Tim Geithner's bank rescue plan looks terrible. I don't want to go to Japan.
Update: So what are we rooting for here? Congress to shut this down? Geithner's opponents within the White House to get their knives out? Massive public outrage to stop pointless bank giveaways? I'd rather not degrade Obama's political capital before the health care fight -- everybody remembers NAFTA '94. But there are plenty of scenarios where that could end up happening.
I don't know what to do. The problem is that whatever damage might be done to Obama's political capital through vigorous, and I hope successful, opposition, it pales in comparison to the damage that a completely broken economy will do.
He has to fix the economy. It sucks, but it's that simple. If Obama is able to take credit for an improved economy by 2012, then he'll probably be allowed to do whatever he wants in his second term. If he can't then we're looking at - well, I don't know. A GOP-controlled Senate? Plus some Republican freak in the White House? Americans don't vote for those they blame for their economic woes.
Krugman is probably not the most objective observer of the Obama administration. You may not realize this, but he really had it out for the Clinton administration when they were in power too. They seemed to do OK though despite Krugman's complaining and ridicule. So there is a history here - Krugman seems to either oppose the governments economic policy (Obama, Clinton) or loath it (Bush). Krugman is useful, but he seems to be overly negative when people don't do exactly what he would do . . .
Also, remember, he made is his mark in International Trade theory. So his opinion matters, but it is not as if this is his particular area of expertise.
Another take is here:
Yeah, I read that this morning, Ira. The same general objections seem to apply, though -- how do we deal with insolvency without overpaying for the assets? Buying the assets at fair prices doesn't deal with the insolvency of the banks unless the assets are really not bad and it's just a panic so fair prices are quite high. And if we were really in a mortgage bond bubble, that's not the case.
Assuming that the fair prices for the mortgage assets are low, you're either going to (1) buy them at the fair low prices and leave the banks in bad shape, or (2) buy them at inflated prices and give away lots of public funds to rich people who made bad decisions.
Right, so the only thing to do is make sure the government is the one holding all the stock of the banks that are getting overpaid. Then, we are giving lots of money to ourselves. And have a chance to destroy lots of the vampire entities and their 'financial products.'
The good news is that the economy is in the downward slide of a recession, and having a more functional banking system does not really matter much until the economy is in a position to start a recovery.
Well, we did try to have a financial-wizardry-led recovery in 2001, but that didn't work out too well ... the weakest recovery for job growth and wage growth since WWII and laying the foundation for the most serious recession since the two recessions of the Great Depression.
But while people are complaining that "banks aren't lending" ... prudent banks don't lend heavily into a downturn. Its not until the upturn that banks play their role in taking a nascent recovery and providing the credit needed for producers and consumers to react so that it can pick up momentum.
That means we've got until late fall at least for the Administration to waste time with new, more sophisticated versions of Paulson's mistake, without the absence of a healthy banking system seriously hampering the economy.
I'd say keeping beating the drum for the workable system proposed by Stiglitz ... there sure as hell will still be insolvent banks at that time to bring it to bear on.
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