As markets slump and banks totter, Treasury Secretary Henry Paulson has begun the tricky $700 billion task of saving the American financial system. Under the law enacted Friday, Mr. Paulson has 45 days to construct a program.
It’s a high-wire act in a hurricane, and there’s no precedent for it. If he’s too cautious, the American economy — and perhaps the world’s — may collapse around his ears. If he’s too aggressive, he’ll stick taxpayers with hundreds of billions of dollars in losses that might have been avoided.
So far the only move he’s made is the appointment of Neel Kashkari, a 35-year-old assistant Treasury secretary (and a University of Illinois graduate), to head up Treasury’s new Office of Financial Stability.
The sooner Mr. Paulson can get the mechanics in place, the better. The world financial system is having a panic attack, and the prospect of a bailout has soothed it only slightly. Should panic take hold, lending will become even scarcer than it is already, and banks will fall like dominoes. Credit will disappear, business of all sorts will retrench and millions of jobs will be lost.

Fear that Wall Street’s disease is infecting Main Street partly explains why the stock market has fallen 14 percent since the rescue plan was signed by President George W. Bush on Friday. That includes a 5 percent drop on Tuesday.
Sound companies are having trouble raising the short-term money they need to conduct routine day-to-day business. The Federal Reserve announced Tuesday that it would begin lending money directly to businesses through the commercial paper markets.
As important as a speedy response is, speed also can be the enemy of good judgment, and there are a lot of tough calls to be made. For example, Mr. Paulson can buy toxic securities from many kinds of financial institutions, or he can inject capital directly into them by buying preferred stock — essentially becoming a part-owner. Which approach he chooses probably will vary widely from situation to situation, requiring careful study and analysis.
Once the businesses’ balance sheets are repaired, panic should ease and credit should begin to flow. That’s the idea, anyway. But this anxiety attack has gone global, with European governments struggling piecemeal to save their own banks.
In America, the Treasury has to devise a system for buying toxic securities without any idea of what they’re really worth. There is no such thing as a market price for them because no one else will buy them. So the system Mr. Paulson constructs has to pay a price high enough to rescue the banks and other instutitions while protecting taxpayers from gigantic losses on doomed securities.

The Treasury plans to use so-called reverse auctions to set prices, buying them for as little as the sellers are willing to take. But these securities are so complex that often no one is sure what’s inside them, and each one is different from the next. Some very smart bankers may try to manipulate the system to push prices up. The Treasury must guard against this and publicly identify anyone who tries to beat the spread.
Congress was wise to attach some strings to the deal, such as restrictions on executive pay at financial institutions that participate in the rescue. That should help deter abuse. The government also can take ownership stakes in bailed-out companies.
With speed of the essence, the Treasury plans to hire private money management firms to handle the securities it acquires. But those private managers may well be associated with some of the very financial institutions that want the government to buy their bad securities. The potential for conflict of interest is obvious.
If the government gets the program right, it will cost the taxpayers far less than the $700 billion that Congress has authorized. It also will allow more homeowners to rework their mortgages and keep their homes.
But the devil is the details, and Mr. Paulson and his colleagues don’t have a lot of time to get the details right.

Caption:  President George W. Bush and Treasury Secretary Henry Paulson