Old wine in a new bottle

As best as I can tell, the Geithner Plan to save our banking system appears to be the old Paulson Plan to buy mortgage backed securities and a bunch of other crap at inflated prices. The Administration has just repackaged this REALLY BAD IDEA so that instead of buying them directly, we incent the private sector to do so with our money.

The plan relies on private investors to team up with the government to relieve banks of assets tied to loans and mortgage-linked securities of unknown value. There have been virtually no buyers of these assets because of their uncertain risk.

As part of the program, the government plans to offer subsidies, in the form of low-interest loans, to coax private funds to form partnerships with the government to buy troubled assets from banks.

Bad, bad, bad. This amounts to giving the banks a massive subsidy using private equity as the bag man. So much for moral hazard, free markets, etc. And what’s worse, there is no guarantee that the banks will actually start lending again even if we do fork over wads of cash. We have no controlling stake in the banks and as such, little say on how they operate. Finally, if and when this plan craters, there will be little stomach in Congress to give the Administration another bite at this apple. Obama may only get one shot to fix this mess and this plan has FAIL written all over it. But don’t take my word for it; here is Krugman on Geithner’s position:

This is more than disappointing. In fact, it fills me with a sense of despair.

Oh boy - this is going to end poorly.