WASHINGTON -- This week's $1 trillion question is whether Treasury Secretary Tim Geithner's public-private bank bailout plan will lure enough investors into buying up bad assets to end the nation's lending paralysis.
Wall Street cheered the plan -- as well as a welcome increase in home sales -- by sending the Dow Jones up nearly 500 points on Monday. But economists and cautious leaders in the financial community had their doubts.
The plan calls for using the fast-dwindling remainder of the $350 billion share of the bank-rescue money when economists say a great deal more will be needed to finance the government's share of the buyout deal.
Financial experts told me Monday that private-investment funds were going to be hesitant about buying up assets "when no one knows how much they are really worth."
Former Securities and Exchange Commission chairman Arthur Levitt told The Washington Times on Monday that investors will be "very, very cautious" about participating in Geithner's plan.
New York Times columnist Paul Krugman, the scourge of American capitalism, said Geithner had talked President Obama into "recycling" the Bush administration's "cash for trash" plan that then-Treasury Secretary Henry Paulson tried last year -- only this time with a few more bells and whistles.
But Geithner's scheme is a one-way bet that's doomed to fail, Krugman argued. If the government's incentives to buy the bad assets drive up their value, investors and banks profit; if they don't, taxpayers will be left holding the bag. Krugman, a bleeding-heart socialist, thinks the feds should take control of the insolvent banks, as Sweden did in the 1990s.
University of Maryland economist Peter Morici levels similar complaints. The plan Geithner "is cooking up could unnecessarily stick the taxpayers with big losses on those toxic assets and give the banks big, unearned profits. It could save many bank executives' careers, while running up the federal deficit even further and undermining international confidence in the dollar," Morici said.
Other economists maintain there are not enough funds left in TARP's resources (even with government loans and guarantees) to bankroll a plan aimed at potentially trillions of dollars in bad assets. Treasury will need at least another $400 billion to make a noticeable dent in the toxic assets clogging up the financial industry's books, said Wall Street economist Mark Zandi at Moody's financial-rating company.