Krugman on dithering

[Ramo]

Obama hasn't even managed to give Geithner much of a staff to work with over at Treasury, for christ's sake.

There are anonymous holds on key members of the economic team. Irresponsible Republican obstructionism.

http://www.bloomberg.com/apps/news?pid=20601103&sid=aAoTZlvoV0fU&refer=us

[Dinner]

Timidity was my major concern regarding Obama.

Yeah, Obama really, really wants to be a centrist and avoid the whole socialist slur but the reality is half measures won't work and this recession will continue until the zombie banks are cleaned up. The only real way to do that is nationalization because the banks have proven throwing money at them willy nilly will be abused and won't solve the underlaying problem. Wipe out the shareholders who didn't bother to provided the needed over sight, fire all the execs who sank their ships, bring in new blood, move the bad assets to the government (who is best positioned to get lone term value out of them), then repritize the banks in order to raise fresh capital. Ta-da! No more zombie banks.

Blau's question about if zombie banks should be reorganized is an interesting one. Maybe some of these "to big to fail" banks should be sliced and diced, merged, or have parts spun off so that we have several smaller banks with national reach. That way we have more competition and no one player is "to big to fail" any more. Maybe to big to fail just means to big.

[Imran Siddiqui]

The proven model is the Swedish model used during Swedens 1991 banking crisis where Sweden nationalized virtually all of the zombie banks, fixed them with government money, then later reprivatized them.

Note, "virtually all" in Sweden's case ended up being two: Nordbanken (already a state bank, IIRC) and Gota Bank.

Also, as a Swedish economist points out:

http://www.petersoninstitute.org/realtime/?p=504

Sweden did not nationalize its banks. It was Norway that did so, which is an alternative model. In Sweden, a temporary emergency bank authority was set up on the model of the US Federal Deposit Insurance Corporation. It had outside, mainly foreign, consultants to scrutinize all bank debts and establish objectively which were nonperforming. The banks were forced to write off their bad debts and transfer them to bad banks.

Sweden had no aggregator bad bank and the bad banks were not nationalized. Each big bank set up its own bad bank. They were given illustrious names such as Securum, Retriva, Nackebro and Diligentia. Securum was the biggest bad bank belonging to the already state-owned bank, Nordbanken, and it became a separate state company. The private bad banks, however, remained the property of the private banks from which they were removed.

Nobody traded toxic waste at the height of the crisis in Sweden. Such trade is an unnecessary complication. A bad bank is not a bank but a private equity fund, which does not need much capital or recapitalization. Its task is to isolate the rotten apples so that they do not contaminate the good loans in the cleansed banks.

The bad banks sold off their assets at a leisurely pace over several years to maximize their value, avoiding excessive depreciation of assets through fire sales. Any gain was to the benefit of its owners. In this way, Sweden avoided the problem of trading undervalued assets. In the end, even Securum made a small profit.

Thus, the common American idea that the Swedish bank resolution involved major nationalization is a sheer misunderstanding. Only one failing private bank, Gota Banken, was merged with an equally bankrupt state bank. Sweden avoided private-public partnerships, of which Fannie Mae and Freddie Mac are the most telling and repulsive example, because, as Larry Summers so memorably has stated, public-private partnerships usually means that profits are privatized and losses nationalized.

People just do not understand what the Swedish banks did and are trying to use that misunderstanding to push for major nationalization.

[Tuberski]

QUINCY!!!!!





ACK!

[Ben Kenobi]

Good research Imran.

It's clear that Obama doesn't have a clue about the financial system, so he should just sit down and not tinker with it.

[DanS]

I agree with Krugman. However...

They're dithering probably because they fear that if they nationalize the banks, the folks/foreign governments who hold mortgage-backed securities in vehicles set up by the banks (SIVs, especially with Citi) will demand that the US government make them whole.

Do we want the US government to feel obligated to pay to correct all of the bad decisions of these foreign government and individual investors? As far as I know, there's trillions of dollars in losses from the housing bubble bursting, and much of it is invested in these SIVs.

[Naked Gents Rut]

****. That's a good point.

[korn469]

**** it! I say let them all fail. Let the people who made bad investments be the ones who suffer the losses. Eventually things will work themselves out.

[Kidlicious]

Dithering my ass. They're just bleeding the system dry. This country is so ****ed.

[Naked Gents Rut]

We are so ****ed.

When Barack Obama announced his champion to rescue the world from economic ruin, it was the first time most Americans had ever heard the name Tim Geithner.

The initial impression was good. The stockmarket surged and the pundits swooned. "Exactly a decade ago, he was Uncle Sam's golden-boy emissary sent into the stormy centre of what was then the world's worst financial crisis [the Asian crisis]," reported The New York Post.

The paper gushed: "Just 36 at the time, he'd been raised in Asia and knew the culture so intimately he scored successes and won confidences that other diplomats couldn't match. Geithner earned widespread plaudits for pulling together quarrelling Asian finance ministers into a $US200 billion rescue of their economies."

"A fantastic choice," said a Bank of Tokyo-Mitsubishi analyst, Chris Rupkey, as the Dow rose by nearly 6 per cent. Even one of Obama's political rivals, the hard-bitten Republican senator Richard Shelby, agreed Geithner was "up to the challenge".

If anyone in the US media had thought to ask a former Australian prime minister for his assessment, they would have heard a different view. And they would not have been so surprised at Geithner's performance since.

In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis."

In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription. ...

http://www.smh.com.au/opinion/obamas-economic-saviour-savaged-as-keating-lets-rip-20090306-8rk7.html

[Thue]

I agree with Krugman. However...

They're dithering probably because they fear that if they nationalize the banks, the folks/foreign governments who hold mortgage-backed securities in vehicles set up by the banks (SIVs, especially with Citi) will demand that the US government make them whole.

Do we want the US government to feel obligated to pay to correct all of the bad decisions of these foreign government and individual investors? As far as I know, there's trillions of dollars in losses from the housing bubble bursting, and much of it is invested in these SIVs.

Am I missing something?

The current status:
-You give the banks free money.
-The US government implicitly guarantee bank debt.
-If the bank loose too much you let it go bankrupt, stop payments
-If there is anything left after the crisis, the shareholders get it.

With nationalization
-You give the banks free money.
-The US government implicitly guarantee bank debt.
-If the banks loose too much you let it go bankrupt, stop payments
-If there is anything left after the crisis, the people who bailed out the banks get it.

So I don't see the reason for not nationalizing the insolvent banks. It is just lemon socialism. The shareholders deserve to be wiped out. You should take lessons in being good capitalists from Sweden...

[Kidlicious]

It is just lemon socialism.

Socialism for the rich and free markets for everyone else.

[chequita guevara]

The proven model is the Swedish model used during Swedens 1991 banking crisis where Sweden nationalized virtually all of the zombie banks, fixed them with government money, then later reprivatized them.

If we fix the banks with our money and get them working, why should we then sell them to the same dicks who ****ed up the system in the first place?

[Arrian]

I agree with Krugman. However...

They're dithering probably because they fear that if they nationalize the banks, the folks/foreign governments who hold mortgage-backed securities in vehicles set up by the banks (SIVs, especially with Citi) will demand that the US government make them whole.

Do we want the US government to feel obligated to pay to correct all of the bad decisions of these foreign government and individual investors? As far as I know, there's trillions of dollars in losses from the housing bubble bursting, and much of it is invested in these SIVs.

I figured there had to be *some* reason for the dithering. Maybe this is it.

-Arrian

[chequita guevara]

No, they're dithering because they have an ideological aversion to nationalizing private property. Obama and his team are just another group of neo-liberals. Without a mass movement, they will continue to act like Hoover-lite. They could easily nationalize the banks and refuse to honor the CDSs.

http://www.salon.com/opinion/feature/2009/03/06/neoliberalism/index.html

Obama's timid liberalism
Once, even Republican presidents like Eisenhower and Nixon believed in the public sector. Now, during a national crisis, a Democrat opts for inadequate, neoliberal, private-sector remedies. What happened?

By Michael Lind

Mar. 06, 2009 |

Barack Obama's bold, ambitious budget plan proves that he is the true heir of Franklin Roosevelt and the New Deal. Consider Obama's Rooseveltian energy plan. In 1939, President Roosevelt decided to mobilize Americans to create a new source of energy: atomic power. Although he was urged to focus on government-funded R&D, FDR chose a different route. He wisely encouraged private capital to invest in atomic energy research by a variety of tax incentives. To make atomic power investment more palatable to private capital, FDR boldly chose to make all other forms of energy in the U.S. uneconomical, by slapping high taxes on kerosene and coal. With the money from the new federal Kerosene Cap and Trade system, President Roosevelt and Congress funded a small-scale federal research program, in the hope of attracting much greater private investment ...

Wait. What's that you say? FDR didn't do that? He poured federal money into the all-public Manhattan Project and created the first atomic bomb in a couple of years? He didn't tax kerosene to make it uneconomical and to encourage private investment in atomic power?

Oh. OK. Never mind.

But what about Social Security? In 1935, FDR signed the historic Social Security Act. It created a complex "retirement mandate" system, forcing all elderly Americans to buy expensive annuities from private insurance companies, without, however, imposing price controls on the insurance companies ...

What? FDR didn't force the elderly to subsidize private annuity brokers? He imposed a single, simple, efficient tax to pay for a single, simple, efficient public system of retirement benefits?

All right, then, forget FDR. He was a socialist, anyway. Let Dwight Eisenhower serve as a model for the Obama administration. President Eisenhower authorized the biggest infrastructure program in American history, when he signed the National Interstate and Defense Highways Act of 1956. The interstate highway act created an elaborate system of private tax incentives and public-private partnerships (PPPs) to encourage private corporations to build national highways. To begin with, all U.S. highways were leased to domestic and foreign corporations for a period of decades. Second, all U.S. highways were set up with toll booths, so that American drivers would be forced to repay the corporate owners of the national highways every few dozen miles. Finally, a system of high-speed lanes with higher tolls was created, so that the rich could whiz down the road while middle-class and poor Americans were stuck in traffic jams ...

All right, what now, wise guy? So that's wrong, too? Eisenhower's national highway system wasn't based on tolls, leases to foreign companies, income-based pricing, and tax credits for private corporations? It used gasoline taxes to fund free public highways?

Free highways without toll booths, owned by the public, paid for out of taxes? My God. So the John Birch Society was right after all. Dwight Eisenhower was as much of a socialist as Franklin Delano Roosevelt!

The point of this imaginary monologue is simple. Once upon a time in the United States, public goods -- from retirement security and energy research to public roads -- were provided by the government and paid for by taxes. As late as the Nixon administration, the provision of public goods by government was considered perfectly compatible with a robust market economy by so-called Modern Republicans like Eisenhower and Nixon as well as New Deal Democrats like Roosevelt, Truman, Kennedy and Johnson. In the intervening 40 years, however, free-market fundamentalists of the Chicago School have managed to change the debate, redefining "socialism" to mean not only public ownership of the means of production, but also public provision of public goods.

Rather than fight back, most Democrats in the last generation adapted to this hostile conservative political climate by jettisoning New Deal "big government" liberalism for "market-friendly" neoliberalism. Neoliberals shared the right's enthusiasm for deregulating industries that New Deal Democrats had regulated in the public interest. Jimmy Carter and Ted Kennedy supported the deregulation of trucking and airlines, while Bill Clinton presided over the dismantling of the New Deal era's banking regulations and declared: "The era of big government is over." Neoliberals and conservatives agreed that public goods should be provided by private, for-profit or nonprofit entities, rather than government agencies. If private corporations or universities had no motivation to provide public goods, well, then, they would be bribed with tax credits or other government subsidies.

Neoliberals are liberals in one sense -- they fret about unequal outcomes. But rather than help middle- and low-income Americans by regulating the prices of privately provided public goods, as the crude and direct New Dealers would have done, neoliberal Democrats have argued for allowing the "market" (translation: the publicly subsidized entities) to set prices and then promised to provide tax subsidies or grants to help middle- and low-income Americans pay for the expensive, privately provided public goods.

You might have thought that the Crash of 2008 would have led Democrats to reconsider this neoliberal approach to providing public goods by private means. But to judge from President Obama's budget, the White House is still living back in the neoliberal era, when the diminutive Milton Friedman cast a giant shadow.

Consider Obama's education proposals. The problem with higher education is that it costs way too much. Tuition costs at private universities and some state universities have been growing far more rapidly than inflation. A crude, old-fashioned, old-thinking New Deal liberal would see the problem as one of excessive prices demanded by universities, not insufficient funds on the part of the students whom the universities gouge. The hypothetical New Deal liberal would threaten to deny universities their privileged tax-exempt status unless they spend more of their endowments on tuition and keep their prices affordable.

The neoliberal alternative is to avoid impolite and divisive inquiries into the reasons for skyrocketing tuition costs. That would entail the government concluding that prices in a particular industry (in this case, a nonprofit industry) are too high, something that government should not do. Instead, the taxpayer will be forced to cough up money to help students meet the exorbitant fees. Thus Obama's first budget calls for maintaining the $2,500 New American Opportunity Tax Credit for middle-class students, while converting Pell Grants up to $5,550 into a permanent government entitlement. If I were a university, I'd raise my tuition by ... oh ... let's say $5,550 a year. Government subsidies without government price controls would encourage cost inflation, one might think, but this possibility appears not to bother the brilliant economists on Obama's team.

Then there's energy. The problem with alternative energy sources like solar power and wind power is that they are still too expensive, compared to coal, natural gas and nuclear energy. The answer, according to a minority of enviromentalists like Ted Nordhaus and Michael Shellenberger, should be massive, Manhattan-style public sector R&D to discover ways to bring alternative energy prices down -- in absolute, not just relative, terms, to maintain cheap electricity for American industry and American households. That would be the Roosevelt approach. But the Obama approach is to use a cap-and-trade system to artificially raise the prices of conventional energy, in the hope that private capital (with modest help from public capital) will pay for efforts to invent a cheaper solar cell or wind turbine. The fact that most of the left embraces cap-and-trade should not blind us to the fact that cap-and-trade is a classic example of an indirect, overly complicated, "market-friendly" neoliberal approach, touted originally by conservatives and neoliberals as an alternative to the allegedly discredited "top-down, command-and-control" approach that gave us, among other things, the TVA, the Manhattan Project and the Internet.

And healthcare? The Obama administration deserves credit for trying to reduce prescription drug costs and to promote electronic medical records. Obama's budget director Peter Orszag in particular deserves praise for pointing out that escalating economy-wide healthcare costs, not the Social Security and Medicare costs associated with the aging of the boomer generation as such, represent the real long-term threat to the U.S. economy. Even so, it seems likely that whatever ultimately emerges as the consensus Democratic healthcare plan will be yet another Rube Goldberg scheme for massively subsidizing employers, private health insurers, or both.

I'm sympathetic to the argument that the public, after nearly half a century of conservative anti-government propaganda, will oppose the direct provision of public goods paid for out of straightforward taxation -- the "socialistic" old Eisenhower-Roosevelt approach. It was the conviction that a single-payer healthcare system was politically impossible that led me to endorse the individual mandate system as the next best alternative, in "The Radical Center," a book I co-authored with Ted Halstead in 2001.

But a lot has changed since Wall Street imploded last fall. The great investment banks are gone, the U.S. has nationalized much of the financial system, and appears to be on the way to effectively nationalizing the automobile and housing sectors as well. In this environment, we need to consider some heresies, like the idea that the best way to provide a public good is not necessarily to pour subsidies on middlemen, and then bail them out with more subsidies when they fail at their public function.

The fundamental barrier today is the way that the issues are framed, by Democrats and Republicans alike. Thus the problem is defined not as making credit available for individuals and businesses, but as saving the banks and the shadow banking system. The goal is not to provide healthcare to all citizens, but to enable all citizens to purchase private health insurance. The objective is not to ensure universal access to higher education; it is to insure universal access to colleges and universities. In these and other cases, the means is confused with the end. The ultimate goal -- providing credit, healthcare or education -- is identified with the interests of non-governmental for-profit or nonprofit providers of that service. If these private institutions fail to provide the public service in a low-cost, effective and equitable way, then they must be subsidized even more. The idea of achieving the same public goals through simpler, more direct and efficient means that would cut out the middleman appears to be heresy to the Obama administration.

It's not necessary to nudge the Obama administration leftward until it arrives at socialism. When it comes to the public provision of public goods, Eisenhower Republicanism would be just fine.


-- By Michael Lind