Krugman vs. Obama-Geithner

Princeton economist Paul Krugman has received a lot of attention lately for his opposition to the Obama-Geithner plan for dealing with the toxic assets issue.  He’s been making the rounds on the news shows, and this week he’s on the cover of Newsweek.  As one of the quotes in Newsweek’s article on him seems to imply, Krugman perhaps sees himself as sort of like the hero of one of those old Isaac Asimov sci-fi novels he used to enjoy as a kid:  as a bit of a nerd on a mission to save civilization.     

Of course, I don’t know anything about economics, but if I understand right I think Treasury Secretary Timothy Geithner’s plan essentially involves a public-private partnership in which the private sector will purchase the bad bank assets (estimated at about $2 trillion dollars, mainly mortgages) at auction (perhaps as much as $1 trillion dollars worth), but largely subsidized (perhaps 85%) by taxpayer money.    

What’s Krugman’s beef with the toxic assets plan?  “The administration,” he wrote in a post on his blog,  

is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. . . .  [T]here are no bad assets, only misunderstood assets. 

But Krugman believes the banks

really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money.  To keep the banks operating, you need to provide a real backstop — you need to guarantee their debts, and seize ownership of those banks that don’t have enough assets to cover their debts. . . .  

Paul Krugman is certainly not the only economist out there who’s critical of the Geithner toxic assets plan; and perhaps most of these critics, like him, see some sort of nationalization of at least major banks as inevitable.  These others include:  the University of Texas at Austin’s James K. Galbraith; Dean Baker, co-director of the Center for Economic and Policy Research; MIT’s Simon Johnson; John McCain’s former economics advisor Douglas Holtz-Eakin; and Columbia University’s Joseph Stiglitz, who won a Nobel Prize for economics in 2001. 

But Krugman has a huge following on his blog, as well as a twice-a-week column in the New York Times — and, to top it off, he also just won a Nobel Prize last Fall.  In this difficult time of financial crisis, it seems he has emerged as a sort of everyman’s economist of the moment.    

Anyway, if you’re interested in finding out more about Paul Krugman and his ideas, Greensboro Public Library has the following titles by him:  The Age of Diminished Expectations:  U.S. Economic Policy in the 1990s (1990); Peddling Prosperity:  Economic Sense and Nonsense in the Age of Diminished Expectations (1994); The Great Unraveling:  Losing Our Way in the New Century (2003); The Conscience of a Liberal (2007); and, last but not least, The Return of Depression Economics and the Crisis of 2008 (2009).


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