Krugman Wonders What Geithner Means

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Like everyone else, Paul Krugman can’t quite tell what it is Timothy Geithner’s “plan” is supposed to be. But he agrees that there seems to be some chance that there’s backdoor nationalization in the scheme:

Stress test: everything depends on how this is actually implemented. What happens if, or more likely when, a major money center bank is stress-tested and found to have negative net worth? One possibility is that the auditors are told to come up with a different answer; that’s a big concern. The other is that the bank is effectively nationalized; as I read the language that could be achieved as part of the public capital injection.

So what is the plan? I really don’t know, at least based on what we’ve seen today. But maybe, maybe, it’s a Trojan horse that smuggles the right policy into place.

My read of the situation is that this isn’t an epistemic problem where we don’t know what the real plan is; rather the plan is just undefined. What was announced today leaves the door open to handling this the right way. Unfortunately, it also leaves the money open to the dread zombie bank scenario.