Treasury Secretary Timothy Geithner pledged government financing for programs aimed at spurring new lending and addressing banks’ toxic assets, an effort that may grow to as much as $2 trillion.

The Treasury is creating a Public-Private Investment fund, with an initial capacity of $500 billion that could grow to $1 trillion, to provide financing for private investors to buy distressed securities, Geithner said in a speech in Washington.

The Treasury will also work with the Federal Reserve to finance as much a $1 trillion in new consumer and business loans. The newly established Consumer and Business Lending Initiative is modeled on an earlier program to support new credit.

“This initiative will kickstart the secondary lending markets, to bring down borrowing costs, and to help get credit flowing again,” Geithner said.

The third component of the Treasury’s strategy is an assessment of the banking system’s condition, accompanied by a second round of capital injections. The Treasury’s new investments in banks, in the form of convertible preferred securities, will be placed in a Financial Stability Trust, Geithner said.

“The financial system is working against recovery and at the same time the recession is putting greater pressure on banks,” Geithner said in the text of a speech in Washington. “It is essential for every American to understand that the battle for economic recovery must be fought on two fronts” –job creation and reviving credit markets, he said.

Fresh taxpayer funds come with tighter restrictions on banks, including limits on dividend payments, acquisitions and executive pay.

(Source: Bloomberg News)