Can Geithner plan work?

NYT does one of its "Room for Debate" online discussions that has Paul Krugman (Op-Ed columnist, Princeton University) Simon Johnson (MIT), Brad DeLong, (UC Berkeley), and Mark Thoma (University of Oregon) dissecting the administration’s public-private program. The Geithner plan only works if the government can convince private investors that buying crappy mortgage-related securities is potentially lucrative (assuming the prices of the assets start going up) and relatively risk-free (the government takes on most of the risk). The plan is immensely complicated and carries a massive price tag and the truth is no one has the slightest idea of whether it's going to work. Krugman is obviously a doubter, but others are more equivocal. At the risk of being overly simplistic, the arguments seem to rest on how you feel about nationalization of the banks. Krugman has been pushing for the government to take temporary control of the most troubled institutions; the Obama people are clearly looking to avoid that step. Anyway, here's a summary of their comments:

Krugman:

Well, the stock market loved the Geithner plan, which proves … nothing. Stock investors have no special knowledge here; they’re groping like everyone else. For what it’s worth, credit markets didn’t react much at all. But let’s back up and focus on the fundamentals. In essence, the Geithner plan is the same as the Paulson plan from six months ago: buy up the toxic assets, and hope that this unfreezes the markets. Don’t be fooled by the apparent role of private enterprise: more than 90 percent of the funds will come from taxpayers. And the way the funds are structured provides a strong incentive for investors to overpay for assets.

Johnson:

Secretary Geithner’s plan might work, in the sense of facilitating the removal of some “toxic” assets from the balance sheets of major banks. But it is unlikely to work, in the sense of restoring the banking system to health. There are already several trillions of troubled assets to deal with and this total may rise as we head deeper into recession. The Geithner plan needs to scale up in order to have real impact, but as it gets bigger the political backlash will grow. This kind of complex market-based scheme makes scams easy. After less than 24 hours, the Internet already abounds with detailed and plausible proposals regarding how to take unreasonable advantage of the plan, either if you are an independent hedge fund buying toxic assets or the employee of a bank selling the same or – ideally – someone with connections to both.

DeLong:

I suspect that in the end we will be driven down the road to some form of bank nationalization — and if that is where we are going Paul Krugman is correct to say that it is better to get there sooner rather than later. But unless Paul Krugman has 60 Senate votes in his back pocket, we cannot get there now. And the Geithner Plan seems to me to be legitimate and useful way to spend $100 billion of TARP money to improve — albeit not fix — the situation. It has the added benefit, I think, of laying the groundwork to convincing doubters of nationalization: “We tried alternatives like the Geithner Plan and they did not work” might well be an effective argument several months down the road.

Thoma:

How will policymakers be able to tell if the plan is working? The first thing to watch for is whether private money is moving off the sidelines and participating in the program to the degree necessary to solve the problem. If the free insurance against downside risk that comes with the non-recourse loans the government is offering doesn’t induce sufficient private sector participation, then it will be time to end the Geithner bank bailout. Even if increasing the insurance giveaway would help, legislative approval would be unlikely and the political fight that would ensue would hurt the chances for nationalization. If the price of these assets is increasing sufficiently fast, then the loans will be safe.

As I said, nobody knows, everybody is guessing, and the economy hangs in the balance. Cocktails anyone?