Chris Carroll Reassures Me that I Am Not Crazy...
He, too, thinks that the Geithner Plan is a reasonable way for the Treasury to spend $100B of TARP money:
Treasury rewards waiting: [T]he US Treasury’s plan to rescue the financial system is a lot savvier about the relationship between financial markets and the macroeconomy than are the usual-suspects: critics from both left and right who are already pouncing on the Geithner plan.... [T]he Treasury has absorbed the main lesson from the past 30 years of academic finance research: asset price movements mainly reflect changes in investors’ collective attitude toward risk. Perhaps the reason this insight has not penetrated, even among academic economists, much beyond the researchers responsible for documenting it, is that it has not been expressed in layman’s terms. Here’s a try: in the Wall Street contest between “fear” and “greed,” fear fluctuates much more than greed (in academic terms, movements in “risk tolerance” explain the bulk of movements in asset prices). Such extravagant movements in investors’ average degree of risk tolerance have proven impossible to reconcile with economists’ usual benchmark ways of understanding peoples’ attitudes toward risk.
One [unsuccessful] response has been to try to reverse-engineer a “representative consumer”....
The second response to the market’s remarkable fluctuations in risk attitudes is more in tune with Warren Buffett’s view, following his mentor Benjamin Graham, that market prices move much more than can be justified by the sober judgment of someone with a long horizon and stable preferences....
Which brings us back to the Treasury’s plan. The details flow from an overarching view that... [market] risk aversion has become not just problematic but pathological. The different parts of the plan reflect different approaches to trying to coax private investors back into the market by reducing their perceived degree of risk to levels that even a skittish risk-shy hedge fund manager might find tempting. The government and the private investor would be partners in a Buffett-like arrangement in which the assets would be held long enough that the investors can expect to receive payments that have justified the waiting....
[T]he problem with the Paulson plan was never fundamentally with the idea that there were problems in the market for toxic assets, but with the idea that the right way to fix that problem (and everything else wrong with the economy!) was simply to have the government drastically overpay.... [T]he new plan from the Treasury gives private investors (who know more than Treasury about the likely payoffs of these securities) the pivotal role in competing to set the prices.... The private investors currently on the sidelines are not fools and have no incentive to lose money on the deal....
[I]t may be necessary to make any bank that participates agree to the sale of all their toxic assets, to prevent the kind of cherry picking.... And there is good reason to be very careful to minimize the possibility of “heads-I-win, tails-the-government-loses” kinds of bets. But broad-brush denunciations are unhelpful...
