http://www.nytimes.com/2009/11/20/opinion/20krugman.html?_r=1&hp The Big Squander By PAUL KRUGMAN Published: November 19, 2009 Earlier this week, the inspector general for the Troubled Asset Relief Program, a k a, the bank bailout fund, released his report on the 2008 rescue of the American International Group, the insurer. The gist of the report is that government officials made no serious attempt to extract concessions from bankers, even though these bankers received huge benefits from the rescue. And more than money was lost. By making what was in effect a multibillion-dollar gift to Wall Street, policy makers undermined their own credibility â and put the broader economy at risk. Skip to next paragraph Fred R. Conrad/The New York Times Paul Krugman Go to Columnist Page » Blog: The Conscience of a Liberal Related Times Topics: American International Group Inc. Readers' Comments Share your thoughts. * Post a Comment » For the A.I.G. rescue was part of a pattern: Throughout the financial crisis key officials â most notably Timothy Geithner, who was president of the New York Fed in 2008 and is now Treasury secretary â have shied away from doing anything that might rattle Wall Street. And the bitter paradox is that this play-it-safe approach has ended up undermining prospects for economic recovery. For the job of fixing the broken economy is far from done â yet finishing the job has become nearly impossible now that the public has lost faith in the governmentâs efforts, viewing them as little more than handouts to the people who got us into this mess. About the A.I.G. affair: During the bubble years, many financial companies created the illusion of financial soundness by buying credit-default swaps from A.I.G. â basically, insurance policies in which A.I.G. promised to make up the difference if borrowers defaulted on their debts. It was an illusion because the insurer didnât have remotely enough money to make good on its promises if things went bad. And sure enough, things went bad. So why protect bankers from the consequences of their errors? Well, by the time A.I.G.âs hollowness became apparent, the world financial system was on the edge of collapse and officials judged â probably correctly â that letting A.I.G. go bankrupt would push the financial system over that edge. So A.I.G. was effectively nationalized; its promises became taxpayer liabilities. But was there any way to limit those liabilities? After all, banks would have suffered huge losses if A.I.G. had been allowed to fail. So it seemed only fair for them to bear part of the cost of the bailout, which they could have done by accepting a âhaircutâ on the amounts A.I.G. owed them. Indeed, the government asked them to do just that. But they said no â and that was the end of the story. Taxpayers not only ended up honoring foolish promises made by other people, they ended up doing so at 100 cents on the dollar. Could things have been different? Some commentators argue that government officials had no way to force the banks to accept a haircut â either they let A.I.G. go bankrupt, which they werenât ready to do, or they had to honor its contracts as written. But this seems like a naïve view of how Wall Street works. Major financial firms are a small club, with a shared interest in sustaining the system; ever since the days of J.P. Morgan, it has been common in times of crisis to call on the big players to forgo short-term profits for the industryâs common good. Back in 1998, it was a consortium of private bankers â not the government â that put up the funds to rescue the hedge fund Long Term Capital Management. Furthermore, big financial firms have a long-term relationship, both with the government and with each other, and can pay a price if they act selfishly in times of crisis. Bear Stearns, the investment bank, earned itself a lot of ill will by refusing to participate in that 1998 rescue, and itâs widely believed that this ill will played a major factor in the demise of Bear Stearns itself, 10 years later. So officials could have called on bankers to offer a better deal, for their own sake, and simultaneously threatened to name and shame those who balked. It was their choice not to do that, just as it was their choice not to push for more control over bailed-out banks in early 2009. And, as I said, these seemingly safe choices have now placed the economy in grave danger. For the economy is still in deep trouble and needs much more government help. Unemployment is in double-digits; we desperately need more government spending on job creation. Banks are still weak, and credit is still tight; we desperately need more government aid to the financial sector. But try to talk to an ordinary voter about this, and the response youâre likely to get is: âNo way. All theyâll do is hand out more money to Wall Street.â So hereâs the real tragedy of the botched bailout: Government officials, perhaps influenced by spending too much time with bankers, forgot that if you want to govern effectively you have retain the trust of the people. And by treating the financial industry â which got us into this mess in the first place â with kid gloves, they have squandered that trust.
A good article except that the author falls into the "blame someone else camp." The bankers were complicit and greedy. But politicians pushed "house ownership as a moral imperative like freedom and democracy" But people played the buy and sell game for greed. etc etc There isn't just one guilty party.
That Nobel fraud is the last one who should be complaining. "To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." - Paul Krugman, Dubyaâs Double Dip, August 2nd, 2002 Compare to: "Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market. I therefore hope this committee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act." - Ron Paul in the House Financial Services Committee, September 10, 2003
No shit It's really hard to stomach this absurd little freak (klugman) complaining about the results of govt basically following his own advice. What's more do we still find this freaking idiot lamenting the stimulus was too small. This is what we get when the only acceptable school of thought is that of "the economic tooth fairy" When will people wake up to the fact that keynes in order to ingratiate himself with govts around the world formulated his conclusions first(based upon what govts wanted to hear) and his reasoning second. When one looks upon it this way it's easy to see why his crazy notions found immediate (and still enjoy today)favorable audience with govt policy wankers the world over. Good lord it's time the world dumped the grandiose attention whore's ideas whose economic theory of "tinkerbell* and the tooth fairy" has caused more pain and destruction the world over save Marx. *favorite of liberal dupes : just wave the magical govt wand of spending money you don't have , and POOF all problems instantly vanish.