The $700 billion bailout package that the US Treasury Department has submitted to Congress finally addresses the root cause of the current crisis by aiming to remove distressed assets from the financial system.

Despite the severity of the crisis, the response by the authorities had until now been disappointingly limited and characterised by ad hoc decisions. The US Treasury package shows however that the authorities now appreciate the risk the crisis poses to the global financial system and to the real economy.

The package is being compared to the 1989 Resolution Trust Corporation set up to deal with the Savings and Loans crisis. It would allow the government to purchase up to $700 billion worth of bad debt linked to the collapse of the housing market. By taking these troubled illiquid assets off the balance sheet of financial institutions, it would restore strength to the financial system, thus allowing it to resume normal lending operations.

The measures now taken by the US authorities are the first directed at the root of the crisis. The idea is that by removing enormous amounts of bad real-estate debt and huge quantities of structured financial instruments that rest on that debt from the financial system, liquidity will be restored to the marketplace. Discussions about 'moral hazard' are useless in the current situation.History has shown that a banking crisis always requires massive fiscal bailouts. As Nicholas Brady, former U.S. Treasury secretary and Paul Volcker, former chairman of the Federal Reserve, wrote in an article in the Wall Street Journal this week: "The pathology of this crisis is that unless you get ahead of it and deal with it from strength, it devours the weakest link in the chain and then moves on to devour the next weakest link.".

Assuming that Congress moves to enact legislation to let the package go through in the next days, what will be the impact on equity markets? The rally in share prices that started on Thursday could last for a while. Beyond this technical bounce, the big question is whether markets have seen their lows for this cycle. Deleveraging in the financial system and the US household sector will continue meaning that the outlook for economic growth and corporate profits in the industrialised countries remains bleak. Equity markets seem to have started to price in some earnings risk but it is much too early to say that share prices already discount all the bad news.