Krugman: 'The Obama Administration Is Dithering' On Banks

In his column today, Nobel laureate economist and intermittent critic of the Obama administration, accuses the President and his economic team of "dithering" in their approach to the financial crisis. Writes Krugman:

Many analysts agree. But among people I talk to there's a growing sense of frustration, even panic, over Mr. Obama's failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern.

Krugman then goes on to explain this "holding pattern." He calls the administration out for presenting vague and inchoate proposals aimed at settling investors' nerves. When each new plan is shot down by "informed commentators", the administration simply replaces the old plan with a new one, which is actually just a slight variation of its predecessor -- and so goes the cycle.

Krugman then goes on to discuss "zombie banks" and suggests that the administration is in denial as to the full extent of the crisis:

So why has this zombie idea -- it keeps being killed, but it keeps coming back -- taken such a powerful grip? The answer, I fear, is that officials still aren't willing to face the facts. They don't want to face up to the dire state of major financial institutions because it's very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable.

Comments

[alanearth]

where was the nobel genius krugman when the economy went down the tubes under bushface.

[ntmessage]

Today unfortunately, Krugman, Stiglitz and Galbraith are inadvertently enabling different wolves. Splitting them up is the answer (Volker) not Nationalization.

1. When the "yield curve" is inverted, a recession is underway.
2. When the "yield curve" is positive it forecasts growth.

This indicator has never failed. Ever. It signaled the current recession months before we saw the impact. The indicator confirms the recession ending in months not years.

Unequivocally the current strategy by Obama and Geither is working.

No mass Nationalizations needed. No lost decades. No depression.

Greenspan thinks Nationalization is good, now? He was wrong before and is still wrong.

Rubini predicted a bubble. Who did not know we were in a bubble? His thinking has not changed, however. He was right at S&P 1500 we are at S&P 650, now. Today he is wrong.

Nationalization is simply a tool where big moneyed investors and vultures all over the world can pillage and loot America"s assets. Taxpayers must have their investments protected. It is amazing that we are demanding a return on an investment in just a few weeks, when the vultures are calculation huge ROI over years on our nickel. Silly and dangerous.

We still need to fix the regulations and transparency but Nationalization is a cataclysmic misuse of taxpayer money, and now irresponsible since the banks have begun the healing process.

Exposing the taxpayer to the Sharks that got us into this mess: Bankers, large hedge fund managers, sovereign funds; is the height of neglect.

[tompoe]

Krugman avoids acknowledging the 2010 budget calls for creation of national bank, funded through 2013. Wonder why the silence on this strategy?

[research]

90% of the stock market is Credit Default Swap Insurance, not stock.

600T$ CDS insurance debt overhang.

The insurance is on risky Shorting of companies.

bring back the uptick rule, look it up.

Ban and invalidate all CDS insurance.

It is pure fantasy to think you can insure away investment risk.

Put the FED under the treasury as the constitution requires.

Then the Treasury can create the money needed to fund FDIC and governmnet if all the banks fail.

Ban all derivatives so

Banker focus on Main Street investments.

[Whinger]

As a reporter or journalist of some sort, Mr. Krugman should report the facts and refrain from expressing self-opinionated analysis!

[Doofus]

Y'know, as a professional economist & college professor, Paul Krugman
doesn't 'do' journalism as such. What he does is pure, hopefully
well-informed, opinion & analysis, period.

[twofish]

We need a (3rd?) Bank of the United States. Give depositors in the zombie banks accounts in the new Bank, then break them up. The pieces that are full of toxic assets will die, other pieces may live. The new Bank can go about the business of lending to individuals and businesses again. If the Fed is just going to print money, we may as well do some good with it.

People are still not willing to face the fact that most of the credit default swaps (side bets on others' failures) are going to have to disappear back into the black hole they came out of. We're pouring money into the hole, hoping to fill it and let everyone go back to whatever they were doing when the housing bubble burst. It's not going to work. There isn't enough money in the whole solar system.

[research]

Credit default Swap insurance" Wall streets worst invention.

http://www.marketoracle.co.uk/index.php?name=News&file=article&sid=9307

[alanearth]

This is so they can take idiotic risks and still get their money back when they are wrong , AIG to the rescue ie taxpayers.

[lena22]

Screw the banks, the acted irresponsible. Just like CNBC talking heads say don't help the home owner, don't help the banks. If the auto companies can fail so can the banks. My credit union is doing great.

[toosinbeymen]

amen to that. I joined a CU after being jerked around by Bank of America for the nth time. I love the genuine personalized transactions. They respond to my emails, no robocalls like BOA. It's a little less convenient than having ATMs on every corner but I don't mind - the payoff is huge and I don't feel like I'm contributing to the monster machine.

[iblog]

It's PRESIDENT Obama, MISTER Krugman.

Not "Mr. Obama".

PRESIDENT. OBAMA.

[jackstpaul]

The use of Mr. Obama is the New York Times policy of referring to people already identifed in the article by any title they hold.

It has nothing to do with Krugman; it's NYT editors.

[harriscrl3]

Isnt there suppose to be some kind of global economic summit in April. Could that have something to do with why they are holding off on the banks?

Carol

[Doofus]

Y'know, there are MAJOR disagreements among economists about
how to proceed. There are Keynesians & Friedmanites & even a
Goolsbeean or two, oh my. A couple of MAJOR websites...

http://economistsview.typepad.com/economistsview/2009/03/paul-krugman-the-big-dither.html

http://baselinescenario.com/2009/02/23/privatize-the-banks-already/#more-2673

[Doofus]

& lest I forget...

http://delong.typepad.com/sdj/

[PhilipTaylor]

Nationalizing a bank is Easy, Fast, Cheap, Simple.

1. Simply take the bank over... Fire the CEO and the Board of Directors... They get nothing.
2. Declare the stock worthless, the share holders get nothing.
3. Audit the books, absorb toxic debts until and any positive balance pays Bond Holders.
__If bank is Deeply Bankrupt close it.
4. Put in new management to run the bank while it is under Govt control
5. Sell stock to recapitalize the bank and it is back in the private sector

Whole process takes a few weeks.

Thanks to rich misty for structure

[Doofus]

Fortunately (?) the stocks are heading towards worthless anyway, however
certain wealthy individuals, & you know who you are, will fervently object,
until they've had a chance to sell out. 'Nationalization' in 'capitalist'
countries is carried out by paying for the outstanding shares.
Fidel Castro, for one, did it the way you suggested & that
remains one of our major beefs with him to this day

Otherwise, I'm with you, Comrade!.

To the barricades, mes amis!

http://en.wikipedia.org/wiki/Liberty_Leading_the_People

[PureReason]

One the whole I think it's whats going to happen anyway.... The longer we wait the worse it's going to be...

I think I would change a couple of things though;

On #2: I would freeze the stock prices at current levels and allow the share holders to get at least a percentage of any new bank entities created in the end. If the banks is Deeply Bankrupt and can't be saved, then of course they would get nothing.

I would also split up the big banks into smaller regional savings and loans. This would force banks to add to the local economies their located in. And hopefully jump starting everything on a local level. Which with luck would spread....

[bhantol]

What if the government passes a law that puts a lower cap on how much any home can be sold by some kind of a formula that at least guarantee that a home CANNOT be sold at price lower than the what it was bought + 3.0 % appreciation every year.
That will establish the "home value cap" and at least the banks won't treat these as toxic assets and might as well keep the existing foreclosed homes or sell them since the price is guaranteed by the government.
Plus help people finding it difficult to pay their mortgages by buying out their loans and lending to the same buyer with very less or no interest rate until 2-4 years.

Also provide vouchers to banks instead of direct bailout money (heard this over NPR). The value of voucher would be determined by the amount of new loans it has lend by some formula (say a bank started lending $100 in new loans would be able to get encash the vouchers for $90 or some formula whatever makes sense).

AIG is a scam. Take over AIG. Throw illegal insurance stuff. Bank of America also need to be investigated.

Infrastructure development needs to be expedited. Open up the frequency bands for Google and other players. I am sure more technology innovations will come out of it and will add more jobs. Where are the green jobs ? This needs to be moved faster.

[ProudMormon]

Just because you can the bottom price doesn't mean someone has to buy it.

Hugo Chavez tries to cap the top price for food in his country, but that doesn't mean someone has to grow it. Venezuelan farmers are refusing to plant crops that cost them more to grow, harvest, and sell than they get in return.

That's what price controls do for you. They destroy the market instead of stabilizing it. Cap prices too high, nobody buys. Too low, nobody sells. It's pointless.

[PureReason]

Price controls always end up having the opposite affect. On adjustable rate mortgages, I would force lenders into rolling back the interest rates on all the loans they've made to the initial lending rate. If a person bought a house could afford the payments at that rate, they should now. I bank won't be making quite as much money, but they're be seeing more than they are now. (Yes, I know banks were making more money on foreclosed homes for a while there, and it seemed to part of the business plan, but not now.) This won't help all home owners; people who have lost their job are in trouble no matter what. This would hopefully reduce the reduce the extent of the mortgage problem to a manageable size.

[coolmessanger]

Banks should be at least temporary nationalized or left dead!
Because if they have to be rescued they may as well be rescued for the best cause: ALL AMERICANS!
Krugman is right on his analysis (what a brilliant mind!).
Obama should nationalize these banks and ask for another 5 to 10 TRILLIONS $$$ stimulus plan in order to get the economy back to work, otherwise, despite his good intentions, very difficult times are yet to come... Good luck to all of us!

[Carolab]

The banks are being made whole through the bailouts, as well as their investors--making the need to nationalize them moot--although why we should be on the hook for their bad debts is beyond me--we paid them, we should own them. Even so, if we nationalize the banks and not the Fed, the Fed gets off scott-free with a clean set of books--even though they "owe" Treasury for the money lent to buy the "assets" it is holding. If those assets are mere junk and they are pledged for this debt, we get zip in return and the Fed owes nothing. It is the Fed that must be nationalized or abolished. It was the Fed that fought against regulation in any way shape or form of the derivatives.

[Carolab]

Remember the Fed has also limited its liability by placing these "assets" from Bear and AIG into its Maiden Lane LLCs.

[barnybilt]

Whats wrong with nationalising the banks it just means the government takes them over and cleans up the mess and deals with the crooks. With crooks and robbers we take over their businesses and pay to clean up their mess and deal with them. The bankers and robbers should be in the same place rattling tin cups on the bars of a federal pen. I know everybody is afraid of the government handling anything with good reason but could they do much worse than these banks have already done. Is this the reason to let the banks continue ripping us all off and tearing the country apart while using our money to do it. Even if they so called were to get them fixed they will just go back to the same old practices and dig us all deeper down the road.

[leonel]

By close to consensus, Krugman is our most articulate economist. So I have a suggestion on his problem with our problems. Let's nationalize Krugman and make him work for us!

[coultersnemesis]

LOL the campaign to nationalize Krugman! ha! SO why isn't he working for Obama?...