Krugman doesn't think much of the latest Geithner plan. Surprise, surprise.
Notice that the government equity stake doesn't matter -- the calculation is the same whether private investors put up all or only part of the equity. It's the loan that provides the subsidy.
And in this example it's a large subsidy -- 30 percent.
We are sort of puzzled, however, that he hasn't fixated more on the effect the plan, and the inflated marks it could create, will have on related assets that are stuck in mark-to-market mode, and that this may be the Treasury's real goal. After all, imagine the multiplier the Treasury is getting this way. Consider:
Agency and non-agency mortgage backed securities outstanding were about $7.5 trillion in late 2008. If a mere 10% of these are currently afflicted with the evils of mark-to-market accounting because they have become Level III assets (we can't help but think of Schedule III narcotics whenever we see that), the Treasury is in a position here to buoy up marks on $750 billion in assets with the use of $50 billion in capital. (Assuming half the $100 billion PPIP program is used on the Securities rather than the Legacy Loan side of the problem and that the figure stays at $100 billion for the entire program). Plug in your own figure for the amount of subsidy you think the Fed's leverage is putting on the marks and do your own calculation as to the effects.
We think the plan is just re-inflation (and we bet the Administration really wishes Krugman would shut up about this subsidy stuff) but at least it seems it might be effective re-inflation.
Geithner plan arithmetic [The New York Times]