Yesterday was a very important turning point in the ongoing twin crises, in the banking/financial system, and in the overall economy.

Expectations were riding very high that Treasury Secretary Geithner would pull a rabbit out of a hat, in a speech billed as an announcement of bold, new plans to stabilize the banks. Obama himself, the night before in his press conference, assured us in the manner of a glib salesman that Geithner’s speech would be most impressive.

You can see how impressive from a chart of the stock market. After a steady opening, stocks fell like a rock, almost from the moment Geithner opened his mouth. They never recovered, finishing the day down more than four percent. The sickening fall (led naturally by financial shares) was matched by a very strong rally in bonds. The large new issue of three-year Treasury notes was notably successful. The safe-haven bid for US government debt is back.

The Treasury Secretary really had nothing much to say. The bottom line is that the financial crisis is extremely challenging, and there aren’t any good answers. Geithner wants to avoid nationalizing America’s large banks (recognizing fully that the government doesn’t know anything about running banks). He wants to attract private capital bank into them, and he wants to avoid asking Congress for another TARP program of perhaps a trillion dollars or more.

As I explained to you yesterday, the banks are undercapitalized from the losses they’ve taken on mortgage-based assets, and the losses still have a long way to go. Insolvent banks can’t lend money, and the sheer scale of the losses they’ve suffered means that there may not be enough private capital in the world to bring them back. Full nationalization is probably the only choice.

So if Obama’s team really believe that this problem is a simple matter of building enough confidence among the world’s investors to come back out and play, they’re very wrong. And this is why I think Geithner looked and sounded so uncomfortable yesterday. He actually knows quite a bit about how banks and markets operate. And he knew he’d been sent out to sell a case for recovery that was about as compelling as when President Gerald Ford told us all to fight inflation by wearing WIN buttons.

I really don’t know why the Obama people chose to set up this speech as an oracular pronouncement that would bring confidence back to the markets, and I don’t know why the political team (including David Axelrod) got mixed up in helping Geithner decide what to say. Geithner has the experience and the intellectual equipment to do his job. What on earth was Axelrod doing in the room?

This says a great deal about the new President. He’s evidently seeing the twin crises as a problem of confidence that he can solve by waving the right magic wands. Obama has invested a very great deal in the story that he and his people are far ahead of George Bush, Henry Paulson and the now-hated TARP rescue plan. And not only Obama but also Congress, with Barney Frank having said on multiple occasions that the Democratic version of TARP would be very different and would work much better.

But Geithner proved unable to do more than acknowledge that he doesn’t have any better ideas than Paulson did back in October. This isn’t a confidence problem, and it’s not a problem we can solve by creating a secondary market for impaired assets. (Even in the best of times, back in 2005 and 2006, there were no aftermarket prices for mortgage-backed securities. That’s just not how these things work, and Geithner knows that.)

Obama has, in quite so many words and on numerous occasions, staked his Presidency on the idea that a large but carelessly written package of programmatic government spending on left-wing priorities will succeed in ending the economic recession. That’s the basket with all the eggs in it. From outward appearances, the President seems to have decided that the banking crisis will either take care of itself, or is susceptible to the blandishments of his charm.

And just wait till next month. The automakers will be driving (not flying) in from Detroit to ask for the next installment of their government stabilization program. (Just don’t call it a nationalization, a word that evidently doesn’t poll well.) A trillion dollars in stimulus is going to be hard enough. Congress will prove just as unwilling to put up tens of billions more for GM as they will be to post a trillion dollars more for a second bite at the TARP apple.

The next topics to consider are: what will be the market reaction, what can really be done about the banks, and most important, what can be done about the economy? Stay tuned.