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 — for that is what the Geithner plan amounts to — 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 — as it almost surely will — 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.

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themiddle

11 Comments

  • So, you’ve officially jumped ship, eh, Middle? Hope there’s room in the lifeboat next to Maureen Dowd.

    And it took Krugman’s piece to make you finally lose faith in Geithner?

  • I was wavering about him when the AIG mess came out, but in some ways that was still Bush/Paulson legacy so I let it go. I really lost faith today when I read the description of the “toxic” asset bailout. It came to me right then that all the evil people have benefited from what is killing the average Joes and Geithner has been a sponsor from the beginning and I’m not sure it’s working. Personally, I am paying a lot in taxes and don’t benefit in any way from this giveaway, while the folks over in New York, North Carolina and Chicago who did this to all of us, are walking away with bonuses, saved careers and their hands continually out for more with Geithner/Obama obliging.

    Obama said that one can’t rule from anger, which is legitimate, but this approach of throwing money at the wrong side of the problem is ridiculous.

    You know, considering how much this has cost and will cost, why don’t they just make a gift of $25,000 to half the families in the US (50 million families means total cost around $1.25 trillion) and watch as the economy soars back to life?

  • Jesus ck, I wrote like 17 million posts and another 72 million comments in the past couple of days while you were hanging out god knows where and now you’re giving me grief about a missing link?

    Sheesh!

    There, I fixed it. 😉

  • ps, Tom, under certain circumstances that don’t really fit my life currently, I would gladly accept an invitation to hop into Dowd’s lifeboat…that’s one sharp woman.

  • There’s not a dime’s worth of difference between Paulson, Geithner, Robert Rubin, even. They’re all from the same Goldman, Sachs culture– hell, they’re all Democrats, aren’t they? They didn’t see any of this coming, yet continue to be deemed worthy of high public office.

    There’s no basis in our experience of these people that their incontinent fiscal policies will lead us out of this mess– quite the contrary. The recovery, when it comes, will originate with the private, not the public, sector. But we’ll still have deficits that will make the Reagan and Bush II versions seem like small potatoes.

    Change we can believe in, eh?

  • Well, in Obama’s favor is the fact that he walked into this pit and has to deal with it. He’s also not a trained economist so when people like the ones he has working for him tell him the country should make a u-turn at the third stop sign up ahead, he has to accept their advice.

    Still, I agree that this is all very ugly and worrisome.

  • Krugman was on Charlie Rose last night. He argued that the administration needed to implement an RTC/FDIC, S&L-style approach in which banks are put into receivership and restructured, with the government pruning bad/non-performing assets and selling them at auction (to private investors, other banks, etc.), without the subsidies involved in Geithner’s plan.

    I did some legal work on the periphery of the RTC workouts, and that agency was certainly effective; its auctions greatly reduced the hit to taxpayers of the S&L failures (Krugman mentioned a total cost of $130 billion).

    The principal objection to that approach in the current crisis is that far more, and far more important, institutions are involved. The sheer scale of overvalued assets on the banks’ books may make wholesale receivership unrealistic. (Think Japan circa 1990.)

    On the other hand, no one knows whether even Geithner’s subsidies will entice private investors to buy ‘toxic’ assets from the banks. The subsidies, and/or discounts from the banks aside, the assets may be worth far less than the banks think they are, and far less than most investors are willing to pay. If the government itself (via the FDIC) put the banks in receivership, the assets would simply be auctioned off to the highest bidder.

    Krugman was quite critical of what he saw as a series of halfway measures by the administration (e.g., an underfunded stimulus), and was pretty hard on Obama personally, with some sharp remarks about his detached leadership style. He seems to think a government takeover of the banks is simply a matter of time once Geithner’s plan fails.

  • I agree about the halfway measures. I understood why he played Mr. Nice Guy with the Republicans on the Stimulus but it was a mistake. That bill needed to be bigger and all money into the economy instead of tax cuts.

    I don’t know where I read it but the only place where tax cuts seem appropriate and helpful right now is a cut for working men and women so they can have more take-home pay.

    I also believe that there would have been a market for the “toxic” assets even without subsidies. If you must have subsidies, why so big? Also, why do it without a clear assessment of what is owed by these banks? Are we funneling billions to dead companies?

    I hope Geithner is right and Krugman is wrong, but so far, if you look at their records over the past 6 months, Geithner has been wrong a number of times and Krugman is usually right.

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