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Thank God For Paul Krugman

If I had to put a number on it, I'd say Krugman is 10 percent more alarmist than I am, 75 percent more skeptical of the Obama administration, and about 25 percent more liberal. (And probably 100 percent smarter.) But, man, am I grateful he's around writing these columns. If Krugman weren't regularly asking questions from such prominent real estate, it's hard to imagine Treasury facing the kind of skepticism it faces. Which can only be a good thing given what happens if we get this wrong.

Today Krugman tackles something I have real questions about myself:

[T]op officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.

Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the “basic inherent economic value” of troubled assets and the “artificially depressed value” that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they’re worth much, much more.

And the government’s job, he declared, is to “provide the financing to help get those markets working,” pushing the price of toxic waste up to where it ought to be.

What’s more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions.

As Krugman points out, there are only two places to go from here: You either way overpay for the assets by heavily subsidizing the investors who buy them, which doesn't seem fair. Or you pay the fair price but leave a huge hole on the banks' balance sheets. Neither option seems especially appealing.

I guess where I part company from Krugman is that I'm willing to accept some unfairness if it'll solve the problem. I just don't think Treasury can make the subsidy large enough for the overpayment to suffice. (Alas, the political constraints are enormous.) So, increasingly, nationalization looks like the only option.

--Noam Scheiber