Yikes, a plan....

Unfortunately for all of us, Krugman is probably right.

The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.

And so the plan is to use taxpayer funds to drive the prices of bad assets up to “fair” levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use “the expertise of the market” to set the value of toxic assets.

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 banks would be crazy to begin to sell their troubled portfolios of assets while Geithner continues to promise them that at some point somebody will overpay for them. First it was 'the market', then it was 'the hedge funds' and now it is a combination of private capital with an explicit guarantee from you and I.

As Krugman points out, this is looking weirder by the day:

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.

There are any number of other plans out there that do not rest upon the idea that these assets need to be purchased in such a way that the banks are saved. Temporary nationalization is just one. Why this administration remains fixated on the Goldman Sachs Recovery Plan is now looking very odd.