of taxpayer resources."

In a briefing for reporters, Geithner said private investors could take losses if the assets fall in price. He said an auction would determine the price paid for the assets.

The details announced Monday would cover purchases of whole loans held by banks. Details about purchasing mortgage-backed securities will be announced later, after further discussions with banks and potential investors.

Many analysts took a wait-and-see attitude on whether the plan would work.

"Unfortunately, we will not know until we see the program in actual operation," said Douglas Elliott, an expert on the bank crisis at the Brookings Institution, a middle-of-the-road think tank. "There are substantial reasons to be concerned that the program will fizzle or prove to be too expensive for the taxpayer, but there are also some grounds for hope."

One key stumbling block (and its a big one) is that the assets could already have lost 70% of their value, Elliot said.

Jeremy Siegel, a professor at the Wharton School of Business, said the plan would prove attractive to private investors because it was like a "call-option" on the toxic assets.

"If the asset values go below the purchase price, the Treasury is going to eat that loss. This plan is definitely going to work," Siegel said in a television interview.