Paul Krugman is one of the most astute commentators on American public life, especially as it relates to our economy. Winner of last year’s Nobel prize for Economics, he has been a tireless critic of the Bush Administration and has not held back now that Obama is in power.
It was disconcerting, to say the least, to read his criticism of the latest twist in the Obama attempt to fix the banking system and the credit markets. For those of you who aren’t following, Tim Geithner, the Treasury Secretary, announced today that along with the bank and AIG bailout plan for which we’re paying $750 billion, and along with the trillion dollars the Fed has just pledged to release into the economy to lubricate those stiff bank credit lines, and along with the $180 billion we’ve given as a gift to AIG, and along with the $100-$200 billion in guarantees to Freddie Mac and Fannie Mae…
…We are now planning to spend between $500 billion and a trillion (1000 billion) dollars to buy the “toxic” assets held by banks in some weird public-private investment scheme where we, the taxpayers, heavily subsidize the risk of investors purchasing these “toxic” assets. If they go up, the investors will make a ton of money, but if they go down, the investors will only lose a little while the taxpayer will lose a fortune.
This sounded to me like a recipe for disaster, but what do I know? The guys over at Treasury are smarter than me so I assume they have it all figured out.
Not so fast, says Krugman in today’s NY Times column. He uses the term “despair” in his title! Discussing the plan, which he calls “cash for trash,” Krugman writes:
This is more than disappointing. In fact, it fills me with a sense of despair.
After all, we’ve just been through the firestorm over the A.I.G. bonuses, during which administration officials claimed that they knew nothing, couldn’t do anything, and anyway it was someone else’s fault. Meanwhile, the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money.
And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.
But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus â€” for that is what the Geithner plan amounts to â€” will change that fact.
You might say, why not try the plan and see what happens? One answer is that time is wasting: every month that we fail to come to grips with the economic crisis another 600,000 jobs are lost.
Even more important, however, is the way Mr. Obama is squandering his credibility. If this plan fails â€” as it almost surely will â€” it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place.
All is not lost: the public wants Mr. Obama to succeed, which means that he can still rescue his bank rescue plan. But time is running out.
These are scary times.