So Timothy Geithner outlines his plan to save the US financial system this morning in The Wall Street Journal. in that piece, he unveils the Public Private Investment Program which will use US Treasury Capital and financing from the Federal Reserve, the Federal Deposit Insurance Corporation, and of course money from private investors, to create a fund that will buy the banks' so-called "toxic assets". It will cost $500 billion with the "potential to expand up to $1 trillion over time".

"The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses," Geithner writes. "Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets."

The problem with this approach is that investors aren't really taking that big a risk, it's underwritten by the US Government. It's a point taken up by economist Paul Krugman this morning. As Krugman points out, private investors are being asked to put up a small amount of their own money, and in return they get large, non-recourse loans from the taxpayer to buy bad assets.

"For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn't, that's someone else's problem,'' Krugman says. "Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard. 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."

The big worry is what happens when this plan fails? Does it leave the Obama administration with enough political capital to develop a plan that actually works? Like nationalizing the banks.