Thoughts on the Geithner Plan

Paul Krugman is the most noted opponent of Timothy Geithner's "pubic-private partnership" plan to fix the problem of toxic assets. In fact, today he says:

It’s a bit disappointing to see the Obama administration engaging in this sort of market-worship — hailing markets as a Good Thing in themselves, rather than as an often but not always useful means to an end. But I have reason to think that unlike the Bushies, they don’t really believe it; it’s just politics. Which is actually better than having genuine market fanatics running things, I guess.

This recalls a question that our own SevenDollarPen had asked in an earlier post:

Maybe someone can explain this to me. Why does it make any sense for taxpayers to give billions (or more) to these banks and not own the banks? Why are profits privatized and losses nationalized?

Paul Krugman thinks it's all politics. Interestingly enough, despite the fact that I think this is true, I am not entirely opposed to it (though admittedly my knowledge of the situation is somewhat limited). This is a delicate situation that I feel requires a bit of politics. Geithner himself is in a very tight spot. Regardless of the action he takes, he is bound to face criticism from the left and the right. Consider the ramifications of announcing his current plan. People on the left, such as Krugman, fault Geithner--and the Obama administration--for pandering to Wall Street and not being bold enough to advocate a policy of nationalization and public ownership. And although Wall Street jumped with joy at the news, people on the right will still continue to accuse Geithner of supporting big-government. However, would the alternative have been a better direction to go? As Andrew Leonard writes:

On the other hand, just suppose Geithner had followed the Krugman plan, and announced the immediate nationalization of Citigroup and Bank of America on Monday morning. It's hardly a stretch to imagine an ensuing market crash as bad or even worse than what we have already witnessed. And market crashes don't just hurt the pocketbooks of the rich. They wipe out pensions and have an undeniable effect on consumer psychology.

If the stock market goes down, right-wing critics declare that Geithner (and by extension, the Obama presidency) is a failure because "the market" has lost confidence in the administration. But if the stock market goes up, the left wing suspects that's only due to the unfair funneling of taxpayer money to Wall Street. If one constituency is satisfied, the other is bound to be distraught.

Leonard actually goes on to argue that in this climate, it's silly to imagine a middle path that could please everybody. However, I don't think we should be so skeptical of the plan just yet. True, nationalization seems to be the most promising route, supported now by many economists besides Paul Krugman, including Doug Holtz-Eakin, who was McCain's economic advisor during his campaign. Yet, consider Mark Thoma's comments on the matter in a wonderfully informative post entitled "Which Bailout Plan is Best" (Thoma, by the way, is a supporter of nationalization):

I prefer nationalization because it provides a certainty in terms of what will happen that the other plans do not provide, the Geithner plan in particular, but it also appears to suffer from the political handicap of appearing (to some) to be "socialist," and there are arguments that the Geithner plan provides better economic incentives than nationalization (though not everyone agrees with this assertion). The Geithner plan also has its political problems, problems that will get much worse if the loans that are part of the proposal turn out to be bad as some, but not all, fear. So all three plans do the requisite things - get assets off the books and provide recapitalization - and each comes with its own set of political worries.

So I am not wedded to a particular plan, I think they all have good and bad points, and that (with the proper tweaks) each could work. Sure, some seem better than others, but none - to me - is so off the mark that I am filled with despair because we are following a particular course of action.

What do you--the readers--think about the plan? Comments are welcome! By the way, for a very clear analogy of the tenets of the Geithner plan as compared with other bailout proposals (i.e. nationalization and the old Paulson plan), read this post by Mark Thoma, which relates the current situation to cars in a lot.