Public Private Investment Program (i.e. the Geithner Plan)
Against
Paul Krugman is against the Public Private Investment Program (PPIP). I tend to agree with him mostly because the current plan subsidizes the private investor a lot. This description by Nemo explains the mechanics well.
For
The rationale for the plan is that we need to subsidize the private investor to get the markets working, which are now undervaluing the toxic assets because of the reinforcing “irrational” downward spiral. The subsidy lowers the risk to the private investor so gives them incentive to buy. Brad DeLong basically makes a similar argument in favor of the plan here and here.
For the treasury’s own explanation of the plan, see this.
My thoughts
I think it makes more sense to use a strategy similar to the response to the S&L crisis in the 1980s or the Swedish crisis. It would basically treat things more like bank insolvency, which is what it is. The downside of this is we don’t how bad the repercussions will be for the rest of the economy. Many financial institutions hold bank securities and would loose out a lot if banks became insolvent. In some respects, the PPIP is buying time (and legacy assets and loans).
Despite this down side, I still lean toward handling the toxic asset issue without a subsidy because at heart I am a fiscal conservative and tired of extending government loans. In this case it's, the FDIC’s non-recourse loans.
Paul Krugman is against the Public Private Investment Program (PPIP). I tend to agree with him mostly because the current plan subsidizes the private investor a lot. This description by Nemo explains the mechanics well.
For
The rationale for the plan is that we need to subsidize the private investor to get the markets working, which are now undervaluing the toxic assets because of the reinforcing “irrational” downward spiral. The subsidy lowers the risk to the private investor so gives them incentive to buy. Brad DeLong basically makes a similar argument in favor of the plan here and here.
For the treasury’s own explanation of the plan, see this.
My thoughts
I think it makes more sense to use a strategy similar to the response to the S&L crisis in the 1980s or the Swedish crisis. It would basically treat things more like bank insolvency, which is what it is. The downside of this is we don’t how bad the repercussions will be for the rest of the economy. Many financial institutions hold bank securities and would loose out a lot if banks became insolvent. In some respects, the PPIP is buying time (and legacy assets and loans).
Despite this down side, I still lean toward handling the toxic asset issue without a subsidy because at heart I am a fiscal conservative and tired of extending government loans. In this case it's, the FDIC’s non-recourse loans.