WASHINGTON - Nobel-prize winning economist Paul Krugman said in remarks published on Monday that the latest U.S. Treasury bailout program is nearly certain to fail, triggering a sense of personal despair.
U.S. Treasury Secretary Timothy Geithner on Monday unveiled a plan aimed at persuading private investors to help rid banks up to $1 trillion in toxic assets that that are seen as a roadblock to economic recovery.
"This is more than disappointing," Krugman wrote in The New York Times. ""In fact it fills me with a sense of despair."
"The Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt," the Princeton University economist said, citing weekend reports outlining the plan.
"This isn't really about letting markets work. It's just an indirect, disguised way to subsidize purchases of bad assets," he added.
Krugman called it a recycled idea of former Treasury Secretary Henry Paulson, who later abandoned the "cash for trash" proposal.
"But the real problem with this plan is that it won't work," he says, adding that bad loans may be undervalued because there is too much fear in the current climate.
"But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus -- for that is what the Geithner plan amounts to -- will change that fact," Krugman wrote.
While the real economy is being hurt by the meltdown of the financial system itself, Krugman says this is not the first or the last time this has happened. And there are lots of roadmaps to get us out.
"It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books," Krugman said.
Time is running out on the Obama administration to take control of the banks - and the crisis.
"If this plan fails - as it almost surely will - it's unlikely that he'll be able to persuade Congress to come up with more funds to do what he should have done in the first place," he wrote.
The White House strongly disagreed with Krugman's assessment, defending the administration plans on the morning talk shows.
"I think Paul's just wrong on this one," Christina Romer, head of the White House Council of Economic Advisers, said on ABC's "Good Morning America" show just ahead of the plan's release.
"This is really tails both the government and the private sector win, heads both the government and the private sector lose. We both are going to have, as the saying goes, skin in the game."
(Reporting by Corbett B. Daly; Editing by Walker Simon)