The real concern about the financial sector is that it is undercapitalized with  severe  shortage of luquidity as the  losses it has sustained and the growing risk-aversion of lenders in the free market. To avoid the credit contraction to  do  any further damage, financial institutions need more capital to continue lending and be in the business. The current secnario   makes  the treasury plans to recapitalize financial institutions in phases. The  first phase would have paying above the current market value for mortgage-backed assets, second phase  would be creating a market for these assets and allowing prices to be established and thirdly the treasury hopes that once the illiquid assets are off the balance sheets, institutions can raise capital and will become more willing to lend and eneter into more stable and sustainable business growth.

Though these are very sound intentions, it  can sustain in present run down market conditions is the big  question and  proper  risk analysis of the   total  plan. The downside  is that If the government overpays, it is not going to help the market discover the true price that traders are willing to pay. Which in turn will cause in  every way of course  taxpayers  to bear the burnt. Ultimately, the  authorities will have to focus on recapitalizing the banking sector in addition to asset purchases, a quick audit of the large financial institutions, speedy closure of those that are beyond revival and a recapitalization plan for those that can survive, are all priorities of what needs to be done.These are standrads procedure  which have    stood the test  of time and   been  used by many   countries to  get  out of the a  stiff  finicial  situation.

As the US represents about a third of the world economy it  concerns to the world too  on how  well does the  US  comes out of this finicial soup. The matters get even more    complex as  US routinely spends more than it produces.  Thus If US demand shrinks, global demand will also be affected which will lead to another  big spillover in many other  foreign financial institutions, largely in Europe which hold substantial quantities of US securities. .

As a consequence of this  sub-prime crisis every country needs to learn to be careful about excessively low interest rates and excessive credit growth. Firstly,  the consequences of unstable interest rate policy should be  scrutinized . Secondly, they should worry about incentive structures in the financial system. Bonuses based on short-term performance should be avoided, but instead  longer-term performance incentives should be  provided based on actual materialization. A regulatory system has to be kept in place above all the  which needs to make sure that their systems are resilient enough to market fluctuations.