I actually agree with Krugman:
But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.
The likely cost to taxpayers aside, there’s something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different. This is starting to look obsessive.
But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.
I guess that is not surprising. What he has to say is plainly obvious. What he doesn’t point out however, is the obvious circle-jerk that is taking place. Who are these “private investors” who will set the prices for these assets the banks hold? Banks themselves! What we have here is just another shuffling around of the money.
Bank A will create a vehicle, that, for 3% down, will buy assets from Bank B for 100% more than they are worth. (60c rather than 30c). Bank B then creates a vehicle that buys from Bank A, for 3% down, assets for 100% more than they are worth. The banks have both then sold assets which are worth 30c for 58.2c to the taxpayer. Banks get 28.2c of more free money from the government. Hooray.
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