Brad DeLong's explanation of the Geithner plan -- which is what everyone appears to be agreeing to call it -- is really a must-read. It's a much better explanation of the plan than, say Timothy Geithner's explanation on the plan, which more asserts the plan's goodness than explains it. Brad DeLong's explanation also has the virtue of a comments section, which includes this scary riposte from Robert Waldmann:
Geithner's argument and yours is based on the claim that there are assets whose market price is far below their hold to maturity value. Why isn't Warren Buffet buying these assets ? Because he is terrified by the Zeitgeist ? Because he isn't patient enough to hold to maturity ? Preferred stock in Goldman Sachs yes, CDO's no. Do you think you understand how to make money by combining contrarianism and patience better than he does ?I mean he has a track record, he has tons of money and he is not buying CDOs.
The plan is not simply premised on a firm assumption that the assets are mispriced rather than effectively worthless. It's also premised on the assumption that there is so much uncertainty in that judgment that private investors will not make it on their own. In other words, there's a seemingly fundamental incoherence here: We agree that only private investors can price the assets. But they are signaling that they don't think the assets are worth pricing if they must bear the risk. So we are bearing the risk for them. The plan, it seems, is to ask the private market what these assets are worth, but to pay them handsomely to deliver the answer we want.
