It hardly makes things clearer: “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. 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 first sentence here is very strange. Private investors are not usually known to be keen to “share losses”, so this is an odd rationale.

Perhaps today’s announcement (1.45PM GMT) will clarify. Perhaps not.

It is an auction for a call option on the toxic assets with an option price of 0.15X, where X is the exercise price. When the auction establishes X, the government will then pay the bank X for the assets.

The underlying motivation seems to be that X is going to be a good approximation to the true (but said to be unknown — pace Markit) current market price of the toxic assets S. But that will only be so for a particular value of the asset price variance sigma (just solve the Black-Scholes formula with X=S and C=0.15X to get it). If asset price variance is some other value, then X may bear no close relation to S.

Krugman and de Long both seem to assume that the price will be at or close to current book value. But the NYT article on which they are drawing indicates that the price at which the assets will be purchased is going to be determined by what the hedge funds are prepared to pay for their share of the equity. What happens if there are no deals? After all, even with all the leverage they are getting, if the hedge funds concur with the rest of the market that these assets are worth far less than book, then at book price they would be buying a deep out of the money option.

We’d better wait until we get the full details before deciding whether it is any worse than the UK insurance scheme, which was negotiated behind closed doors and as such presumably entails an even more generous subsidy than implied by any workable scheme in which the price is determined in open competition.