…In the end, this looks the same to me as the plans in which the government simply buys the bad assets. In Caballero’s plan, the government doesn’t lay out cash, but provides underpriced insurance that creates large potential liabilities. In the asset-buying plans (including Geithner’s public-private partnership), the government does lay out cash, but gets assets that have some value, and could have more value in the future. In either case, the ultimate size of the bill depends on whether or not the assets recover in price; once the risk has been transferred to the government, the rest is just details.
Now, that doesn’t make this option necessarily any worse than the others. I believe the goal is to have healthy banks, and the taxpayer will pay one way or another. So the asset insurance proposal deserves consideration.