There are two poles to this "toxic trash" debate: those who believe the trash is worthless (Krugman) and those who think it undervalued (Geithner). I side with Geithner and hope his plan works. The worthless camp ignores the fact that the "subprime" CDOs et al. are securitized by real property. Surely this real property hasn't lost all it's value? Granted, the underlying assets (homes) have dramatically dropped in value. But they haven't dropped 100%. And even in the case of CDOs with foreclosured mortgages the CDO owners generally are in the front of the line when it comes to disbursement of foreclosure proceeds. Furthermore, the default rate in the bundles of mortgages (hundreds even thousands) that make up CDO's is nowhere near 100%. That means that CDOs still have some sort of revenue stream; it's just the uncertainty surrounding the future default rate that makes the CDO's untradeable. The level of uncertainty surrounding the return on any given CDO prevents investment. Thus you are left with a CDO that has physical and monetary value but no price. This is largely a problem of faith, and is not one necesarily rooted in the lack of any value in the securitized assets comprising the CDO.
What Geithner has that Krugman lacks is faith in the ability of the market to work out the value of the underlying securitized assets. Krugman thinks that the market cannot work out the value of CDOs even though they are securitized by physical property and revenue streams from current mortgages. It is impossible for Krugman for there to be a market solution to the market's crash. For Krugman derivative trading is discredited. I disagree. Properly regulated derivatives like CDO's are useful because they ameliorate risk and free up capital. This crash is like most others, a product of excess and not the result of some innate flaw in derivatives. No one blames the 1929 crash on innate flaws in the concept of stock shares. While I don't know if Geithner's plan will pan out, I do think Geithner's right to have faith in capitalism's ability to scavenge itself. Capitalism is first a predator but second a scavenger.
