Krugman v. Geithner et al.

Krugman has a decent op-ed in the Times this week. Unsurprisingly, he hits the nail on the head at one point. Noting that Geither's plan is a good deal for financial institutions, he writes:

If asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.

However, I think this conclusion might be missing the point. After all, we can all agree that the taxpayer is getting screwed here. (Even my redneck, Limbaugh-loving grandfather agrees with Krugman on this.) Therefore, if we move beyond the outrage of it all, what are we left with? Here is where the good professor loses me. He writes:

But the Obama administration, like the Bush administration, apparently wants an easier way out. The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.

Is that such a crazy concept? I absolutely believe those assets are worth more than the market is willing to pay. Financial markets, as complex as they may be, are driven by psychology. Anyone who has money to invest has to be at best wary (and certainly weary). I for one think Krugman is overstating the negative impact of Geithner's plan. Roubini is in the same camp.

Krugman is fantastic most of the time, but these days he is mixing the Kool-Aid. And everyone is drinking.