Barack Obama's rescue package won't fix the problem, says economist James K Galbraith.

In his testimony to the House Financial Services Committee, reported here, Galbraith says the problem is worse than what's portrayed and that all the Treasury plan would do would be to preserve the wealth of investors and bank insiders. Everyone else would suffer. And any turnaround would be a long way down the track.

"In this situation, stuffing the banks with money will not change their behavior,'' Galbraith said. "Bank chiefs have made it very clear, in testimony here and elsewhere: they will not return to ordinary commercial, industrial and residential lending until they can see a reasonable way to make money at it... More likely, they will hunker down, invest in Treasuries and prime corporate bonds, and rebuild capital for the long-term, as they did from 1989 to 1994. Only this time, with the yield curve as flat as it is and the insolvencies as deep as they are, it could take a decade or longer.

"The Treasury plan, if put in place as described, would have a perverse effect on the distribution of wealth. To guarantee bad assets at rates above their market value is simply a transfer to those who hold those assets. It would enable them to convert those assets, sooner or later, to cash. The plan would thus preserve the wealth of bank insiders and financial investors, while failing to prevent the collapse of the wealth of almost everyone else. I cannot believe that the American public will tolerate this, for very long."

The only answer, he says, is to put some of the banks into receivership and restructure them. But even when that's over, it won't be a return to business as usual. We are now experiencing a long and painful process of change.