Paul Krugman: Bailout Narratives

[Kurt_and_Hunter]

Bailout narratives
There seem to be two prevailing narratives about the bailout plan(s). Both have elements of truth, but are fundamentally wrong.
One narrative is that of the Wise Men and the Destructive Yahoos. According to this narrative, men who Understand What Needs to be Done put together a plan to save the world, but they did a bad job of communicating, and a mob of ignorant people stands in their way.

The other narrative is that of the Evil Plotters and the Righteous Uprising. According to this narrative, the same people who sold us the Iraq war have tried to bully Congress into adopting a plan that is, in essence, a cynical ripoff — a scheme to transfer vast wealth to the rich and cripple the next administration.
As I said, there’s some truth to both narratives. Many of those opposing the bailout are indeed destructive yahoos — read some of the speeches during the House debate. And yes, there were Iraq echoes in the way Paulson tried to ram his original plan through.

But both narratives are mostly wrong.

There’s a reason Paulson et al had such a hard time communicating the case for their plan — they didn’t have a very good case. To this day they’ve never been able to explain clearly why buying up bad mortgage assets at market prices will solve the credit crunch. The Wise Men, as far as I can tell, have never had a clear idea of what they’re doing.

My view, which I think is now shared by many economists, is that Paulson grabbed hold of the wrong end of the stick — he should have been seeking to expand bank capital, taking an ownership share in compensation, rather than trying to push up the value of toxic paper. In the end, that’s what we’ll probably do.

On the other hand, the way that Paulson et al have been blundering around puts the lie, I think, to the idea that this is a cynical ploy. Ideology certainly played a role — it’s probably a lingering distaste for Evil Socialism that made Treasury go for buying toxic waste rather than injecting capital. And if the Bush years have taught us anything, it is that sometimes conspiracy theories are right. But in this case the performance has been more Keystone Kops than Star Chamber.

So now what? Like Jamie Galbraith, I’d rather see Dodd-Frank-Paulson, which is much better than the original plan, pass than not. The true cost to taxpayers will probably be close to zero, and it would buy some time. But I’m not passionate about this. The real financial rescue still lies in the future, probably under the Obama administration.


http://krugman.blogs.nytimes.com/2008/10/01/bailout-narratives/

[ixion]

1. Keystone Kops steal 700 billion?

I think not. Sorry, I'm going to have to disagree with Krugman, again, on this issue, and side with an earlier version of Krugman, the one where he explained that if we didn't stop racking up debt that we were going to destroy the dollar . This is what I'm not hearing addressed, and what I think is the most critical issue.

[phantom power]

2. The narrative I heard was not about propping up bad paper...

the purpose of buying Big Shitpile was not to try and preserve its value, it was to get it out in one place where everybody could see it, and then start properly valuating the remainder.

Of course, that's just one more narrative among many.

[Skink]

3. He said today the fix it demands won't be coming from the Bush admin...

So this is the best that can be done.