Blogs Assess the Geithner Plan

The stock market likes the proposal, but the online commentary isn't as favorable

By Karyn McCormack

Reactions to Treasury Secretary Timothy Geithner's plan to purchase toxic assets announced on Mar. 23 were deeply divided and largely critical of Geithner, even though stocks jumped 7% on the news.

The main debate was between economists Paul Krugman and Brad DeLong. Krugman, the chief critic of the plan, wrote: "The Obama Administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system—that what we're facing is the equivalent of a run on an essentially sound bank." He goes on: "This plan will produce big gains for banks that didn't actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized."

Krugman also said: "I fear that when the plan fails, as it almost surely will, the Administration will have shot its bolt: It won't be able to come back to Congress for a plan that might actually work."

DeLong, an economics professor at University of California at Berkeley, believes Geithner's plan will ultimately reduce unemployment. "The Fed's and the Treasury's announcements in the past week are what we think will be half of what we need to do the job," DeLong wrote. "And if it turns out that we are right, more programs and plans will be on the way."

Down Memory Lane

Plenty of other blogs jumped in on the action, with many siding with Krugman. Robert Kuttner, co-founder and co-editor of The American Prospect magazine, wrote: "Basically, the Treasury is colluding with private speculators to create off-balance-sheet entities, to offer new windfall profit opportunities and disguise the true degree of risk. If this all sounds vaguely familiar, Geithner's Treasury, with no sense of irony, is offering a reprise of the several abusive and opaque gimmicks that produced this crisis, a tour that winds back down Memory Lane, from AIG to Enron."

"The main purpose of this entire strategy is to disguise the true depth of the hole in bank balance sheets and to prop up insolvent banks, not to repair the larger system," Kuttner wrote. "It has been largely designed by and for the same Wall Street players that created the crisis."