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

[canarypapers]

I wish Congress had made the same demands on Citigroup as they did with the auto industry: Show us the plan, then we'll show you the money.

As Michael Moore so sagely and correctly asserted, had the Big 3 received their requested bailout, sans conditions, oversight and a plan, the money would have only gone "up in smoke, or off to other countries.­" Perhaps Congress should pay closer attention to Moore's prescription for the auto industry: First, clean out the entire management team (who, like the banking giants, suffer from self-inflicted wounds), then tell them exactly what they will be manufacturing from now on.

In Moore's words: "President-Elect Obama has to say to them [the auto industry], yes, we're going to use this money to save these jobs. But we're not going to build these gas guzzling, unsafe vehicles any longer. So, we're going to put the companies into some sort of receivership and we, the government, are going to hold the reigns on these companies. And they are to build mass transit. They're to build hybrid cars. They're to build cars that use little or no gasoline. And -- I mean because we're facing a national crisis -- not just an economic crisis, but a crisis of the polar ice caps are melting. There's only so much oil left under the Earth. We're going to run out of that, if not in our children's time, our grandchildren's time...."

[Oldtimer]

NOBODY should be allowed to become too big to fail because this results in blackmail of the
working class. When fat cats are too fat to fail the American worker is asked to feed them more.
Where is the outrage on behalf of the working class? These banks already charge 25 and 29%
interest on credit cards. Obama should announce an 18% cap that is more than fair. If a bank
can't make a profit on 18% then it should lose its charter.
Bush isn't fearmongering much these days but others are. We are being sold a new bogeyman
called the new Great Depression. I say let these poorly managed banks fail. Failure is part of
capitalism. These dirty capitalists have no risk, no fear of failing because the
working class will bail them out. America has to return to making things or all we will create is debt.

[mjtaylor22]

REMEMBER THE ANTI TRUST LAWS WE USED TO HAVE
REMEMBER GLASS STEGALL ACT OF 1933
WELL THIS USED TO PREVENT TOO BIG TO FAIL.
BUT THE GRAMM LEACH BAILEY ACT AKA SENATE BILL 3283 REPEALED THIS PRACTICTICAL LAW
OH YEA THAT WAS NOV 1999 THANKS PHIL GRAMM

[Pdubya]

glass stegal encourage offshore "investing". euphamism for moving jobs offshore. rubin was part of that, btw.

[Oldtimer]

This is a test to se if I'm banned.

[CheshireCat2]

Speaking from experience, if you are bann-ed (RIP DesertLight), you won't even get to make the post.

If you are referring to the "You are bann-ed from making comments," on the bottom of your page, it is a gliche that occurs from time to time. Just refresh your browser.

[artsandminds]

Yea, your not

[bigfro]

Krugman should run the FED

[ScapeGoat]

At the very least, he should be an advisor to Obama.

[Tubalcain]

There should be a clause in the structure that all these millionaire execs who most are already from wealthy or affluent backgrounds to begin with have to switch places with those who are not so well off. We'll give the million dollar salaries to the the people that actually work hard everyday to pay their mortgage, put food on the table,etc; and all of these smart dumb guys should get paid about $35K a year and change their lifestyle and go through it like the rest of us.

[HelenBach]

try $21,000 a year and no, we are not living in an HGTV McMansion, driving a Hummer or BMW

it made me sick to witness the AIG bailout and then hear about the spa retreats. And to hear it explained like, well, those were planned way in advance to keep the workers here. whaaaaa?
like the smallest company hasn't already cancelled their holiday party (complete with Costco meat and cut up veggie trays)

and it makes me even sicker to hear republicans blame the auto workers and their union for making crappy cars. They should just give up their benefits and everything will be ok?

[CheshireCat2]

I see that Paul Al-Krugman the Nobel Prize winner has chosen to remain on the sidelines as a critic rather than getting his hands "Dir-ty."

On Sunday night I asked the question, "How many people here actually work a job that results in paying taxes?" As predicting, for the most part I was repudiated for asking the question. I didn't ask the question to be a "sanctimonious as-s." I just came from the school where, "If you are not going to help row the boat, then don't rock it."

I have little respect for people like Krugman who claim and perhaps have a distinct superiority on the subject, have chosen to criticize as opposed to assist. This crisis we face is not a partisan crisis, it is an American crisis and our children and our future as a leader on the World Stage is at stake. For God sakes Paul, give the president elect a call and employ your mastery to help or else "shut up!"

[bigfro]

I'm building a new boat, go sink with your friends and scream deregulation so more companies like Citi can get short sold into oblivion. The smartest and the brightest maybe, but that doesn't make them honest. Once health care passes no rednecks will vote for your retread party because it will trump your BS religion.

[CheshireCat2]

Sail away baby!

[RoloTomassi]

"For God sakes Paul, give the president elect a call and employ your mastery to help or else "shut up!""

Excuse me, but you should be aware that that's not how it's done; when it comes to helping in this kind of political context, they ask, and you answer.

I strongly suspect that Krugman would be helping if he had been asked to do so; with that option not open to him, the most he can do is to speak out against what he sees going on in this crisis.

[HelenBach]

I'm thinking Obama needs to invite Krugman to the Brain Trust. And he absolutely should. Why hasn't he?

[Tubalcain]

The problem is not Krugman or other critics. The problem is Obama and his advisers who are of the "Milton Friedman-Chicago Boys" school of thought. The "deregulate everything" school that Krugman is not a part of-no matter what nobel prize he won, he is more of a Keynesian economist "liberate trade, regulate capital". It's hard to get the president elect's ear when you're he's surrounded by Ex-Clinton people, who are really moderate republicans in blue drag. There will be very little change, that was promised. How can we have change if its the same old people running the show. Sadly, this is the 3rd Clinton Administration but its actually being run like a plantation.

[1201SLD]

""Most of the people who have looked at it, the small hours of this morning, have said...:

Mr. Krugman can (and usually does) do better. So, some other persons, known or unknown, admittedly not at their best, have piped in with their opinions of this deal. Anyone, anyone at all, can tell us the downside of any proposed rescue or bailout sight-unseen; 100% down the tubes and horrendous unemployment for starters. Perhaps if clear minds take a measured look at this situation and solution in the light of day, some further benefit or virtue, less than worst-case, may be identified. Experience in other downcycles (yes, this one is much worse) show that if the rate of descent can be slowed and to some extent controlled, if more time is allowed for digestion of losses, then panic is reduced, ancillary solutions are put in place, and total downcycle loss and economic disruption are also reduced. Slight consolatoon perhaps, but...

[Trebor1]

The bailout is not working because it is concentrating on the symptoms, not the disease. The underlying problem is that mass production implies the MASSES have enough money to buy the production. Wages for all but the top 2% have been declining for a generation, in real terms. No one seems to want to put money in the pocket of the masses, all they do is talk about the credit markets. The average person doesn't need more credit -- he needs income. Wages will have to go up, or prices will have to come down, or goods will sit on the store shelves.

[oldfreedomdude]

I agree. Bankers from local banks in the Midwest and the Northeast have told me that the bailouts have nothing to do with them, that they are doing business as usual, according to solid old fashioned banking principles. If they they know you and you are a reasonable credit risk, they will loan you money. However, as Trebor1 says, the average person already owes too much money, and is also underemployed or unemployed, so certainly isn't going to borrow any more. The bailouts are for the speculators. Banks like Citbank are so greedy, that being given taxpayers money to 1-2% interest to loan back to the taxpayer at, for example, 7.550 % on Citbanks college loans, isn't enough, so they gambled for even higher profits. Now, once again, the taxpayer is asked to cover for them.

No more money to the big banks, give the money to the average person in terms of universal health care, energy efficient upgrades to homes, and public transportation.

[Trebor1]

Freedom - well said!

[DuganS1]

The underlying problem is not that the masses don't make enough money. It's that they have over consumed, and especially that the US consumes too much more than it produces. Real household income per family member and real disposable income has increased significantly over the past 20 years. Wages also don't include fringe benefits, which have gone up substantially in the past 20 years. About prices, they have already come down. Haven't you noticed?

http://3.bp.blogspot.com/_otfwl2zc6Qc/SLWCRVSqwHI/AAAAAAAAFgs/aEXmkxBOraU/s1600-h/income1.bmp

http://4.bp.blogspot.com/_8rpY5fQK-UQ/SQsiAKZapoI/AAAAAAAAExM/zLTxAGB-lno/s1600-h/dispos2.png

[bigfro]

FU jerkoff.

The smarter you are the more believable of a fake world you can create for yourself.

A country without manufacturing is a dying country. Everyone is making less money and credit does not equal wages. It just obviously fills your pockets at the expense of the rest of us.

Go ahead and Play blind and keep only for yourself, but don't attempt this BS in public greed monger.

[ScapeGoat]

There is a thing called "supply and demand". So far, demand has kept up with supply, not because wages have increase but because of increased credit. The bill is coming due and that is part of the problem. If wages were higher, demand would increase and the economy would do better. The economy is like a plane. One wing is supply and one is demand. If the wings are not even or if they are heaver on one side (supply, in this case) the plane will eventually crash (the great depression). You can have a million TV sets sitting on a shelf but if no one has money to pay for it, they will just sit there and the economy will collapse. As current real wages fall, the demand has been sustained by credit. As debt increase, the pay back also increases and when that catches up to us, you have a recession or worse, a depression­..

[Trebor1]

The masses in the US have over-consumed. But, as has been said 10,000 times, we are in a world ecomomy. The workers elsewhere in the world have had their wages held down for two reasons, to provide us with cheap goods, and so THEIR governemnts would have the cash to lend to the US. This melt-down is the result of robbing the workers of the world of their share of the fruits of production.

God smoted the stock and credit markets because we robbed His children.

[who38]

True enough. Thirty years ago, a family usually did not have two incomes. By making that change, the loss of income was not so noticeable. Now that both incomes have been maxed out, there will need to be another option. Stagflation?

[kdublya]

The bailout isn't working because banks are paying themselves first (see also hoarding.)

"OECD says interest rates should be lowered further"

'Indeed, though not part of the central projection, deflation would now appear to be a greater risk than an alternative where inflation expectations become unanchored, although neither eventuality has a very high probabilit­y.'

http://www.forbes.com/afxnewslimited/feeds/afx/2008/11/25/afx5738700.html

[Vinca]

IS THERE ANY FOREIGN CONNECTION TO CITIBANK? I DON'T HOW THEIR GAMES ARE PLAYED, BUT I'D LIKE TO KNOW

[garimpeiro]

Saudi Prince Alwaleed bin Talal owns approx 4 percent of Citigroup's shares.

[guppyinthecesspooloflife]

"Abolishing the Federal Reserve will allow congress to reassert its constitutional authority over Monetary Policy. The constitution does not give congress the authority to delegate control over Monetary Policy to a Central Bank. I urge my colleagues to put an end to the manipulation of the Money Supply which erodes Americas standard of living and enriches well-connected elites."-
Ron Paul
Speech before Congress 2002.

-The greatest threat facing America today is not terrorism or illegal immigration. The greatest threat is the shameless Deficit Spending of our Government and Federal Reserve currency devalution. The press sometimes criticizes Federal Reserve policy about the validity of the Fiat System itself is never challenged. History shows that when the destruction of monetary value becomes rampant the political structures become unstable. We then have good reason to be concerned about the future of our nation-
Ron Paul
Congressional speech April 2007

[1201SLD]

"Abolishing the Federal Reserve will allow congress to reassert its constitutional authority over Monetary Policy."

That would be just dandy. A bunch of uninformed special-interest conflicted lawyers arguing about monetary policy. I'll sit this one out.

[leftLibertarian]

Sounds better than secret Federal Reserve meetings. We the People have no idea where our money is going.

[Realization]

For years, Treasury has failed to help get a handle on the trade deficit and allowed the U.S. to become dependent on foreign lending. Not entirely their fault but Treasury should have recognized outflow of wealth is not sustainable, corrected currency rate imbalances vs. undervalued currencies that were part of targeted industrial policies, and supported a manufacturing base in the U.S. Treasury allowed itself to be enslaved to more borrowing.

Treasury's handling of the financial crisis is like a guys who want to go fishing but are afraid to touch worms to bate the hook. They really don't want to intervene but are forced to - so they do it badly. I would hate to have these guys leading my platoon in a pinch. They don't have the guts and decisiveness.

We do need to sustain the financial system. We also have to eliminate the trade deficits by getting out from under fossil fuels and by making cars in the U.S. (Look at the numbers, there is no other way.)

Our competition in autos considers the industry to be strategic and has protected home markets and supported domestic firms. Whatever mistakes they have made, U.S. makers are important - not just for jobs but to keep design, engineering and technology at home. This is national power. The goal should not be to just support the industry but to make it the world leader. Japanese, Koreans, Chinese (they will be coming) and Europeans understand this.

[DuganS1]

The problem is not under-valued foreign currencies, which makes goods cheaper for US consumers and businesses; it's that US consumers have over-consumed because of low interest rates, which indirectly resulted in the massive increase in commodity prices, of which oil makes up the largest part of the trade deficit. Bringing down the price of oil does more than anything by far in bringing our trade deficit back towards balance. The large increase in exports over the last three years has helped as well. Making all cars in the US that are purchased by US consumers is not a solution.

[gopee1990]

The bailout is a necessary one since it is america's second largest bank ..........­.....!

www.iwebforums.org

[jfor]

Does America really need banks as large as Citi? As a customer of many banks I can tell you that Citi is by far the worst in customer service, attitude and competance. If I had a choice, Citi would be the last bank in America I would do business with. I am not alone.

[mergina]

Really? And what PROOF is there of that claim? And if a bank is being run into the ground, then WHO is being held responsible, WHO is being fired because of their failures, and WHO is being arrested for the many illegal acts that have led them to this alledged point of needing a handout?

[DuganS1]

The proof should be obvious. The credit market seized up tremendously after Lehman was allowed to fail. Citi is much bigger and holds much larger assets than Lehman.

[leftLibertarian]

By your logic a bailout would be necessary for America's largest bank. And how about the 3rd? Aw heck the top 10? Where will it end and where will the money come from?

[mamacat]

Love that Krugman. Hopefully the next bailout will be done better.

I would like to hear him address the issue of how we are going to prevent the financial system from doing again what it has already done. What measures need to be enacted to prevent another melt down at some point in the future? Hopefully something can be done that won't be so easy for the Republicans to undermine.

[leftLibertarian]

The problem is once you have a bailout for Citi, you have lowered the risk bar for all other banks. Why not just send every American a check for - say 5 million dollars?

[gr8abz]

Krugman may be right (although he has a way of finding something wrong with most everything). Unfortunately I think the only realistic thing is to act on the bail out pronto and make the adjustments later. In times of dire emergency solutions are often far from perfect. However, I wager there is more to come in terms of the handling of this deal down the road. Meanwhile I am relieved they took action.

[leftLibertarian]

LOL