Krugman: Citigroup Bailout Necessary, But Structured Outrageously

One economist who's not pleased with the way the bailout of Citigroup is structured is Nobel Prize winner, and Princeton economics professor, Paul Krugman. Krugman acknowledged that the bailout was necessary, but wrote on his blog that the structure of this bailout is an 'outrage':

A bailout was necessary -- but this bailout is an outrage: a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more.

Krugman also criticized the details of the Citi bailout on CBS' The Early Show:

"If Citigroup had not been bailed out, then the whole financial system could collapse," said Princeton economics professor Paul Krugman on CBS' The Early Show.

But is the government bailout of Citigroup well-structured, and are taxpayers getting a fair deal here?

Krugman, author of "The Return of Depression Economics and the Crisis of 2008" (Norton), says on first read, no.

"Most of the people who have looked at it, the small hours of this morning, have said this is a lot of taxpayer risk in return for not much," Krugman told co-anchor Maggie Rodriguez.

"It looks like a very sweet deal for Citigroup management, very sweet deal for Citigroup shareholders, to the extent they have anything left - not very good for the taxpayer. This was not good."

With other bailouts seemingly having done nothing to boost consumer confidence, Rodriguez asked, why do it if it is not well-structured?

"Well, you know, things could be worse, you know? That's been the moral of this crisis: things can always be worse,' Krugman said, "and they have been getting worse.

"Things could be much worse than they are. It's what hasn't happened, not what has, is the justification. We had to do this, but we should have done it better."

Wall Street cheered the news of Citigroup's bailout with stocks rising sharply.

Comments

[ploopy]

the big three have sold jets , and are now going to carpool back with their tails between their legs. tiger is needing more time with his family, and will be out of the buick endorsing contract... besides that, i keep hearing this "too big to fall" , or is it fail? but what i never hear associated with this is "the bigger they are, the harder they fall."

[ReasonIsMyReligion]

Big 3 bailout typically accompanied by talk of cutting autoworker pay.

Where's similar talk re No Banker Left Behind?

[ReasonIsMyReligion]

"Too Big To Fail" = Failure of Antitrust

[ReasonIsMyReligion]

Just because Bill Kristol is a New York Times columnist is no reason why no one in Washington seems to be listening to Krugman.

Feh. A Nobel Prize juts ain't what it used to be.

[Imabachi]

You appear to be one of the few in the country who truly, profoundly, understands; one sees the whole picture. But I keep wondering if the government being assembled by President-elect Obama has your understanding about the need for urgent action. Hopefully the new Congress does understand the urgency and will take action with alacrity and with force.

[sunzen]

Its a Pyramid built on a house of cards©®™

[IgIzBliss]

wrapped inside an enigma, covered by a paradox

[sunzen]

The entire system is insane.

[myshadow]

from 2006

...Published: WEDNESDAY, JULY 19, 2006
RIYADH: Saudi Prince Alwaleed bin Talal, the largest shareholder in Citigroup Inc., said shareholder patience is wearing thin over rising costs at the largest U.S. bank.

Then, as of one year ago the government of Abu Dhabi was the largest stockholder of Citi....

w is keeping his pals comfortable....

[ReasonIsMyReligion]

Then let the oil barons bail it out.

[Puzes]

YES! But will they? NOOOOOO ... they need their money to help their friends ... like say, Michael Jackson.

[sposton]

If these financial institutions are to large to fail they need to be taken over by the government. Shareholders value ought to be wiped out and business ought to be managed for what is in the interest of real American economy and taxpayers. I don't believe these banks can survive as privately owned companies. The management and shareholders have acted irresponsibly; why should we reward them? Nationalize now!

[BeyondGoodAndEvil]

They will be nationalized. Citi will probably still eventually fail despite the bailout. There's simply too much debt on their books and the Government/taxpayers can't possibly absorb that amount.

If Citigroup fails other banks will follow. Think of it like a domino effect. Then Governments all over the world will have to step in and nationalize their banks. They won't be able to fund all the insured accounts, so they will probably issue bonds to everyone in place of their deposits.

We are in the midst of something that is historic in nature and potentially catastrophic. And you can thank the Repeal of Glass-Steagall and ignorant legislators' lack of foresight for the whole mess.

Deregulation never works, because greed always trumps sense and ethics.

[who38]

Sad but true.

[sposton]

They will be nationalized after these banksters can hide away enough billions we are currently giving them. They will then use this same money to buy the recoverable assets from nationalized entities. Taxpayers and the short end of the stick go together.

[Puzes]

Paulson has been holding hands with the bankers for years ... this is cronyism at it's most blatant. And, as for the comment below about student loans ... how many kids are getting any more of them anyway? The drop out rate is awful but, likely to increase ... many of the parents have been laid off ...

[rjmiller]

One of the many reasons this is necessary is that Citigroup backs a large number of federal student loans, such as the Parents Plus and Stafford loans. If Citigroup fails it could lead to a high number of dropouts that could cause major universities to be unable to pay their bills. The dropouts would then be without a college education and be limited in their career options, causing the future of the US economy to be marginally worse.

[rpahk]

It was a mistake to outsource federally guaranteed student loans to the banks. My student loan in the 1970's was a direct student loan from government payable over 10 years after graduation at 3% interest. Very efficient and reasonable.

[Soulsurfer]

I don't think Paulsen can bring himself to do what needs to be done. He's one of the guys who bought into this whole shell game to begin with. Krugman has been calling BS on the trickle down deregulation Friedman disciples for as long as I've been reading him, and lo and behold, he was right. The anti-government schmucks have bypassed the market, and are now taking money directly from the taxpayer. What Krugman is pointing to is that management still gets its outrageous salaries, the share price might be temporarily propped up long enough for investors to sell it off without losing everything, and the government will be left with the shell of a company. Not such a good plan for us.

[vooter]

"If you don't give us the hundreds of billions of dollars we're demanding, THE WHOLE SYSTEM COULD COLLAPSE!!!!!" I say, let's give it a try. Let's see exactly what would collapse. THIEVES.

[who38]

Without regulation, the operating system won't change and it will fail anyway.

[Oldtimer]

Does anyone doubt now that Wall Street runs this country? I've been saying this since Arianna
opened the Huff Post. Washington serves Wall Street not the other way around. Wall Street is
holding a gun to America's head. It's blackmail. They charge 29% interest on credit cards when
Washington should enforce a cap of no more than 18%. They have a bonanza on mortgage fees
and bonuses then turn around and claim they are too big to fail. NOBODY should be allowed to
get too big to fail and I don't hear Krugman addressing this. Again I say Wall Street runs the country.
There will be no investigations let alone convictions.
Bush is leaving office with his ultimate achievement - a mortal attack on the real enemy -
the Middle Class. he neocons have been at war with working people since they took office and the
Wall Street crime gang has given them the ultimate weapon. This is not mutually assured
destruction mind you. Fat cats are too fat to fail but us working people? We can not only fail but
we can't seek bankruptcy now. What a great system if you are part of Bush's banquet base.

[who38]

Think it is more than Wall Street unless you are using that term metaphorically. I think that it is the world banks that are calling the shots. Maybe 50-100 people that are controlling all of the economies.

[cyndeewi]

If these banks are getting so much money where is is going? I would not give a cent to any of these banks unless they fired the top management.