My question about the Geithner bailout plan

So Timothy Geithner unveiled the Obama administration’s bank plan today. Brad DeLong likes it. Paul Krugman hates it. The markets loved it, but, if you think about it, part of the reason there’s been a financial meltdown is that the markets has the ability to misprice a lot of stuff, so let’s discount this data ...

By , a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast.

So Timothy Geithner unveiled the Obama administration’s bank plan today.

Brad DeLong likes it.

Paul Krugman hates it.

The markets loved it, but, if you think about it, part of the reason there’s been a financial meltdown is that the markets has the ability to misprice a lot of stuff, so let’s discount this data point juuust a wee bit. 

Who’s right? 

I’m not sure, and I’m really jet-lagged.  However, this is important, here’s my quick and dirty and partially-informed take:  

Krugman’s position is the statement that Geithner’s plan is just a warmed-over version of Paulson’s initial TARP plan to buy toxic assets.  I don’t disagree with that assessment.  By implication, however, Krugman thinks that since so may economists thought this idea was bad back in September, it is therefore bad now. 

If memory serves, however, the reason for this economic consensus at the time was the idea that it would take too long for this buyback program to work.  With credit markets near frozen, the idea of injecting the banks with capital was thought to be a better and quicker idea.

Fast forward six months.  While the bottom has fallen out of a lot of markets, the credit crunch has eased.  There is now time to execute some version of the original TARP idea.  Furthermore, the people doing the implementing have more political legitimacy than the lame-duck Bush administration. 

In other words, I think this plan has a much better chance of succeeding than the original TARP plan.  But I’m nowhere near sure of this. 

Comments on the intrinsic merits of the plan are very much appreciated. 

Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast. Twitter: @dandrezner

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