Reactions to Treasury Secretary Timothy Geithner's plan to purchase toxic assets announced on Mar. 23 were deeply divided and largely critical of Geithner, even though stocks jumped 7% on the news.

The main debate was between economists Paul Krugman and Brad DeLong. Krugman, the chief critic of the plan, wrote: "The Obama Administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system—that what we're facing is the equivalent of a run on an essentially sound bank." He goes on: "This plan will produce big gains for banks that didn't actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized."

Krugman also said: "I fear that when the plan fails, as it almost surely will, the Administration will have shot its bolt: It won't be able to come back to Congress for a plan that might actually work."

DeLong, an economics professor at University of California at Berkeley, believes Geithner's plan will ultimately reduce unemployment. "The Fed's and the Treasury's announcements in the past week are what we think will be half of what we need to do the job," DeLong wrote. "And if it turns out that we are right, more programs and plans will be on the way."

Down Memory Lane

Plenty of other blogs jumped in on the action, with many siding with Krugman. Robert Kuttner, co-founder and co-editor of The American Prospect magazine, wrote: "Basically, the Treasury is colluding with private speculators to create off-balance-sheet entities, to offer new windfall profit opportunities and disguise the true degree of risk. If this all sounds vaguely familiar, Geithner's Treasury, with no sense of irony, is offering a reprise of the several abusive and opaque gimmicks that produced this crisis, a tour that winds back down Memory Lane, from AIG to Enron."

"The main purpose of this entire strategy is to disguise the true depth of the hole in bank balance sheets and to prop up insolvent banks, not to repair the larger system," Kuttner wrote. "It has been largely designed by and for the same Wall Street players that created the crisis."

Yves Smith at nakedcapitalism doesn't like the plan either. He wrote: "The banks own some paper that is truly worthless. This program won't solve that problem." Smith also criticizes the plan for a competitive bidding process, which he says will "elicit a higher price which is BAD for taxpayers!" He goes on: "Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone's eyes to glaze over".

Peter Boockvar wonders: "Is this just an act of Houdini where we're just shifting assets to the taxpayer who will have a 50% ownership rather than seeing an extinguishment or payoff of the debt which would happen without this program over time."

The Approach Is Toxic, Too

Arianna Huffington took shots at Geithner in a post entitled "Take the steering wheel from Geithner's hands." She wrote that he has delivered "his approach to the crisis that is as toxic as the assets that have hamstrung the economy. Geithner, brilliant and hardworking though he is, is trapped within a Wall Street-centric view of the world and seems incapable of escaping." Among other things, Huffington points out that Geithner was "instrumental in the original bailout of AIG and the creation of the TARP plan. And he was a key player in the decision to let Lehman Brothers fail." She wrote: "Geithner's actions throughout his career are proof that the toxic thinking that got us into this mess is part of his DNA."

John Carney at Clusterstock wrote a mock letter from Geithner mimicking the infamous Nigerian investment scam letters that have invaded our e-mail boxes for so many years. "We decided to search for an external assistance because we are having problems recovering large amounts of investments made in assets backed by real estate assets," the letter said.

Mike Shedlock at Mish's Global Economic Trend Analysis wrote: "There have been a lot of intelligent comments by Yves Smith, CalculatedRisk, and Krugman. So far no one has said what I think the plan is: a gigantic confidence game."

However, Mickey Kaus at thinks DeLong won the debate. "Congress can't afford to not give Obama another chance to fix the economy," he wrote. "It would be like deciding, in the middle of World War II, that FDR's strategy wasn't working and he'd lost a lot of credibility—so we'll just have to lose the war. …On the issue of rescuing the economy, Obama is too big to fail."

Before it's here, it's on the Bloomberg Terminal. LEARN MORE