photo credit: eek the catFear of toxic assets has crippled financial markets, but buying them will be easier than banishing the fear.

Equity markets reacted gleefully on Monday to the long-awaited details of the US Treasury’s plan to buy up unwanted financial assets from American banks.

In short, the plan will set up funds with equal amounts of public and private capital as equity, boosted by government-guaranteed loans, to buy loan assets and asset-backed securities.

The existing Term Asset-Backed Securities Loan Facility (TALF) will also be extended to create a lending program aimed at investors in assets backed by residential and commercial real estate and consumer loans.

The plan is designed to muster debt and equity capital, with a total purchasing power of about $US500 billion ($A709.47 billion), potentially growing to $US1 trillion ($A1.42 trillion).

Its aim is twofold - to get the troubled assets off the books of banks, allowing them to raise capital and start generating credit again, and to rekindle the market for securitised debt, enticing private investors back into financing vehicles that had been another important conduit for the supply of credit.

The news of the debt deal revived a flagging equities rally, lifting the US S&P 500 index by seven per cent to a level 23 per cent above the 12-year low reached less than three weeks ago.

Despite the rally, though, the US market is trading barely half its all-time high hit in October 2007.

And there is good reason to keep the champagne corked.

The anxiety afflicting global markets was stirred up by the slump in US housing prices and the associated collapse of the mortgage-backed securities market that had been overinflated by a carefree attitude to risk among both lenders and investors.

But quarantining those and other asset-backed securities in the Public-Private Investment Funds proposed in the joint statement by the US Treasury and the Federal Reserve - even if the plan goes off without a hitch - will not suddenly make it all better.

Confidence in the global banking system has been dealt a harsh blow.

Even Australian banks, with virtually no exposure to troubled assets as the crisis unfolded, are paying higher risk premiums in money markets.

The urge to borrow for investment in risky assets is subdued.

The perception that housing and shares are good long-term bets has been shaken.

Investors in securitised assets, like mortgage-backed securities, are not likely to come flocking back in a hurry.

Just because the US government is helping to clean up the mess left after the market imploded does not mean the market will not implode again.

Confidence will take a long time to heal.

And it is more than just confidence.

The world is in recession.

Falling demand is keeping a lid on corporate pricing power, commodity markets are under pressure, and in the finance sector even prudent lenders are facing higher default rates as businesses fail and unemployment rises.

The environment for investors is unarguably hostile, but will eventually improve.

Indeed, the share market might even have seen its lows.

But the effects of the credit crisis will linger long after the paperwork has been tidied up.

AAP