Paul Krugman: Geithner Has Persuaded Obama To Recycle Bush's "Cash For Trash" Plan

nytimes.com:

Over the weekend The Times and other newspapers reported leaked details about the Obama administration's bank rescue plan, which is to be officially released this week. If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy -- specifically, the "cash for trash" plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.

This is more than disappointing. In fact, it fills me with a sense of despair.

Read the whole story: nytimes.com

Comments

[katekid]

Ivory tower Krugman needs to stop the jilted ego-conomist act.
His constant bleating, makes my hair hurt and is a recovery distraction.

[RedEric]

Remember as well that Klugman wants Obama to increase deficit spending and increase the 'stimulus' in the belief the government (which cause these problems to begin with) can somehow spend its way out of a recession, something that HAS NEVER WORKED.

http://allanerickson.wordpress.com/2009/03/25/opposition-to-president%e2%80%99s-budget-from-both-sides-of-the-aisle/

[ObjectiveRealist]

Your portrayal of "government (which cause these problems to begin with)" is disingenuous at best. Senator Phil Gramm, and former Senators Leach and Bliley, are not and never were the sum of all the United States government. Their de-regulatory legislation allowed the complex fraud-driven financial bubble which has recently burst. It was not "government" generally which caused the problem, but the misguided agenda of "de-regulation" held by a few elected officials, which kept government _supervision_ out of Wall Street's crookedest affairs.

[Doofus]

An interesting presentation of ideas from some of the
heavyweights not on the Obama team, on the NYT today.

* Paul Krugman, Op-Ed columnist, Princeton University
* Simon Johnson, M.I.T.
* Brad DeLong, U.C. Berkeley
* Mark Thoma, University of Oregon

http://roomfordebate.blogs.nytimes.com/2009/03/24/will-the-geithner-plan-work

[Social Construct]

I think Mr. Krugman is correct, but what do I know, really? Yet, even in my ignorance of all things financial, I get a feeling in my pragmatic gut that there's something wrong with this plan. The scenario that keeps filling my visions of the future is that while this plan will make Wall Street interests and institutions look good Main Street will feel little, if any, benefit. In my humble and ignorant understanding of this plan, it looks, smells and feels like an end run with old trickle-down theory wrapped in shiny, new paper.

[Doofus]

There's something very true about this suspicion, but the essential
lubricant in American economics is Profit (not necessarily 'Greed').
The down-side of that is the 'trickle-down' part which is always there.
The 'system' wants you to take risks with your money, so you get to
be, got to be, a 'trickler' or a 'tricklee', sometimes both.

[JiminNC]

Krugman wants to make himself part of the problem. Shows that anyone can win a nobel ... Knowledge about economic matters does not make you smart enough to make good decisions.

[EmberOfTruth]

I like The Krugster (as I call him), really do. I have often quoted him in many of the political debates I have had the misfortune to find myself in. But in this case, I hope he's wrong. I just simply want the country to right this ship, regardless of whose plan saves the day.

[Michael Oluwagbemi]

Krugman misses the point. If things go aweful, does he really think these big private equity guys with billions on the line will just walk away? True the government puts up a chunk, but the alternative was to force the banks into bankruptcy in which case the government is left with 100% of the bad assets as well as a Lehman proportion crisis that will lead to loss of the progress already made. Or the conservative alternative of doing nothing? Really? What this partnership guarantees is two things: good faith and right pricing. The timing is right, most of these assets are evidently undervalued because of fear. But government still is in no position to price these securities due to legal and self interest problems. On whose interest would government price? Well now, the private investors have a skin in the game and will ensure to get the most optimum price possible guaranteeing that no overpayment occurs: and I doubt any of them will plan to walk away upfront (destroying a good reputation and future profit ) by paying too much for the assets anyway. If they make money, tax payers also make money. May be not as much as they would if the tax payers were in it alone- but that is without discounting that taxpayers would have overpaid doing it alone. I know Krugman is a fan of the Swedish model, but the Swedes have a tiny banking system. If Citi folds today, the FDIC will fold up

[Lemeritus]

I was with you all the way to "Well now, the private investors have a skin in the game and will ensure to get the most optimum price possible" for two reasons:

1. I don't think private investors tossing in only 3 cents of every dollar really have all THAT much skin in the game (two guesses who really does).
2. If private investors want to dabble in "toxic" assets, if they're so certain the assets are undervalued, then God speed! I don't have a problem backrolling the little blood suckers, but not at 97%. When investors don't really have skin in the game, all they're likely to do is create a new bubble.

Oh, and just to prove I'm not completely in the bag for Krugman, the Swedish model would never, ever work here. We need an altruistic philanthropic program disguised as a crass capitalistic idea.

[Jezreel]

PART 2

Nationalization is not always the best answer.

Our government has taken a different approach. The FDIC has already taken over (nationalized) many banks since the crisis began. In such cases, the FDIC assumes full responsibility for banks, cleans them up and then sells them off. Other firms, like Lehman Brothers have been allowed to fail . In some instances, firms like AIG and Citigroup, have been partially nationalized. The government owns part of the company but does not have full authority over its day-to-day operations.

Over the weekend, President Obama announced that his team is preparing major regulatory changes and governing authority over firms like A. I.G. The changes will allow the government to exercise more control over its operations and bankruptcy-like authority over is contractural obligations and organizational structure.

On Wednesday, the Administration announced that firms that cannot pass the stress tests, that are currently underway, will have 6 months to raise additional capital from private investors. If they can't they risk being taken over (i.e., nationalized) by the Federal Government.

Dr. Krugman seems to think that his is the only workable option. President Obama thinks that different firms face unique challenges and we should therefore have a variety of options avaiable to deal with different situations.

I believe the government's approach is much more practical and sensible.

Read this great article:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/02/28/BUSB166EG0.DTL&type=business

[msjimmied]

Have we become what we despise the most? people who do not question what their leaders do? We need dissenting voices and naysayers and people who give us another viewpoint or we could end up like the REPUBLICANS! Treasure the voices...

[liberalbug]

Agree. We own this trash now and people are celebrating a modest uptick in the stock market. It's ok to question your leaders, call them out on being wrong or shortsighted. I told this to my republican family repeatedly over the last 8 years. Now I fear democrats may be making the very same mistake.

[Lemeritus]

Not all of us. Just the very frightened. Me? I subscribe the the Will Rogers school: "I belong to no organized party. I am a Democrat."

[Jezreel]

PART 1

Please explain why the government (people of the U.S.) would be less indebted if we nationalized a company like A.I.G. Bank nationalization requires that we the people (us) assume responsibility for 100% of the company's assets and liabilities. That would include its day-to-day operations both in in the U.S. and foreign countries.

Is it legal for the U.S. to operate a publicly owned company overseas? If so, who would oversee it? The U.S. Congress?

If the company loses money U.S. taxpayers would be on the hook. We would be responsible for verifying Workers Compensation claims and unemployment insurance claims. We would be legally obligated to pay retirement and 401K plans. We would have to provide health insurance, vacation payments, etc.

That is what Dr. Krugman has recommended.

[cubs325]

did this guy win a nobel prize or an oscar - it is getting hard to tell you he is -

[AtheistUS]

Well, watch news with a little more attention - and you will get it.

[vinny]

This really is the biggest swindle in the history of humanity.

[LindaLeigh]

I don't agree with much of what Paul Krugman has ever said but I do believe he knows a heck of a lot more than I do. I just hope he's wrong about this.

[ssg13565]

When I had a boss ask me to do something that I believed wouldn't work despite having told him my misgivings, I came up with the strategy of giving his request my very best effort to prove that I was right. In the one instance I remember most vividly, I did succeed in accomplishing what he asked me to do. Both os us were glad I took the attitude that I did.

In another case, I was the decider. There was one employee who just kept on insisting that we do it his way. There was no convincing him that with the uncertainty of whether he was right or I was right, the least he could do was to give my decision a try. Despite this person's demonstrated past abilities he proved to be completely worthless on this project. Not only our group, but the whole industry left his ideas in the dust. He's probably still complaining to this day, 30 years after the fact.

It is up to Krugman to decide which kind of player he wants to be. If he turns out to be right, he can say, "I told you so". If he is wrong, he will be remembered as the most uncooperative SOB there ever was. I admire his courage to take the chance. He deserves everything he gets for making this decision.

[CherokeeGirl]

hey, you make some good points. This may just be another one of those "do it my way" tug o wars. I just wish that someone would get to the bottom of what's going on between the Treasury and the Federal Reserve. Seems like they all have way too many BBQs and golf together.

[Mikeeee]

Ok, so Obama is doing it right? Will you tomorrow go out and buy a home for $300,000 that is worth $50,000? because that is exactly what geithner and summer are doing with "your" money.
Now you may think it's good judgment, but I really don't see you going house shopping tomorrow to pay $300,000 for a home that is worth $50,000 to prove me wrong.
This isn't science, it's straight addition and subtraction and you would think your son a fool if he came home and told you he'd just done that.

[twofish]

"Worth" is a slippery notion. What a house is worth is what you can get someone to pay for it. What you are worth as an employee is what you can get someone to pay you. (Assuming no actual fraud on anyone's part, all hands above the table and nothing up the sleeve, so to speak.)

That's the problem, after the bubble bursts, what is a tulip bulb or a house in East Armpit worth? I'd suggest one way to start on an answer to the price of a house is to look at the median income and the current rents in the area. Median income dropping because jobs are being offshored or workers are being expected to "give back" in tough times? Oops, banksters, I guess those houses aren't worth what you would like them to be. The important thing is, it's all tied together and can't be decided in a vacuum.

[Jezreel]

Totally agreed. The longer this conflict of ideas between Dr. Krugman and Drs. Summers and Griethner, the more I think that Krugman is either jealous or resentful that he was not selected for a position with the Administration.

Also, today Krugman appeared on PBS, CNN and MSNBC. His article was cited on C-Span and on Faux Noise. In my view, Krugman's constant criticisms make him appear like an attention seeking, covetous individual who's painfully desirous of another person's position in the Administration.

Lastly, Dr. Krugman has only recommended nationalization of Zombie banks, cleaning them up and then selling them off to the highest bidder. In my view, that's exactly what the Obama Administration is doing, exept they aren't calling it nationalization.

[ssgman]

Nope, what Krugman suggests doing and what Geitner is doing are diametrically opposed. About as opposite as you can get, actually.

[vinny]

Giethner's plan is a shell game. It's a way of creating value for an imaginary object.

[ProudLiberalDan]

As you would say, "Yawn...."

Once again, an Obama apologist farts the same talking points out of her mouth.

Krugman has repeatedly stated that he did not want a position in the administration so that he could continue to speak honestly.

But don't let facts get in the way of your talking points about Krugman.

[Doofus]

Either Paul Krugman is (mainly) talking to other economists, and
we are just listening in, or he is seriously over-estimating our
ability (mostly) to understand what he's talking about.

It's not for nothing that economics is called the dismal science.

[Catothemuchyounger]

"When I had a boss ask me to do something that I believed wouldn't work despite having told him my misgivings, I came up with the strategy of giving his request my very best effort to prove that I was right. . . . It is up to Krugman to decide which kind of player he wants to be. "

What the Heck are you talking about??? Obama and his economic officials are not Krugman's "bosses" and he is not a "player" he is an independent pundit. If he was inside the Administration he would have to do his best to make the Administration policy work. But he is not part of the Adminstration. Why on earth should he not tell it like he sees it? And why should his real boss, the Times, continue to run his column if he is just going to fill it with Administration talking points?

This business of Krugman not being a team player or loyal servant makes no sense. He is not supposed to be either.

[AtheistUS]

If Geithner plan fails completely (I hope not), then nationalization of banks may go far more violently than it could be done now.