Krugman: Where Are the Grown-Ups?

[depakid]

Many people on both the right and the left are outraged at the idea of using taxpayer money to bail out America’s financial system. They’re right to be outraged, but doing nothing isn’t a serious option. Right now, players throughout the system are refusing to lend and hoarding cash — and this collapse of credit reminds many economists of the run on the banks that brought on the Great Depression.

It’s true that we don’t know for sure that the parallel is a fair one. Maybe we can let Wall Street implode and Main Street would escape largely unscathed. But that’s not a chance we want to take.

So the grown-up thing is to do something to rescue the financial system. The big question is, are there any grown-ups around — and will they be able to take charge?

Earlier this week, Henry Paulson, the Treasury secretary, tried to convince Congress that he was the grown-up in the room, come to protect us from danger. And he demanded total authority over the rescue: $700 billion to be used at his discretion, with immunity for future review.

Congress balked. No government official should be entrusted with that kind of monarchical privilege, least of all an official belonging to the administration that misled America into war. Furthermore, Mr. Paulson’s track record is anything but reassuring: he was way behind the curve in appreciating the depth of the nation’s financial woes, and it’s partly his fault that we’ve reached the current moment of meltdown.

Besides, Mr. Paulson never offered a convincing explanation of how his plan was supposed to work — and the judgment of many economists was, in fact, that it wouldn’t work unless it amounted to a huge welfare program for the financial industry.

But if Mr. Paulson isn’t the grown-up we need, are Congressional leaders ready and able to fill the role?

Well, the bipartisan “agreement on principles” released on Thursday looks a lot better than the original Paulson plan. In fact, it puts Mr. Paulson himself under much-needed adult supervision, calling for an oversight board “with cease and desist authority.” It also limits Mr. Paulson’s allowance: he only (only!) gets to use $250 billion right away.

Meanwhile, the agreement calls for limits on executive pay at firms that get federal money. Most important, it “requires that any transaction include equity sharing.”

More: http://www.nytimes.com/2008/09/26/opinion/26krugman.html?hp

[JDPriestly]

1. The same amount of money is there, somewhere, that was there

1 year ago (plus the amount that has been printed since that time). The money has been withdrawn from the system. It is not circulating.

There is no need for a bail-out. There is a need for the imposition of higher taxes on the very rich to pay down our huge deficits. Foreign lenders have no confidence in our currency because we have over-borrowed. The sub-prime mortgage problem is the symptom of more serious problems in our society.

Another symptom is the large number of homeless people who sleep in the streets of our cities, under freeway bridges and other secret places. Yet another is the large number of children in foster homes, many of them, if the truth were known abandoned or abused because their parents cannot provide for them. And still another symptom is the number of Americans who cannot afford to by medications they need or who cannot even afford to go to a doctor for treatment of chronic illnesses.

Compared to the poor in the United States, the banks are in great shape. They still own their buildings. They manage to pay for their CEOS their multi-million dollar parachutes as they close their doors and declare bankruptcy. And where are those millions played to the exiting CEOs? It's all there.

I understand the Bushes are buying a new house in Texas. Do you seriously think that they won't be able to afford the mansion of their choosing? Do you seriously think that Bush will be homeless after leaving the White House?

Bush and his wealthy friends are screaming that the sky is falling. It isn't falling for them. They just want us to think it is. Look, DUers, most of us will end up on the losing end no matter what happens. The wealthy CEOs of the banks and investment firms have spent whatever small amount of money I entrusted to them. The question is at this point -- do we let them bring them us down so that they can lift themselves back up -- or do we let them just drop us and watch us fall?

Remember, the very rich became much, much richer during the 1930s. I may be wrong, but I believe that Joseph Kennedy is a good example of someone who made out like a bandit in the 1930s. So did Standard Oil and the Rockefellers.

A society with this enormous gulf between the wealth of the rich and the poverty of the poor was not the dream of Jefferson and Adams and Madison. They firmly believed that in American the differences between rich and poor would not be great. Sure. They talked that talk while knowing that, in America, slaves were being bought and sold and whipped. They did not live the dream. Nevertheless, they envisioned and assumed a republic in which there is no aristocracy.

In recent years, thousands and thousands of Americans have lost their jobs -- jobs for which they were highly qualified, sometimes jobs they had performed for many years. The CEOS and the bankers offered no meaningful bail-out for the unemployed. They showed no mercy. They preached the gospel that the markets would take care of everything and that those of us who lost our jobs should just have faith. They promised that the free markets and the global economy would take care of everything.

Their faith-based economic theories have not worked.

I oppose the bail-out. I oppose authorizing one cent to rescue the failed banks and crooks on Washington. I oppose authorizing one more cent for the War in Iraq.

Instead, I would like to see a bail-out for ordinary Americans. I would like to see the bad mortgages refinanced on 99-year leases by our government. I'm not talking about forgiving loans. Here is my plan. The owners of properties in foreclosure get long-term workouts, monthly payments they can afford. They pay the government and when they sell the houses, they have to give a good share of the profit to the government. That will stagger the losses and slow down the decline in housing prices.

It's not the banks that need a bail-out. It's ordinary Americans. No money to Paulson. No money to the banks except through the exchange of the bad loans for 99-year loans owed to and repaid to our government. Let's invest in the American people.

Based on what we have seen in recent years, you can rest assured that if we bail out the banks and the investment companies, they will take the money and spend it overseas building still more factories in China and service centers in India. Not one cent will be spent on rebuilding America. So, lets at least give the homeowners facing foreclosure a lift up (but not a hand-out).

[chill_wind]

5. Your argument appeals to me very much as both a very principled

and practical one. (You should make this a thread). And one of the things you remind of right up front that is getting totally lost in the arguments is the plight not just of the struggling middle class, but of those getting tossed out with no safety net whatsoever, nowhere to go, at the very same time monies for temporary help and services are getting slashed. Just yesterday we had a thread about the budget slashes coming to Ohioans this winter in welfare programs and home heating assistance. It's staggering to realize what the trade-offs in this money would do for the poor and the middle classes. The same that could also be said about the cost of Iraq occupation.

"Lets invest in the American people." Yes.

[DaveT]

2. The first premise of the argument for a "bailout"

is the fear of a run on the banks.

In boom times as well as the most miserable busts, if everybody asks for their money back at any given time, the whole financial system collapses. This is because saving and investing are based on the banking miracle of one dollar being in two places at once -- in the simplest form, you put part of your paycheck into your savings account, while the bank loans money to people who buy houses. Only a fraction of your money sits idle in the bank, while borrowers use the rest of your money (and every depositor's money). In accounting terms, your deposit in the bank is a "liability" to the bank -- it owes it back to you; while the money it loaned out is an "asset" because somebody else owes the money back to the bank.

Although the bank owes you your money back, you don't look at it as a debt. You look at it as "your" money. Meanwhile the borrower has the cash in hand to buy things. Thus one dollar is in two places at once.

Confidence that you can get "your" money out of the bank is always based on the fiction that your money is "there." One of the Depression Era reforms was Deposit Insurance -- a promise by the Government to step in and give you "your" money back if the people running your particular bank turn out to be idiots or crooks who loan out your money to dead beats. If word gets out that the bank is unable to collect the money it is owed, it gives all the depositors a reason to run and not walk to the bank to get to the window before anybody else does to get "your" money out before everybody else gets "their" money out. The Deposit Insurance program has done an excellent job of preventing such a run on individual banks because people know that they don't really have to race to the bank because the government will stand good for insured deposits. Thus confidence remains and fear has been banished.

This system protects the depositors of individual banks. Obviously, if all the banks in the country faced a simultaneous run from all the depositors in the country, Deposit Insurance would not work.



So, with the pathetic reality that most of the banks and other lending institutions have simultaneously been run by idiots or crooks, there is a serious danger that a run may start against the banking system as a whole. The only thing that EVER prevents such a nationwide run on the banks is the ephemeral psychology of "confidence." Regulations once upon a time helped to shore up that confidence with things like reserve requirements and standards of creditworthiness for borrowers to keep the banks from giving its depositors' money to deadbeats.

The idiotic and nakedly corrupt politics of "deregulation" have now obliterated "confidence." And Paulson figured that the way to restore that confidence was to put out the word that $700 billion dollars was now on the case. Nobody could possibly know whether this would "work" because their is no empirical way to measure "confidence."

Such a move would probably have calmed the skittish colts who drive the Dow and Nasdaq up and down by hundreds of points in a day -- and a case can be made that nosediving stock prices might well precipitate a run on the banking system as people see their equity investments disappear, and draw down upon their allegedly safer bank deposits to keep from running out of money altogether.

Who knows?


The problem for our debased and corrupted political system is that there is no way to know for sure what it will take to restore confidence in the banking system. As I mentioned at the outset, even in the best of times, confidence is based upon the commonly agreed upon lie that "your" money is safely stored in the bank.


Obviously, there has to be a long term solution to the problems created by the corrupt lunacy of deregulation. Otherwise we sink sooner or later into Depression because the banks really are run by idiots and crooks.

The problem that our dimwitted Members of Congress are now wrestling with is that meaningful re-regulation does nothing to put more money into the banks to stave off the wide spread fear that one had better get out while the getting is good. But putting more money into the banks does nothing to assure people that the people running the banks are any more competent or secure than they are today. Unfortunately this is a Catch-22.

This Catch-22 also explains why Krugman's very insightful column does not offer a specific solution either. He only hopes that some "adult" will step in and provide that answer.


It will not happen. A crisis created by too much unsecured debt will not be solved by more unsecured debt. And with the Federal Government running a structural deficit, that is exactly what any bailout scheme is -- more unsecured debt.

I have heard people argue that such Federal "fiat" money is not really unsecured because the US Government has a huge store of fixed assets that are far more valueable than the aggregate national debt. Watch, friends, as the final turn of the screw comes when Hank Paulson runs the Federal Goverment another trillion dollars into the red and the next crisis is how do we prevent a run not on banks but on Treasury Bonds, Notes and Bills. In order to calm the markets and keep those skittish colts from turning a T Note into a Junk Bond, we have to turn the Grand Canyon over to the People's Republic of China.

Let me repeat my principal argument -- a crisis caused by too much unsecured debt will not be solved by more unsecured debt.

Somebody please show me where I am wrong. I want to be wrong.

[Astrad]

4. Great analysis!

Perhaps the 700B isn't meant to solve the problem structurally. As confidence is a psychological condition it is intended to give the public the sense, however illusory, that something is being done to solve the problem. This will dampen their anxiety about the security of their deposits and relieve redemption pressure on the banks. Not that I think it'll work.

[JDPriestly]

7. You are right!

[DaveT]

3. kick -- excellent take on bailout politics and the economics

[chill_wind]

6. ...

[sarcasmo]

8. MR. Krugman, one of the smartest people on the planet.

[TBF]

10. I think you forgot the sarcasm tag - this guy is worried about one thing only - his portfolio.

[judasdisney]

9. The Bailout will be fatal. It's a trap.

And there's zero explanation, let alone any guarantee, how $700 billion would solve the problem or why.

It's insane.