So what is the plan? I really don’t know, at least based on what we’ve seen today.

From Paul Krugman:

"The Rorschach plan (wonkish, or at least hard to read)

An old joke from my younger days: What do you get when you cross a Godfather with a deconstructionist? Someone who makes you an offer you can’t understand.

I found myself remembering that joke when trying to make sense of the Geithner financial rescue plan. It’s really not clear what the plan means; there’s an interpretation that makes it not too bad, but it’s not clear if that’s the right interpretation.

The plan deserves praise for what isn’t in it, at least as far as I can tell. There doesn’t seem to be provision for mass purchases of toxic waste at premium prices; there also doesn’t seem to be a massive “ring-fencing” guarantee against private losses on bad assets. In that sense the plan is better than what the last few weeks of leaks led us to expect.

What is in it, in reverse order:

1. Super-TALF: a big expansion of the Fed’s quantitative easing, with Treasury backing. I’m OK with that.

2. Private-public purchases of questionable assets; as I understand it, private investors would be the junior partners, so this is probably not a big giveaway (unless there’s huge public financing, in which case it amounts to ring-fencing after all). I also suspect it wouldn’t accomplish much, but no harm, no foul.

3. Stress test: everything depends on how this is actually implemented. What happens if, or more likely when, a major money center bank is stress-tested and found to have negative net worth? One possibility is that the auditors are told to come up with a different answer; that’s a big concern. The other is that the bank is effectively nationalized; as I read the language that could be achieved as part of the public capital injection.

So what is the plan? I really don’t know, at least based on what we’ve seen today. But maybe, maybe, it’s a Trojan horse that smuggles the right policy into place."

Me:

Your comment is awaiting moderation.

“2. Private-public purchases of questionable assets; as I understand it, private investors would be the junior partners, so this is probably not a big giveaway (unless there’s huge public financing, in which case it amounts to ring-fencing after all). I also suspect it wouldn’t accomplish much, but no harm, no foul.”

There are already savvy investors buying these Toxic Assets. When TARP was diverted from the purchase of TAs, the price dropped and people like John Paulson started buying them. When the government gets back in the market, the price and availability will dramatically rise. What you are describing is a subsidy to raise the price of the TAs. After all, if some investors are already buying them, why should private investors need a guarantee or subsidy? The point is to push up the price of the TAs.

The plan is to shift some or much of the losses from the banks and shareholders to the taxpayer. Nothing is more wasteful than a hybrid public/private arrangement. We’ve just had one. It’s hideously expensive and falls into the category of insurance for the banks, paid for by lobbying.

Apparently, Geithner believes that the interest’s of the banks and shareholders is more important for our economic arrangement ( A Crony Welfare State ) than the interest’s of the taxpayers. Going forward, he believes that the Investor Class will close shop because a few banks get taken over. And if they close shop, we’re not in business. I think that’s rubbish, but I’m not a member of the Investor Class.

The banks are in this for the long run. They’re wearing us down. Soon, we’ll be desperate enough to make them whole. The idea that this is an attempt to save capitalism defies belief. The bankers couldn’t compete in a free market economy any more than I could compete in the decathlon.

— Don the libertarian Democrat