They’re different interpretations of the situation that are based on different assumptions

TO BE NOTED: From Matthew Yglesias:

"Michael Spence on Geithner

Nobel Prize winner Michael Spence says the Geithner Plan is a good idea and that its critics are simply assuming that Treasury intends to implement it in an unsound and somewhat corrupt manner rather than talking about the right way to handle the program

Government therefore needs to confine the use and match the level of leverage to cases in which the value may be impaired but the uncertainty is low to moderate. If it permits the use of high leverage in high risk cases, it will end up funneling assets primarily into banks. The investors have to bid on the packages. With excessive downside insurance they would end up paying more than the packages are worth. […]

The reason this is important and not just technical, is that stabilising the financial system is going to require a complex set of government and central bank initiatives undertaken with imperfect knowledge of consequences.

That challenge is going to be much harder with a competent and well-intentioned government (which we have) if our fellow citizens who are understandably confused and very angry, think the government is trying to bail out the financial sector and doing it in a surreptitious way.

The more I’ve followed the back-and-forth on this, the less actual disagreement about the facts I think I’m hearing. What the critics are saying is that Geithner’s plan couldn’t possibly recapitalize the banks in an adequate way unless it was implemented as a horrible giveaways. What the defenders are saying is that if you implement the plan the correct way, it will be a helpful step toward resolving the situation at a time when it’s difficult to imagine the congress appropriating the volume of extra funds necessary to full resolve the issue.

Ultimately, these two points aren’t in conflict with one another. They’re different interpretations of the situation that are based on different assumptions about the competence and good will of the people involved. If you assume that the key policymakers are smart people doing their best, then you’re going to line up with Spence. You’ll predict a degree of success from the Geithner Plan followed by the need for additional action. And you’ll be concerned that over-the-top criticism of Geithner and the Treasury Team is going to undermine the political support that will be needed for further action. But if you assume that the key policymakers are inept, or unduly under the sway of big finance, you’ll see that a sound implementation of the Geithner Plan wouldn’t generate the needed volume of money, so the plan “must” be for a large giveaway. But either way, I think there’s actually agreement about both the nature of the financial situation and the fact that the implementation details matter a great deal here."