Krugman: Obama is F'ing Up Big Time

Discussion in 'Economics' started by ByLoSellHi, Mar 27, 2009.

  1. Obviously, I took artistic licensing with the title, but that's the basic gist. I agree with Krugman. Obama will be making a massive mistake if he empowers Geithner to revive securitization on a mass scale.

    The Market Mystique

    Published: March 26, 2009

    On Monday, Lawrence Summers, the head of the National Economic Council, responded to criticisms of the Obama administration’s plan to subsidize private purchases of toxic assets. “I don’t know of any economist,” he declared, “who doesn’t believe that better functioning capital markets in which assets can be traded are a good idea.”

    Leave aside for a moment the question of whether a market in which buyers have to be bribed to participate can really be described as “better functioning.” Even so, Mr. Summers needs to get out more. Quite a few economists have reconsidered their favorable opinion of capital markets and asset trading in the light of the current crisis.

    But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.

    The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.

    And the financial system wasn’t just boring. It was also, by today’s standards, small. Even during the “go-go years,” the bull market of the 1960s, finance and insurance together accounted for less than 4 percent of G.D.P. The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average, which until 1982 contained not a single financial company.

    It all sounds primitive by today’s standards. Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.

    After 1980, of course, a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. The new system was much bigger than the old regime: On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960s. By early last year, the Dow contained five financial companies — giants like A.I.G., Citigroup and Bank of America.

    And finance became anything but boring. It attracted many of our sharpest minds and made a select few immensely rich.

    Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.

    But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.

    Sooner or later, things were bound to go wrong, and eventually they did. Bear Stearns failed; Lehman failed; but most of all, securitization failed.

    Which brings us back to the Obama administration’s approach to the financial crisis.

    Much discussion of the toxic-asset plan has focused on the details and the arithmetic, and rightly so. Beyond that, however, what’s striking is the vision expressed both in the content of the financial plan and in statements by administration officials. In essence, the administration seems to believe that once investors calm down, securitization — and the business of finance — can resume where it left off a year or two ago.

    To be fair, officials are calling for more regulation. Indeed, on Thursday Tim Geithner, the Treasury secretary, laid out plans for enhanced regulation that would have been considered radical not long ago.

    But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.

    As you can guess, I don’t share that vision. I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.
  2. You do realize that in agreeing with Krugman, you are supporting the nationalizing of the Banks.
  3. Landis, I do realize this.

    So far, taxpayers have sunk 400 billion into Citigroup. Citigroup could have been purchased outright for something along the order of 11 billion dollars a month ago.

    These policies Treasury and the Federal Reserve are following are insane and inefficient, and they're going to ass rape the taxpayer in the short and long run.
  4. How can you quantify that? Statements like that are overly simplistic and disregard real in favor of nominal. Not to mention they say nothing of the status of the employment and demand (proxy for taxpayers' disposable real income) as correlated to policy response.
  5. I know that simple math mandates that sinking hundreds of billions of dollars into one bank (Citi), and running the risk of having to sink even more future taxpayer dollars into it, when it can be bought, in its entirety, for 11 billion, does not seem to be a rational policy response.
  6. timbo


    Eventually this Smith Hayek guy will show up and our problems will disappear.:D
  7. Eight


    The Obama appointees are all from Wall Street. He has the most Wall Streeters in his cabinet of any POTUS, ever. They probably are not going to do much in the way of reform. They probably are the most out of touch with main street cabinet ever imagined as well.. and Obama is amazingly unaligned with the typical American. It's hard to tell where we will be in a few years. Political views cycle and currently they are way to the left. To most people government is the answer nowadays and Wall Street is in charge of the government. Interesting to say the least. I'm thinking that trading is the place to be for the foreseeable future...
  8. Well, to me, it sounds like the current adminstration is a bit schizophrenic. A left leaning President surrounded by right leaning advisors.

    Not really a formula for stability. Can you say *prolonged* economic crisis ?

    But I guess I'd rather have this than a bunch of communists.
  9. timbo


    Most admins are schizo. It's basically competition between attention whores; each of which wants to listen to group consensus.
  10. Touche. :)
    #10     Mar 28, 2009