Is Tim Geithner a 'Toxic Asset'?

Financial rescue plan, take two. Today, Timothy Geithner unveiled his plan to clean up the worst financial mess to hit the country in over 70 years. Read the official summary here. At its heart is the goal of ridding the toxic assets from the balance sheets of our nation's banks. That overwhelming ballast is precisely what is keeping our economic balloon from rising off the ground, and is the result of a byzantine and overly exuberant economic model--built up over decades--that has resulted our historic predicament.

While there is no real argument over what's presently weighing down our financial sector--economists on the right and the left agree that until the toxic assets are dealt with, there can be no real recovery--the way to deal with them remains a touchy subject. Essentially, the quandary facing the Treasury Department is: How best to throw good money after bad?

The Obama administration formally presented the latest step in its financial rescue package on Monday, an attempt to draw private investors into partnership with a new federal entity that could eventually buy up to $1 trillion in troubled assets that are weighing down the nation's banks and clogging up the credit markets.

Geithner has decided that a combination of private investor and federal government capital is the way to go. For reasons yet to be fully explained, he very much wants to avoid nationalization. And this has Paul Krugman, among others, in a very bad mood:

Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy--specifically, the "cash for trash" plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.

This is more than disappointing. In fact, it fills me with a sense of despair.

The role of the private investor has been fleshed out a bit in this new plan. At issue is whether or not these savior investors will actually shoulder any risk for partnering with the government, and how much upside there will be for US taxpayers if the plan turns out to work:

The private investors would be subsidized, but could stand to lose their investments, the taxpayers could share in prospective profits as the assets are eventually sold, the Treasury said. The administration said it expected participation from pension funds to insurance companies and other long-term investors.

Unlike the first roll-out of Geithner's toxic fix, the stock market is rallying. But the real test of this plan will be measurable in the months, and, yes, years ahead, not by the hourly bounce of of the DOW industrials.