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Fool's gold

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This is probably the best discussion of the Geitner plan on the Internet, between real academic economists and everyone's favorite Nobel laureate.

The fear of nearly everyone else is that the hedge speculators will be willing to take small hits selling because their custody banks will be making a bigger spread on selling the new instruments to these speculators. But these economists are beyond that fear---they're just wondering if the plan will work at all.

The path that Main Street fears and the economists ponder the effect of is the path the government is not only enacting but also tacitly winking at. We are all supposed to be shocked, shocked as taxpayers when we learn that the bank's own hedge customers would be willing buy toxic assets for pennies on the dollar, with the spread boosted by taxpayers, and set themselves up to lose money. But if it works, the justification will be that it worked.

The thing is, the amount the taxpayers will lose is unreasonable compared to what we've seen in most of our lifetimes but not unreasonable over the course of economic history. We'll get a debt equal to 90-100% of GNP out of this...which we successfully endured as WWII ended, and which has also been endured elsewhere. The fact that it's all going to banks, and not atom bombs or Saabs, is what is most nettlesome here; but if the baby boom was drunk on debt, comes a time to pay for it. But if it will be able to pay enough of it to make American capitalism work again...nobody seems to be willing to predict with metaphysical certitude.