The Geithner plan is so bad, that I agree with Krugman it has little chance of success. But unlike Krugman, I'm not in despair, I'm optimistic.
The key to the plan is an open auction for the trash assets. That's the Presidents secret tunnel escape route out of this mess.
Ok, my search for optimism over this plan may indeed be an act of irrational desperation, but I don't want to join Krugman in despair.
Here's the way, I think, this is going to work.
Hedge funds take a look at the trash and decide what they're going to bid on the stuff. The government puts up something like 95% of the money and the Hedge fund puts up 5%. There's not much risk for the hedge fund, but there still is risk. In order for the banks to become solvent, they will need to sell the trash for at least 80% of what they payed for it.
There's the problem. Given that a lot of the Lehman trash sold for 9 cents on the dollar last October, I don't think there are many hedge fund managers who are willing to bet that this stuff is going to be worth more than 80% of it's original value in a few years. In fact, since the housing market continues to drop and the commercial real estate crash is just getting underway, my guess is that few managers will be willing to pay more than 50 cents on the dollar.
So the President may get a chance for Plan B, when they give an auction and nobody comes to bid.
But here's my path to despair. The worst case scenario is the hedge funds pay the higher price for the trash, then buy a ton of Credit Default Swaps from some company that is desperate to raise cash (AIG, Citi ?) and the hole gets a lot deeper when the real estate bubble can't be reinflated.