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Krugman is someone I admire greatly. I've written at least five or six posts praising this educated, eloquent man to the skies over the past six months. I vigorously recommended his latest book (which is in actuality a revision of an earlier book) "The Return of Depression Economics."
Krugman is a brilliant analyst of prior fiscal disasters, especially those in other countries. He's passionate and extremely bright. His analysis of currency fluctuations and the consequences of them is insightful to say the least.
But when it comes to offering his plan for our current disaster, I have to be honest.
Speaking of his new book--a 191 page volume--Krugman reserves his solution for pages 184-191 (and that's stretching it, because a lot of this has to do with long term financial reform rather than solving the "emergency.") Krugman's solution to our current emergency runs from halfway through page 184 to the bottom of page 188.
I turn once against to his solution to this emergency, on page 184, and I'm sure you will agree it's not terribly detailed:
"...we need to deal with the clear and present danger. To do this, policy-makers around the world need to do two things: get credit flowing again and prop up spending..." He goes onto say that "the first task is the harder of the two, but it must be done..."
Short on specifics, totally lacking in helpful advice or even minimalistic details.
He suggests capital injection to unfreeze the credit markets: "The obvious solution is to put in more capital."
It didn't work in Japan for a number of reasons... He doesn't tell us where it has worked.
Okay, yes...and...? "...A financial rescue along similar lines is now underway in the United States and other advanced economies, although it was late in coming, thanks in part to the ideological tilt of the Bush administration..."
Okay, it's too late. It's probably too late to stave off this emergency through rampant recapitalization.
He goes on to write:
"It seems doubtful, however, that ("a recapitalization scheme" as opposed to the "buying up of $700 billion in troubled assets from banks and other financial institutions," which by his own admission he finds useless), will be enough to turn things around for at least three reasons."
So, on page 186 he lists three reasons that recapitalization won't work anyway:
To little relative to GDP.
It's "not clear how much of the bailout will reach the shadow banking system, the core of the problem."
"Third, it's not clear whether banks will be willing to lend out the funds as opposed to sitting on them..."
That's great. That's terribly helpful, especially reason #2.
Dear Mr. Krugman. Since you pinpoint the "Shadow Banking System" as the crux of the problem, what IS the solution to attack this crisis at the root, debilitating and disarming the "shadow banking system" and ending the crisis?
Not a word on that. He drops it like a hot potato.
So he disapproves of buying toxic assets and disapproves of recapitalization. He suggests nationalization. So did I and a number of other DU'ers, but that didn't go over so well, just like it's not going over well with investors or the American people.
He seems to grudgingly approve of a stimulus package:
"The point in all of this is to approach the current crisis in the spirit that we'll do whatever it takes to turn things around; if what has been done so far isn't enough, do more and do something different, until credit starts to flow and the real economy starts to recover.
These are not details.
These are not helpful suggestions.
Although Krugman's analysis of prior foreign financial disasters is priceless, what is he offering in the way of specific advice to our current administration?
Something like this paraphrase from his Bloomberg interview back in December or January?: "I have no idea what it should consist of, but it has to be huge. The world has to believe it will work."
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