The New Treasury Plan

One thing strikes me about this new plan from Geithner to deal with the toxic assets weighing down the banking sector: doesn't this seem an awful lot like trying to create a new bubble to solve the popping of the old one?  [You could also say this about the housing rescue plan and the Fed actions to drive down long term interest rates]

Let's see, create an awful lot of cheap, non-recourse loans to get the 'market' to realize that these assets really are valuable.  Why? Because the underlying assets are strong?  No.  Because other investors think they are valuable, and all of us think so because this scheme creates a humongous subsidy for these assets.  This is bubble 101.  [Paul Krugman has a nice primer on how this scheme works in reality]

That said, I am not so rah-rah about nationalization as some other, much more prominent economists (like Krugman), because I believe doing so with just one big bank could topple the entire system as investors pull out in droves.  So I do believe in treading carefully.  So I hope this plan works, but I am worried...