Steven Pearlstein: Krugman Is Wrong About Geithner

[babylonsister]

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/23/AR2009032302800.html?hpid=topnews

Optimism Over Despair

By Steven Pearlstein
Tuesday, March 24, 2009; Page D01

snip//

Krugman's assumption, however, is that the current, depressed market prices for loans is the correct price, from which he jumps to the conclusion that all big banks are insolvent and need to be nationalized. But even a casual observer can see that these markets are broken not simply because many loans are bad, but because of a lack of investment financing. It is the interaction of the two problems -- in econospeak, solvency and liquidity -- that has caused the market to break down and prices to collapse.

As for the nationalization mantra, it's hard to see what that would accomplish. If the government were to take them over and assure depositors and creditors they would be repaid in full -- which is what you need to do to avoid a collapse of the financial system -- then there is little effective difference from a plan designed to rid banks of their bad assets. Nationalization doesn't make the bad loans go away -- it simply moves them from the banks to the government, with the government on the hook for any additional losses.

For the worst banks, that may turn out to be necessary, as it was in the case of Fannie Mae, Freddie Mac, AIG and Citigroup, all of which have been effectively taken over by the government. But wholesale nationalization would likely require a bigger outlay of taxpayer funds, at least initially, while putting the government in the uncomfortable position of managing large and complex businesses with 535 members of Congress suddenly sitting on their boards of directors.

Now that would be something to fill any columnist with a sense of despair.

[AllentownJake]

1. I'm sorry

If you don't attach an insurance policy that insures 85 cents on the dollar...their current prices are the correct prices.

[Barack_America]

7. Isn't that exactly what Geithner's plan does?

I thought that it was a combination of government matching funds combined with FDIC insurance.

[AllentownJake]

8. I'm saying its crap

and I don't like it or this Geithner fellow.

[The Velveteen Ocelot]

2. I think it's time for some kind of Economist Death Match. Maybe on Pay Per View.

I don't know how else to settle some of these issues.

[ErinBerin84]

3. I had a dream about Krugman last night.

Seriously. It's so funny that Krugman has become the center of this debate. But yeah, Krugman (and his cat!) were in my dream last night. We didn't interact, but he was eating a grape or something in the corner. I started laughing when I remembered it this morning.

[SemiCharmedQuark]

4. This guy is not an economist and has been flip flopped all over the place

on the bailout.

[Barack_America]

9. Nonetheless, he raises a valid point. Krugman is assuming that the investments will fail.

And the government will be left footing the bill.

This is not a given.

Krugman has an agenda too. Let's not forget that.

[OwnedByFerrets]

10. And that is what??

[AllentownJake]

12. You can do an acturial analysis

and pretty much figure out what percentage would fail in given conditions.

This is a risk. I wonder if this was calculated and available to the public.

[high density]

5. Great column

The bottom line is this:

- Give Treasury a chance to prove they know what they're doing.
- Regulation is coming.
- Nationalization has its own costs, including those of this toxic asset plan.

[Kurt_and_Hunter]

6. straw man: krugman doesn't favor "wholesale nationalization"

most banks are fine.

[Barack_America]

11. But if Krugman thinks that most banks are fine, why would he assume Geithner's plan will fail?

Krugman's main critique of the plan is that he feels the government will be investing too much in worthless assets. If our nation's banks assets are truly so worthless, how could he simultaneously feel the banks are "fine"?

Short answer is, that he doesn't. Krugman has also written several columns in favor of nationalization. So this "straw man" isn't all straw.

[AllentownJake]

13. What you are going to do

is reward the losers. You are going to have bad banks swapping toxic assets than getting an insurance policy on them. They'll make a profit because give Geithner's ridiculous plan its virtually impossible for them not to.

So the executives who brought you this crisis will get a bonus and also more job security.

Heck of a job Timmeh

[rhett o rick]

14. Who, if not the "government" is going to eat the bad assets?

Nationalization is a great threat that doesn't necessarily have to happen if we break up the big banks and get them out of the gambling business. No FDIC if you are going to use your bank for gambling. Regulate, regulate, regulate.