Is Paul Krugman Afraid of His Own Logic?

Nobel Laureate economist-columnist Paul Krugman has a problem: he can't draw the obvious conclusions from his own analysis of the banking crisis. In his April 27 column, "Money for Nothing," Krugman makes a great case against the enormous pay packages Wall Street is still awarding itself.

• First, he says quite accurately that "there's no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks."

• Next he argues that such high pay is not justified by the so-called innovations produced by Wall Street -- like those disastrous subprime mortgages (a point I also made in "Let Us Now Praise Luddism").

• And finally he states that the free market is no position to set bankers' wages because "Wall Street is no longer, in any real sense, part of the private sector. It's a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a.k.a. 'welfare.'"

So what does Krugman propose to do about it? Silence. Okay, that's not quite fair: He says he hopes our leaders "carry through with real reform." Which is what?

Let's help him out by following through on his own logic. If Wall Street is a ward of the state then the state should set its pay scales just as it would with any other government agency (or welfare recipient). Here's a generous solution: Why not a President's Wage Cap? No one in a financial institution that receives bailout funds or loan guarantees of any kind should receive more than the President of the United States. (That's $400,000 per year.) No exceptions, no deferred compensation, no stock options...just a hard wage and benefit cap, not unlike what autoworkers now must live with.

Is that fair or what?

One thing's for certain, unless we come up with a hard cap, bankers will continue to pay themselves lavishly, only this time with taxpayer money.

Please, Mr. Krugman, lead the charge!

Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity -- and What We Can Do about It, (Chelsea Green Publishing, June 2009)

Comments

[plebeianswillrevolt]

pretty disgusting that the so-called "market" is up 25% and had the best month of gains in 9 years, of was is many more years than that.

Who out there is buyng that crap? .... a stock? What the hell is a stock anyway. An equity, a piece of ownership..... one day this toilet paper is going to be seen for what it really is.

[jomellon]

In Germany a cap of 250 k Euros on pay was set for any banks availing of the bailout. Simple.

[sand252]

I understand that is logical? But is it practicle or possible? Isn't an issue that is thrown in the mix the fact that certain banks did not need any government money, but was sought after to take it so that it would not expose the actual banks that need it? If that is so, then limiting all compensation even for those that did not either cause the failure of the system and did not need aid is a bit harsh given their cooperation with the government on behalf of other collegues. I think the point is that there can be fair and reasonable actions taken, but there cannot be a blanket rule for all. The reality is that these companies were making $ hand over fist and then sharing it with its workers. Thus, there should be regulation implemented that prevents such profit. Additionally, it is the American people that are permitting these profits by using the services of companies that have only its best interest in mind. Instead of the convenience of many banks, may be we should use more credit unions and/or responsible banks that did not engage in credit default swaps, bad subprime mortgages, etc.

[TJCole]

Cap salaries at $3 million per year how about that, then any bonuses must come in stock shares valued at the time of stock sale not annual peak, and that is directly connected to performanc­e......and even profit imagine that, what a novel concept.....?

[LesLeopold]

Just posted another piece on a related topic at http://www.huffingtonpost.com/les-leopold/headline-from-hell_b_192236.html. take a look.. thanks

[LesLeopold]

Not at all sure, Dr. Krugman is ready to set bank compensation packages even under temporary nationalization. You're right, the Titanic is what to do about banks that are too big to fail. Krugman advocates temporary nationalization as the answer. But why will that prevent the problem from recreating itself after the "good" banks are sold back to private investors? Haven't we just patched up the gash in the side of the boat and switched owners?

[PhilipTaylor]

The Executives and Employees have taken so much of the Profits from their banks the Banks are Bankrupt!

These people who in 1980 made 20 times the average worker NOW MAKE 400 Times the Avg Worker!

Remember $10 to $100 Million Christmas Bonuses on top of $10 to $50 Million salaries!

They ruined their OWN Banks and want to continue while WE the taxpayers Bail their Banks OUT!

THEY RUINED THEIR OWN BANKS!

[sposton]

Perfect example of capitalism self-destructing. Contrary to market Utopians we did not get either efficiency or effectiveness. Instead we got this massive self-inflicted meltdown in a self-reinforcing downward spiral. If this failure happened under a socialist system we would not hear the end of the story on how socialism failed. Why don't we have an honest examination of our system? It is painfully obvious that the system has failed on multiple levels. How are we going to fix something we are refusing to believe it has failed?

Capitalism is great at taking credit of anything positive but it absolutely refuses to to take any responsibility when things go wrong. It strikes me as something a fraudster would do, fearing that any admission of responsibility might reveal the whole fraud.

Watch Larry Fink's explanation about what's happened and who is responsible:

http://www.ft.com/cms/3cf2381c-c064-11dd-9559-000077b07658.html?_i_referralObject=1079742267

[h3mlf]

Had we taken Krugman's advice in 2008 we would be months ahead in our economic recovery with a savings of billions to the taxpayer - but the Titans of Wall Street and their minions who run our financial institutions had the ear of Paulson and Bush and we were set on our current path. President Obama "stayed the course" which insured that the bold steps proposed by Krugman (letting banks fail, engaging the working poor & middle class as the engine of our recovery, etc) would not be implemented in the near term, rendering those solutions increasingly less productive - the opportunity cost of placing trillions in the system before the system was improved. Obama, had he taken Krugman's advice, may have changed the economic landscape to one in which working class and middle class people would be the drivers of the recovery and we would not be sitting here today waiting for the banks we bailed out to ease credit to those of us who need it. We should have listened to Krugman and others when it could have made a real difference to the American people - now we are pretty much stuck with what Bush gave us in 2008. Krugman is a National Treasure, and although he may not be 100% correct, he is looking at this problem not only as a genius "Professor", but as an American who loves his country and who understands the inability of the market to address the socioeconomic component of a

[sonofsamphm1c]

Following Krugman's plan would have cost at least as much as we have spent, and there is a pretty good case to be made that his plan would have cost far more.

Do you think allowing a bank to fail is free?

If Krugman were 100% correct, then why didn't he press for the job. He didn't want the job. Maybe he knows about holes in his plan that you don't.

He doing what he does best, shouting insults at the players from the cheap seats.

[FalconerHK]

I find it interesting that the debate remains framed into two idiotic choices:

1. Let the banks fail, as in fall off a cliff, board up the doors like a failed 7-Eleven store in a suburb somewhere, or

2. Pour trillions of dollars into banks that won't disclose how much toxic paper they're holding in hopes of somehow, someday "fixing" them so they'll loan money again.

Krugman has never suggested scenario #1; he simply wants the FDIC to do its job. #2, as we've seen, is insidious at best for reasons already beaten like countless dead horses. And he's already said why he's not working for the administration. Given the failed resumes and Wall St. connections of those that do, I would consider it a compliment NOT to be part of it.

You're criticizing someone you obviously don't know much about using talking points you've not fully contemplated. Let the Nobel Laureate do his thing, unless you're thrilled with the administration's progress thus far.

[swisskabab]

Why would Krugman's plan cost us $3.5 Trillion ?

Krugman is pointing out to Obama "Get a second opinion before we give $3.5T to the banks ... just like we get second opinions for root canals". Geitner & Summers are insulting the intelligence of every American with this thinly veiled, highly efficient transfer of $3.5T to the swiss bank accounts of wall-st bigwigs.

Maybe Krugman refused the job because he knew his hands were going to be tied.
Maybe Krugman refused the job perhaps because he knew the real power was with Summers and the Goldman crew.
Maybe Krugman refused the job because he felt he would end up resigning after a few months like former Treasury Secretary John Snow (replaced by Goldman chairman Paulson).

[h3mlf]

Had we listened to Krugman since 2008 we would be months ahead in our economic recovery, with a savings of billions to the taxpayer and at least an attempt to address the issues of Economic Justice in the Economic Recovery. Unfortunately, the Titans of Wall Street and their minions who run the financial institutions had the ear of Paulson and Bush and we were set on our current path. President Obama, who truly cares about Main Street "stayed the course" which insured that the bold steps proposed by Krugman (letting banks fail, possibly letting AIG fail, providing support for the working poor, engaging the working poor & middle class as the engine of our recovery, etc) would not be implemented in the near term thus rendering those solutions increasingly less productive as time goes by - the opportunity cost of placing trillions in the system before the system was improved. Obama, had he taken Krugman's advice, may have changed the economic landscape to one in which working class and middle class people would be the drivers of the recovery and we would not be sitting here today waiting for the banks we bailed out to ease credit. Krugman is a National Treasure, and though maybe not 100% correct, he is looking at this problem not only as a genius "Professor", but as an American who loves his country and who understands the inability of the market to address the socioeconomic component of a Nation's wealth and prosperity.

[plaidsportcoat]

Not only do they "pay themselves". They also buy huge amounts of political influence in order to ensure their grasp on power is maintained, They buy legislators and judges.
Like the Smithfield factory pig farms that paid off all the legislators so there would be no regulations with fines of any consequence.

[ntmessage]

There is another reason Krugman has gone silent.

He was wrong on every count on how to fix the problem and it is becoming more apparent every day. Just because Wall Street screwed up does not mean we should lose common sense in identifying the best actions to fix the problem, as opposed to ideology alone. The Giether plan is infinitely more economical and workable than Nationalization and social engineering options. Much of the money will be paid back with interest and the government will make money on the Private – Public partnership. Regulation will come back.

What is also fair is programs should be justified on their own merits and payback alone.

[Pumpsie]

If you actually believe that the Geithner plan is going to work, I have a very nice bridge in Brooklyn I'd like to sell you. Every economist not tied to Wall Street believes that some temporary nationalization HAS to happen. Geithner is merely ripping off as much money as he can from the American taxpayer and giving it to his rich overlords before this inevitability occurs.

[ntmessage]

Well, correct statement perhaps depending on how Nationalization is defined. We already have some nationalization. The government is a shareholder in some financial businesses and a debt holder in many of them. Fannie, Freddie and AIG are effectively nationalized now, because they actual were insolvent, unlike the dopey Krugman and Roubini definition of insolvency to include any bank undergoing stress which is irresponsible. The only issue Geithners solution that is working is not in a specific form some desire. If you define Nationalization as wiping out the shareholders and reselling the assets, the FDIC has done this dozens of times already. If you think Nationalization is when the government actively runs the financial system for social issues alone, ala France, then that is were Krugman is 100% wrong, both fiscally and empirically.

This is exactly why the Geithner plan is working, much to the chagrin of many with out of date ideologies. Lets fix the banks now and then fix the health care system and avoid mixing it all into a new complexity that will cease the economy for decades.

[h3mlf]

The Geithner plan may work, but it is not in the best interest of the majority of Americans, only to the wealthy who run Wall Street and the Banks. To deny that there is a social component to any economy is to deny reality. Recognizing the impact of financial policy and market functions on the people in that system is to look at the economic system as a whole - instead of soley using the rise and fall of wall street as the indicator of how our National economy is performing. If the stock market were at 19,000, but unemployment were at 20%, the poverty rate were at 25% and millions more Americans were dying of starvation, would you consider the economy to be in a good place? Once a society ignores the plight of the least of its citizens for the benefit of the greed of the few we cease to be human - this is what Krugman understands better than most.

[sonofsamphm1c]

The economy has never been evaluated in that manner. Bush pointed to GDP growth and low unemployment and low inflation, etc.

[watchTVgetSTUPID]

Wall Street needs reformation. Look what they're are doing to Main Street and Detroit

Hedge fund speculators manipulated oil to $147 a barrell. The $4 a gallon gas price shut down car sales

Wall Street Scam artists sold trillions of dollars of bogus toxic assets and trillions more of CDS(Consolidated Debt Swaps)insurance policies with no assets to back them. The result was freezing credit and crashing Recession. The frozen credit prevented car buyers from buying and prevented GM from borrowing money to operate. GM ceased leasing cars (formerly 20% of their cars & trucks) because frozen credit. The Recession also hit sales hard.

Wall Street pumped $5.1 billion into politicians buying both parties. Geithner & Summers gave trillions of government dollars to Wall Street through numerous mechanisms but balk at protecting the auto industry which is suffering from Wall Street's corrupt actions. Wall Street used much of the money for multibillion dollar bonuses, corporate jets, and consolidating power instead of unfreezing credit. Meanwhile, UAW workers are forced to take major concessions in health care, pay, layoffs and retirement solvency. GM is forced to concede market share by shutting down Pontiac and abandoning their loyal customers.

Wall Street insists on free trade which is unfair trade. Geithner recently said China is not manipulating their currency. The fact that foreign countries under value their currencies in order to dominate manufacturing industry is deliberately covered up by Wall Street appointees in the Administration. No US manufacturers can compete against such an unfair trade

[FalconerHK]

Les, I'm pretty sure the Professor has articulated several solutions - they're just from a wider perspective.

His solution to the pay issue is the same as his solution to the rest of the problems plaguing the zombie banks: take them over, force them into bankruptcy, fire the boards and management (see? no more pay problems), wipe out the bondholders, fix the cooked books, write off the bad, keep the good and bring them back onto the market when ready. I would also add "prosecute" somewhere in there, but I sort of understand Dr. Krugman wanting to avoid the overly dramatic, unlike other pundits.

You're worried about the waiter stealing your change while dining on the Titanic, my friend. No offense.

[FalconerHK]

Les, I'm pretty sure the Professor has articulated several solutions - they're just from a wider perspective.

His solution to the pay issue is the same as his solution to the rest of the problems plaguing the zombie banks: take them over, force them into bankruptcy, fire the boards and management (see? no more pay problems), wipe out the bondholders, fix the cooked books, write off the bad, keep the good and bring them back onto the market when ready. I would also add "prosecute" somewhere in there, but I sort of understand Dr. Krugman wanting to avoid the overly dramatic, unlike other pundits.

You're worried about the waiter stealing your change while dining on the Titanic, my friend. No offense.