So Tim Geithner has announced his toxic assets plan in a column in the Wall Street Journal, and reactions are pouring in.

Paul Krugman makes a lot of sense on this: here's his initial take, a further explanation, and an example to show why Wall Street loves it. I've provided a summary of his argument after the jump. On the other hand, Brad DeLong has provided an FAQ on the plan that Krugman finds unconvincing.

Anyway, more below.

Paul Krugman's argument (and he's right, as usual) is that this toxic assets plan is bad: it's founded on the notion that the toxic assets are dramatically undervalued when we know for a fact that they are, at best, just a little undervalued. We know that the subprime mortages are the cause, and we know that it was a bubble. This plan essentially asks private investors to help reinflate that bubble, which seems like an ill-advised thing to do because...well, it's a bubble, and bubbles always burst.

The other questionable part of the plan is that private investors are being subsidized to invest in these toxic assets and therefore have relatively little to lose if (when) the assets indeed turn out not to be dramatically undervalued. That would leave the taxpayers holding the bag yet again.

So when the Dow shoots up 6% after the announcement of this plan, that shouldn't have everyone thinking that it's a good plan, because it's not. Of course, if the administration decides to stick with this plan, using Wall Street's approval of the plan would be a solid political tactic to rally support. But the reason they like it is because they stand to make a lot of money with relatively little risk to their personal finances; the majority of that risk is shouldered by the taxpayers.

That said, this plan at least takes some action to open up credit lines again, which is a vast improvement over nothing. Wall Street does like it, and there's broad political support for it, with the exception of the reliably obstructionist Congressional Republicans. Brad DeLong has some good stuff in support of the plan as well. An important factor in economic health is expectations; if there's broad support of this plan, consumer confidence may well come back and this could have real positive impact despite its flaws. So while Krugman is probably right, this plan does take steps, even if it doesn't cross the finish line.