Resorting to Plan C

This week, the Washington Post revealed that the U.S. Treasury has launched an internal effort to determine the size and nature of credit risk across the U.S. financial system.  The effort is portrayed as the development of a last-ditch plan to understand the full scope of credit risk and where it resides.  Here is how the Post described the effort.

Informally known as Plan C, the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks, said government sources familiar with the effort.

Part of the mission is assessing which firms are the most vulnerable and trying to decipher what assets these companies hold and whether they pose a danger to the wider financial system. Plan C is a small-scale, relatively informal approach to a problem the administration hopes to address in the long term by empowering the Federal Reserve to oversee systemic risk.  The creation of Plan C is a sign that the government has moved into a new phase of its response, acting preemptively rather than reacting to emerging crises, officials said.

This revelation is somewhat disturbing and promising at the same time.  It is disturbing that the government is just now beginning to work on an effort such as this, but promising in that they are working to prevent future problems rather than just cleaning-up after the fact.