Sorry Krugman, Geithner's Plan is the Least Risky Option

[babylonsister]

http://tpmcafe.talkingpointsmemo.com/talk/blogs/dcdanny/2009/03/for-once-krugman-is-wrong-a-de.php?ref=recdc

Sorry Krugman, Geithner's Plan is the Least Risky Option
March 21, 2009, 11:59AM


Krugman, who shined so much light in the dark days of the Bush administration, and who is still doing more than anyone outside of This American Life to help non-economists understand the banking crisis, is fundamentally wrong in his assessment of Obama's plan to rescue the financial system.

The Obama administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system -- that what we're facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

This is a straw man and suggests why Rahm Emanuel correctly dismissed Krugman as blind to the complexities of governing. Obama has not said that the financial system is fundamentally ok, nor has he said that the banks are "essentially sound." On Thursday, for instance, Obama diagnosed the ultimate cause of the AIG debacle as "a bubble-and-bust economy that valued reckless speculation over responsibility and hard work." Not exactly an endorsement of the status quo on Wall Street, and not a new position either.

There are only two real difference between Obama and Krugman. The first is Krugman's rejection of the argument, made first by Paulson and now Geithner and Obama, that the so-called troubled assets are worth more than anyone is currently willing to pay for them. To Krugman (at least in this debate), the real value of anything is what the market willing to pay right now. This is the principle of mark-to-market accounting, which in other circumstances allowed Enron to steal vast sums by claiming inflated boom-time asset values. Now, Krugman asserts that because a busted bubble has crushed asset values, banks like Citi should be regarded as fundamentally and hopelessly insolvent. He makes this case in the abstract, without having analyzed at all the cash flows that underlie the mortgage-backed securities.

snip//

But could the Treasury Department run Citibank and Bank of America for the two to three years it would take to reprivatize them? With maybe a few weeks to prepare? The very thought of it makes me want to trade what's left of my 401K for a few gold coins and a shotgun.

That's my reaction, and I'm as liberal as anyone you're likely to find in my Blue State zip code. Now, imagine the reaction of the Republicans and their media abettors. And the foreign governments and financial markets. Shit flinging and raw fear, that seems to me the most likely outcome. Perhaps the takeover option would work in the end. But I'd rather bet on the Geithner plan.

A closing observation: much of the skepticism towards Geithner among progressives follows from a sense that he doesn't "get it" about what went wrong. His instincts and sensibilities align with the investment bankers, not the middle class. So it's natural to suspect that Geithner's plan will benefit those who should be punished, and that, left to his own devices, he would be happy to go back to the status quo that let the finance industry run completely amok for a generation.

[spanone]

1. knr

[DJ13]

2. .... by "dcdanny"

Oh well, that definitely beats the opinion of a Nobel winner in economics...........

[Sebastian Doyle]

37. Somehow he left the "l" out of his name.

Must have been a typo when he registered at the blog. And yes, that's a lower case l, not a capitol I

[provis99]

3. oh, dandy.

if Emanuel is criticizing Krugman, that only means that Krugman must be right. That DLC clown pisses me off.

[depakid]

4. Yet another vacuous "can't trust the government" take.

with nothing else to back it up.

[ProSense]

5. Please, leave Krugman alone, that is unless

you're Milton Friedman. The insights of other economists also don't count.

[Jim Sagle]

6. Ahh yess...same old corporate "Democratic" hogwash.

[Skink]

7. Krugman has said these same policies led to Japans lost decade...

So he isn't saying it's the end of the world just that it might take a decade for a properous economy again.
What worries me is that the democrats are not seizing on this opportunity to advance a truly progressive agenda.

[MarjorieG]

11. There is a lot that Congress with ties will not do to support Obama and us. CK Reich

for more important than AIG bonuses and Faux Hill outrage.

"The Obama-supported plan to allow distressed homeowners to renegotiate their mortgages under the protection of bankruptcy has run into a Wall Street wall. Although Citigroup temporarily broke ranks a few months ago when it was receiving one of the most generous bailouts, the rest of Wall Street has remained adamantly opposed, and apparently Democratic leaders have decided not to push back.

Meanwhile, Obama's plan to limit itemized deductions for the richest 1.2 percent of taxpayers (including the top 1.9 percent of small business owners) to 28 percent, starting in 2011, is also in trouble on the Hill. Wealthy contributors and friends of congressional leaders involved in setting tax policy have balked. So Congress is telling the White House to look elsewhere for the $320 billion it needs over ten years to finance half of the tab for health care reform. Congressional leaders have also informed the White House that they don't have the votes to pass Obama's proposal for treating the earnings of hedge-fund and private-equity managers as income rather than capital gains."

How are we going to re-regulate and get bucks to support our change?

[beachmom]

50. Remember it was Japan's lost DECADE, not two months.

Japan was very slow to react, and continually made mistakes. I really think that meme should be thrown out the window. No more Sweden and Japan.

http://www.time.com/time/magazine/article/0,9171,1884815,00.html

In the late 1980s, after banking laws were relaxed, Japan went on a credit binge that made the modern U.S. look prudent. The stock market took off into the stratosphere, and property prices got so out of control that it was said the land on which the Imperial Palace sat in the center of Tokyo was worth more than the whole of California. Then the bubble burst, banks found that their balance sheets were full of bad loans, and Japan entered a lost decade of stagnant economic growth. Nearly 20 years after its peak in December 1989, when the Nikkei index nearly hit 39,000, the stock market has never come close to recovering. The Nikkei recently touched its lowest point since 1982.

So what lessons can the U.S. learn from Japan? Here are three:

1. Act Early, Act Often

After the bubble burst, Japan's powerful bureaucrats, who had earned a reputation for brilliance in the 1980s, dithered for years. In the face of slumping demand and price deflation, they cut interest rates too slowly, delayed a fiscal stimulus and failed to restructure so-called zombie banks, whose bad loans made them dead in all but name.

You can criticize the details of the U.S. response to the collapse of credit markets, but in comparison to Tokyo, Washington has acted at warp speed. As Japan watcher Richard Katz points out in the latest Foreign Affairs, it took the Bank of Japan nine years to bring the interest rate that banks pay on overnight money to 0%; the U.S. Fed managed that in 16 months following the beginning of the credit crisis in the summer of 2007. Japan — in desperate denial about the plight of proud companies — long delayed using public money to recapitalize banks. The U.S. starting doing so within a year of the crisis's start.

Read the rest at the link.

[Skink]

60. We are faster to react but it could be a decade if what's planned is tried.

Nationilization should be the answer now.

[TayTay]

8. This is shoddy commentary.

The TPM writer complains that Paul Krugman has constructed a straw man argument that he then knocks down. Yet the TPMwriter constructs his own fantasy scenario and uses it as a scare tactic. He employs no more statistics or evidence than does Krugman. See this paragraph in the TPM post that posits what would happen if the banks were temporarily nationalized:

Nor do they even address an even scarier question: would the announcement of a temporary federal takeover trigger a disastrous panic? Is it possible even to imagine a political or public relations strategy that could achieve such a takeover in a way that does not risk a much greater disaster than the one in which we currently find ourselves?

This scenario is based on what?

[FrenchieCat]

29. the same thing that other scenarios are based on; educated speculation

based on past human behavior.

Krugman speculates as well.

They all are forced to, since this is a situation quite unique in its severity.

[TayTay]

32. Exactly the point.

Krugman was criticized for employing a logical fallacy in that TPM post. The writer of the TPM post did the same thing.

We are all facing an unprecedented crisis. No one has been through this before. We are all making educated guesses with the intent to produce a lessening of the effects of the crisis. Krugman is. President Obama is. And disagreements are going to happen. That doesn't mean the disagreements are anything more than an effort to correct what someone sees as a mistaken course.

This is the worst financial crisis in 70-80 years. I think there should be vigorous discussion of what to do with many voices being heard. That is the democracy we should have, one in which we don't dismiss these good opinions out-of-hand because the motives are suddenly suspect.

[girl gone mad]

34. But it isn't educated.

Every poll I've seen shows broad support for a temporary takeover of banks, as long as it isn't labeled "nationalism".

ETA: Even when it is labeled "nationalism", a plurality still supports temporary government takeover.

[MannyGoldstein]

9. "Krugman's rejection of the argument, made first by Paulson..."

That line really tells us everything we need to know about this woolly-headed claptrap.

[FrenchieCat]

12. But Krugman nor you are answering the question.....

could the Treasury Department run Citibank and Bank of America for the two to three years it would take to reprivatize them? With maybe a few weeks to prepare?

I don't think that the Government could get rid of the management at these two banks and replace them with other folks not tainted but experienced managers.

I think that is one of the problems with Krugman's take. He makes everything he advocate seem easy, because he doesn't go into the mechanism that the process he describes would entail.

One of the questions I asked earlier today is who would the government replace top management with....and please believe me, they would be forced to change top management. The media would have a field day if they didn't....and that is the other problem. The media would arrange for another manufactured outrage about something small like oooh....that person worked for Wells Fargo 7 years ago, and Wells Fargo took some Bail out money.

So I think that the Obama administration cannot win no matter which way they go, whether it is Krugman's 2 trillion nationalization plan or anything else for that matter. Because of that, I suggest to the Obama administration to go with the plan they want to take responsibility for and believe can work, rather than to feel forced to work with someone else's plan; someone who would end up not taking any of the responsibility if things didn't work out right.

[MannyGoldstein]

13. It's Inconceivable That Anyone Could Do A Worse Job (Than The Current Executives)

And inconceivable that the same bank executives will behave differently in the future. People don't change.

[FrenchieCat]

25. So who to replace them?

That was my question.

[MannyGoldstein]

28. I've Edited My Previous Subject Line For Clarity n/t

[FrenchieCat]

30. But the problem remains.

[girl gone mad]

21. You're late to this party.

The topic of nationalization has been covered in graphic detail. You can find the information you seek through a web search or a search of DU.

No one believes that nationalization will be an easy fix. On the contrary, it will probably be rather difficult. The reason that so many economists favor nationalization is that the alternative is far, far worse.

[FrenchieCat]

24. How is it far, far worse.....

Even Krugman does admit it might work. It's just not what he prefers.
At the end, folks will have to agree to disagree.....
cause it is Barack Obama who ends up taking the responsibility, not Krugman.

[girl gone mad]

35. We don't have to speculate here.

Just take a look at what happened in Japan when they chose zombie banks over nationalization. Economics is a science, it's just that unlike in other fields, we can't often run large scale experiments. In this case, we don't need to. We have several recent models of bank failures to analyze. Japan's method of propping up bad banks was a long-term disaster for their economy. Sweden's nationalization program was a success. These are the two crises which most closely resemble our current dilemma.

[Mithreal]

38. Economics is most certainly not a science

Economics depends more on philosophy than experiment and economists don't even agree it is a science.

[Joe Chi Minh]

55. It has precious little to do with philosophy either - other than theology/moral philosophy,

anyway. Human psychology, anthropology, history. It's about men's most primitive motivations and how they play out in the real world; which is why it has such a strong nexus with politics.

If you Google "quotes j k galbraith", you will find that many of his remarks are of just such a nature: an all too keen insight into human folly, as evidenced, in particular, in the field of economics.

The closest economics approaches science, is in its use of statistics.

[Celebration]

27. I'm going to trust Seidman on this

He headed up the Resolution Trust Corporation doing the same thing with the S and Ls when we went through that crisis. All we would need is another Seidman. He's just a bit too old now. He did a great job in this capacity. He thinks what we are doing is ridiculous--pouring hundreds of billions of dollars into a black hole.

We could even keep *some* of the same management, if needed, but with a different duty--to the taxpayers instead of the owners.

Seriously, it is absolutely ridiculous that AIG is paying off Goldman Sachs 100% on these credit default swaps, with our money. Highway robbery!! Under a receivership, we might stand half a chance as taxpayers. Now we are just getting robbed.

[JVS]

36. A few weeks to prepare? They've known since September that the banks were fucked. Obama has had...

since early November to assemble experts on this and have them develop a plan. The administrations efforts at tackling this problem seem very much like a stay-the-course policy on Paulson's actions and unsurprisingly it is unpopular and considered corrupt.

[justinaforjustice]

47. Replacements? Any HIgh School Graduate.

The CEO's that have run our economy into the ground through successfully pushing their criminal deregulation policies through Congress aren't geniuses, just the sons of wealthy Republicans who got in to Harvard and Yale, many on legacy admissions. If they had been smart crooks, they wouldn't have destroyed their own companies as well as our economy. They were stupid enough to kill the golden goose. But they were smart enough to buy enough Congressional votes to continue their fraud with the bail-outs.

No, these CEO's can easily be replaced -- by any high school graduate with a B average and some ethics.

The majority of the financial institutions they destroyed produced nothing of real value to begin with -- but were agents for stealing from hard-working citizens while creating fraudulent securities and credit default swaps which, at base, had little real value. Their credit default swaps were really a form of legalized gambling, unsupported by real collateral. Now the American tax payers are being asked to pay their gambling debts. Indeed, that is what they have used their billions of dollars of bail-out funds to do -- pay off their gambling debts. The Congress facilitated the fraud by not placing any requirements on the companies to use the funds for actual lending to industries and consumers.

It is time these institutions were shut down and their assets sold to reimburse taxpayers. The government can use the money to lend to industries and consumers on reasonable terms -- without million dollar bonuses to carry out these duties. Our federally run Medicare program runs very well, so would a similar federally run lending institution. And, as with Medicare, a federally run lending operation would save the country an enormous amount of money.

[Joe Chi Minh]

54. "... with maybe a few weeks to prepare." Or maybe considerably longer?

Well, staff belonging to the echelon below normally supersede those above them, don't they?

You make it sound as if the top dogs who caused this economic mega-crisis, would be difficult to replace with more competent people. Is that really what you are trying to say?

[girl gone mad]

10. I'll stick with Krugman, Stiglitz, Galbraith, Roubini, Simon Johnson. Yves Smith, et al..

over some guy with a blog and 5 followers on TPM.

[Thrill]

14. Krugman still fighting the Primaries

.

[Kurt_and_Hunter]

45. Projection isn't just a river in Egypt

[AlCzervik]

15. I'll take Krugman for the block.

[LittleBlue]

16. If I had only known "dcdanny" was against it...

.......

dcdanny.....



:spray:

[AlCzervik]

18. yes, that changes everyting doesn't it? Oh dcdanny, someday you too will win a nobel prize.

:D

[LittleBlue]

20. Better watch your back, Krugman and Stiglitz

dcdanny is coming for you :crazy:

[AlCzervik]

23. part of the 101st chairborne keyboard division.

[LittleBlue]

26. ...

:rofl:

[leftofthedial]

17. your claim is absurd on its face.

it's the ONLY plan from the administration.

[BlooInBloo]

19. Who the hell is dcdanny?

Maybe he's right, but I'll go with actual economists like Krugman and Atrios on the specific Geithner lighting-money-on-fire issue.

[BlueJac]

22. Reality is a better way then dream world...........

more of the same is insane.

[FrenchieCat]

31. It's not more of the same....

the plan is not even published yet, but everyone has already made their pronouncements, because the outline of the plan doesn't appear to adopt their ideas.

Folks just kind of really think they have the corner market on the best ideas.....
although it hasn't been proven.

[Birthmark]

33. I have no faith in...

...Obama's Trickle Down New Deal. I don't think it will do a damned thing for "We, the People" except to add trillions to our debt and millions to the unemployment rolls.

Good luck to all. You'll need it.

[stillcool]

46. Since the economic plan..

has not been published, what are you basing the "Trickle Down New Deal" on? And why do you think others need good luck, but not yourself? The United States has been going down the tubes for a few years now. Did you really think we can avert disaster after the great give-away of the last 8 years?

[Birthmark]

62. Trickle Down New Deal

Injecting liquidity at the top in the hopes that it will spur economic activity further down the chain. I don't need the details to know that that's the philosophy. Does it sound worthy of Repuddinheads? Yeah, I thought so, too.

IMO, a liberal would worry more about the people than the money.

"And why do you think others need good luck, but not yourself?"

I think, check that, I *know& that I am better insulated than most against this recession/depression. Many on this board have lost or will lose their jobs in the coming months. Many of those, like so many Americans, are living paycheck to paycheck and are unprepared for persistent unemployment. It is those folks that I am wishing good luck; and to some extent I'm wishing good luck to all of us. I have no idea how, or if, our economy will ever return to normal, or if the US will even hold together as a country. There must be some reason people are stockpiling ammo.

[960]

39. What. A. Load. Of. Crap.

[Teaser]

57. insightful critique

.

[Jim Sagle]

40. So how are things in DC, Danny>

;)

[NJmaverick]

41. Krugman compared Obama's supporters to Nixon's people

He is a bitter PUMA that uses his economic credentials as cover to continue his vendetta against Obama

http://www.timeswatch.org/articles/2008/20080211150350.aspx

[TexasObserver]

42. Krugman is great at theory, but he knows nothing of governing.

He's your traditional gadfly, and he does a great job in that role.

[nichomachus]

44. Unfortunately we seem to be in the hands

of people who no nothing of either theory or governing . . .

[blueworld]

43. Question from a somewhat iggerant street urchin

I'm always grateful when I see posts/articles that critique what Krugman et. al. are saying, because I don't understand economics as thoroughly as I would like. I admire Krugman, generally believe what he states and have the utmost admiration & respect for him, but being ignorant of the topic, I wonder about some of his conclusions & like to read those who disagree. So far, Krugman's position is the most sound to me.

I have what I believe is a basic question: how can ANYTHING be valued "higher" than what the market is willing to pay for it? Isn't that the point of the market? I grew up in the city - a street kid fershur. The going rate for anything was whatever anyone was willing to pay (unless regulated by government).

IMHO, Krugman MUST be right & Geithner wrong. The same house that was worth $400K a week ago could be worth $200K the day after we discover a toxic waste dump on the property. These assets were worth a great deal more during the bubble. Now that the fraud & incompetence of the "valuers" has been discovered, of course the "value" is less.

Just my two cents worth.

[CTLawGuy]

51. mortgage securities are more complex than things like apples

an apple is worth whatever someone will pay for it, but a security is different. By buying a mortgage security, a buyer buys the RIGHT to receive the payments from that mortgage. If the buyer held the mortgage security until all the payments are made, over potentially 30 years, the buyer would get money (so it would NOT be worth ZERO - the default rate on subprime mortgages is 15%). The present value of all those payments (what all the payments would be worth today) is ONE way to value the security.

That is not how most people handle a mortgage security. What a buyer does is, when it needs money now, it resells it to someone else, a second buyer, so that second buyer would get the right to receive the payments and the buyer would get most of the money up front. The buyer doesn't hold it until all the payments are made. Whatever a second buyer would pay for a security such as this, is its value using "mark to market valuation."

Now, there were so many problems becuase second buyers lost confidence in the ability of the mortgages to be repaid. It wasn't a problem because the amount of money receieved when all the payments are made would be less than excpected, this was a problem because second buyers feared that the lack of confidence would mean no one would buy that security from THEM when THEY need cash quickly.

So Krugman is right in that, using mark to market valuation, the securities are worthless, but wrong in the sense that no repayments would be made. The default rate for subprime mortgages is lower than people might expect. The purpose of TARP is for the government to buy and hold these mortgage securities, as they are repaid, because no one else wants to. If government holds them until all the payments are made, it would lose money for sure, but it would recoup most of what it paid. So they are not "worthless".

[woolldog]

59. Great post

[Warren Stupidity]

48. The Brits nationalized banks overnight with barely a hiccup.

I guess we are just too stupid to run our banks.

This 'least risky option' is just more of the same and doomed to failure. However it will guarantee that the billionaire class will not suffer too much. Obama unfortunately chose insiders to run the recovery operation from the worst financial disaster since '29. These insiders see no possibilities, no options, other than more of the same. The problem is precisely as Krugman and others have noted: they think the current system is salvageable. Where is the proposal to re-implement Glass-Steagal? Where is the re-regulation of the financial industry? Oh, it is nowhere. So far this has been change that doesn't exist that we are being told to pretend to believe in.

[Joe Chi Minh]

56. Or reintroduce the Fairness Doctrine?

[Reterr]

49. Ok "dcdanny"

Whatever you say :eyes:.....

[Odin2005]

52. I've been thinking the same thing.

I'm no Krugman-basher, I think he's an excellent economist, but I think he's gone off the rails a bit here

"Fundamentally, it's a gamble. The thing is, any option is a gamble, and Geithner's gamble is far less risky than Krugman's favored option: a temporary federal takeover of the world's largest banks.

This is the second, and more important, difference between Krugman and Obama: their assessment of risk. Krugman and his allies on the financial blogs make a very strong case that a federal takeover is the fairest, most socially just way to avoid the outright collapse of the mega-banks. They also make mince meat of the conservative arguments typically put forward against "nationalization." What they do not do, however, is make a compelling case that a temporary federal takeover will actually work.

Nor do they even address an even scarier question: would the announcement of a temporary federal takeover trigger a disastrous panic? Is it possible even to imagine a political or public relations strategy that could achieve such a takeover in a way that does not risk a much greater disaster than the one in which we currently find ourselves?"

I pretty much agree with these 3 paragraphs.

[Joe Chi Minh]

53. "A closing observation: much of the skepticism towards Geithner

among progressives follows from a sense that he doesn't "get it" about what went wrong. His instincts and sensibilities align with the investment bankers, not the middle class. So it's natural to suspect that Geithner's plan will benefit those who should be punished, and that, left to his own devices, he would be happy to go back to the status quo that let the finance industry run completely amok for a generation."

"Natural to suspect...." in the sense of kinda "logical" to suspect...? "Trust him. He's a banker"? Mebbe aye and mebbe no and mebbe och the noo. Who knows? But a fear for your personal pension on the basis of certain vague imponderables and talking of preferring to bet on either of the options open doesn't invest the thread header with the kind of authority it would seem to have claimed. Or to be the best counsellor for the national interest, the interests of the population at large. I just hope he's not talking about the so-called "toxic assets", when he refers to the so-called "troubled assets".

[w4rma]

58. Enron used MARK TO MODEL. Not Mark-to-Market.

The collapse of Enron is a well known example of the risks and abuses of Mark-to-Model pricing of Futures contracts. Many of Enron's contracts were difficult to value since these products were not publicly traded, thus computer models were used to generate prices. When Enron's profits began to fall with increased competition, accounts manipulated the mark-to-market models to put a positive spin on Enron's earnings.

Fusaro et. al,, What Went Wrong at Enron: Everyone's Guide to the Largest Bankruptcy in U.S, Page 35
http://en.wikipedia.org/wiki/Mark_to_model#cite_note-4

[amborin]

61. took Japan 10 yrs to bite bullet & nationalize, that's why they had their "lost decade"

we'll have ours, too....and it will harm O's legacy

[Maven]

63. keep on SELLIN IT, bs

:eyes:

[quiller4]

64. Krugman doesn't get it -- property has real value

"The first is Krugman's rejection of the argument, made first by Paulson and now Geithner and Obama, that the so-called troubled assets are worth more than anyone is currently willing to pay for them. To Krugman (at least in this debate), the real value of anything is what the market willing to pay right now. This is the principle of mark-to-market accounting, which in other circumstances allowed Enron to steal vast sums by claiming inflated boom-time asset values. Now, Krugman asserts that because a busted bubble has crushed asset values, banks like Citi should be regarded as fundamentally and hopelessly insolvent. He makes this case in the abstract, without having analyzed at all the cash flows that underlie the mortgage-backed securities."

The number of eager bidders at some of the recent property auctions supports the Geithner-Obama view; not the Krugman position. Property has a real or instrinsic value as well as a market value. Krugman would have you believe that the properties that were once valued at $500,000 should now have book values of under $100,000. If that is true, why are property auctions attracting som many buyers willing to pay $300,000 to $400,000 for bank held homes and condos? (I used recent auction sale prices in Washington and Oregon to work out the percenetages) This is happening in all but the most depressed markets and the number of sales is steadily increasing each month. That is something Krugman and his followers are loath to admit.

I think the two to three year cycle you reference is much longer a holding period than would be required. I'm very willing to bet on Geithner's plan which seems to get much more support from international markets than the alternatives Krugman suggests.

[jeanpalmer]

65. The public went on a cheeseburger eating binge

They now weigh 300 1bs., up from 150 lbs. They're engorged and have cut back. What's Geithner's solution? Increase the supply of cheeseburgers.