Krugman: "Failing the Test"

[Kurt_and_Hunter]

I am sympathetic to folks who might not like general economic posts in GDP, but the fate of the Obama administration is so inextricably tied to developments in the economy that I think my posts are, though often depressing, on point. And some folks seem to find them interesting. (The Obama administration without economic data/analysis is like discussing FDR in 1942 without discussing the progress of the war.)

Failing the test

It’s a depressing spectacle: on both sides of the Atlantic, policy-makers just keep falling short — and the odds that this slump really will turn into Great Depression II keep rising.

In Europe, leaders rejected pleas for a comprehensive rescue plan for troubled East European economies, promising instead to provide “case-by-case” support. That means a slow dribble of funds, with no chance of reversing the downward spiral.

Oh, and Jean-Claude Trichet says that there is no deflation threat in Europe. What’s the weather like on his planet?

On this side of the Atlantic, Tim Geithner seems committed to the view that banks should stay private even if they’re bankrupt, because — well, just because. James Kwak is driven to exasperation:

To be blunt, it sounded like the “private is better” mantra we heard from the Bush administration, and (to a slightly less extent) the Clinton administration before them. Sure, most people agree you don’t want all individual lending decisions being made by bureaucrats in Washington, but that’s just a straw man. There are valid reasons to debate whether nationalization is the best solution; in particular, if you were to take over Citigroup, even for a short period of time, would that immediately weaken Bank of America so much that you would be forced to take it over the next day? And what about JPMorgan Chase? But that’s not what Geithner said. He said “private is better.”

And so is the extremely moderate Tim Duy, over the insistence of policymakers that the “true value” of assets is higher than anything the market is actually willing to pay:

Policymakers are assuming that restoring proper functioning in credit markets - and confidence in general - is equivalent to a housing price rebound. They seem incapable of envisioning a world in which this is not the case. This tunnel vision prevents policymakers of trying to devise policy which assumes that the many of the assets in the banking system are simply “bad.” For Bernanke and Geithner, there are no bad assets. Only misunderstood assets.

And we have the spectacle of James Baker — James Baker! — attacking the Obama administration from the left, calling for temporary nationalization of zombie banks as part of the recapitalization process.

The sickening feeling of drift — the sense that policymakers are refusing to face hard facts, and are dithering while the world economy burns — just keeps getting stronger.

http://krugman.blogs.nytimes.com/2009/03/02/failing-the-test/

[Triana]

1. Send this link and a preview to whitehouse.gov

maybe 'somebody' will look at it.

[Median Democrat]

2. Here Is My Take, If You Were Going To Nationalize The Banks...

You would not announce it or discuss it ahead of time. Why? Because doing so would cause the value of stock shares to tumble, and people at the bank to start to flee, etc. In other words, having an open dialogue on bank nationalization by the White House would pre-ordain the result of the discussion.

More likely, on a Friday evening, after much secret planning and preparation, including hiring massive amounts of FDIC employees, you quietly take over on a weekend. Also, the government would need to take over other banks in similar financial straits, because taking over Citi would increase fears that BofA would be taken over.

[backscatter712]

4. That's a good point.

In all the other issues the Iraq War, the stimulus package, civil rights and so on, Obama's at least been mostly effective, but it's in the banking crisis where it appears to the public that he's failing the gut check and taking ineffectual steps. It seems out of character for the Obama administration, and even though Tim Geithner and Larry Summers so often seem to have their heads up their asses, they are very smart people who understand the number crunching and probably have a good idea what's going to happen.

But if he's planning a dramatic step like nationalizing the banks or putting them into receivership, given the effects that even rumors of such steps have on the financial markets, would he publicly discuss them?

If he is planning a dramatic nationalization step, we might find out about it soon, because the Dow is below 7,000, the markets are tanking just on the stories we already know about, like more money going to AIG, so the point of keeping nationalization plans secret so the country doesn't go into financial panic is becoming moot.

[uponit7771]

6. Yeap, didn't think I'd see 7000k...6800 is sKeery, good thing is consumer spendin went up .5% in Feb

...and treasuries rates are getting better

[Frank Booth]

11. If they're planning on nationalizing any time soon, though, why take the 40% stake in Citi?

I can't see the government nationalizing soon after doing that -- it would make them look like they're flailing around. I guess it's possible that they're considering nationalizing it in a few months, and the conversion of preferred shares into common was needed to get Citi through the next few months, but I have to agree with Krugman that there appears to be a serious lack of decisive action right now.

Overall, I think Obama has done a great job in the 1 1/2 months he's been in office, but Geithner's looking like the weak link at this point. Of course, the world's entire economic system is in such a mess that even Saint Krugman probably wouldn't be able to fix it.

[anonymous171]

3. It's going to take massive protests to change anything in our current state.

We need to make the rich afraid of us so they seek government protection. Right now they think that they can control us and even use us to defend themselves against the Government.

[Jennicut]

5. Nationalizing the banks? Lovely, so we can prop them up fully?

I say let them fail. We did enough. Let little banks come forward and start taking over.

[uponit7771]

7. I don't know why ShitiBank is still listed...1.22 is a stupid when there are other banks to list

[backscatter712]

8. You realize that if the banks fail, it will cause total protonic reversal for the entire country.

No, scratch that, the entire world. The banks are already refusing to lend, axing credit limits, and choking credit lines that businesses need just to conduct day-to-day operations. If this keeps up, nobody will be able to do anything resembling a monetary transaction - we'll be back to the barter system. In the meantime, businesses are failing, people are losing their jobs, already at scary rates due to the banking clusterfuck.

Just letting them fail would cause the entire economy to fail.

So yeah, I'm for full nationalization. Not the current ineffectual tactic of throwing money at zombie banks to delay the day they close their doors. Full nationalization. That means the .gov seizes the banks, puts them under control of federal officials, fires the assclown executives that ran these banks into the ground, and leaves the branches open so customers have access to their money and can still get loans & such, while the government picks the rotten meat off the carcass, writes off all the bad assets and bad debts, and essentially builds a new bank with the same name as the old bank. Once the bank becomes solvent, then sell it back into the private sector.

[Jennicut]

9. It will take an incredible amount of money to nationalize the banks

You do realize that by nationalizing these banks we will esentially pour even more money and more of our workers into them just to give them back to the private sector like it was no big deal. Its not nationalization but socialization of the banks-more corporate welfare. I think the entire banking system as we know it is a mess. The fact that some on the right want nationalization tells me this is not a good idea. I think some of them need to fail. They are not lending right now so why would they in the future. There is just no way to make some of them solvent, the losses are too big. The monopoly of banks needs to end. Greenspan wants this done and that makes me very nervous.

[KittyWampus]

10. Ah, no. The US would partake of profits as assets are gone through and sorted out.

[Median Democrat]

12. Lets Say Feds Wanted To Nationalize. Can They? Enough Employees?

This is the issue that is hinted at, but never discussed at length. Everyone agrees that nationalization is a massive undertaking. Okay. How massive, and is it so massive, that it cannot be done as a practical manner. Does the federal government even have enough FDIC employees to pull it off? As far as I know, the FDIC is being stretched to the limit, and is taking over banks at a rate of about 2 a week. Who is going to nationalize the banks even if the Obama administration wanted to do it?