The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.
For example, the administration initially floated the idea of offering banks guarantees against losses on troubled assets. This would have been a great deal for bank stockholders, not so much for the rest of us: heads they win, tails taxpayers lose.
Now the administration is talking about a “public-private partnership” to buy troubled assets from the banks, with the government lending money to private investors for that purpose. This would offer investors a one-way bet: if the assets rise in price, investors win; if they fall substantially, investors walk away and leave the government holding the bag. Again, heads they win, tails we lose.
Why not just go ahead and nationalize? Remember, the longer we live with zombie banks, the harder it will be to end the economic crisis.
Shut down the insolvent banks, pay the FDIC insured accounts, and sell the insolvent bank’s assets through the Resolution Trust Corporation. Let’s be done with this! Why should the taxpayer be on the hook for the bank share holders? By what conceivable stretch of the Constitution does the government have the right to take my money and give it to rich share holders?
It is time we started following our laws instead of making it up as we go along.
I agree with Sick & Tired – there is a process for this. The ongoing soap opera over a few banks that are “too big to fail” (supposedly) and the new administration’s obvious bewilderment at what to do is destroying investor confidence in banks that are relatively healthy.
Enough! The government is making things worse. Stop already!
[blockquote] Let’s note that Krugman is a sober, first-rate economist, but also a woolly-eyed, low-grade political hack. He firmly believes that government is better qualified than private actors to direct the country’s economy, and has advocated a Federal government share of 28% of GDP, compared to the current 22% or so. Since he understands economic efficiency as few do, the conclusion is that he’s committed to the social outcomes that come with government control, as opposed to the free-marketer’s commitment to maximizing utility. [/blockquote]
-Francis Cianfrocca
Deconstructing Krugman
http://newledger.com/2009/02/deconstructing-krugman/
#1, I am in substantial agreement – it should be noted, however, that the RTC is one of those rare government institutions which went out of business after it’s mission was completed. (My wife worked for the FSLIC, then RTC and then the FDIC.)
#1,
Although I basically agree with you, I am uneasy about your recommendation to “sell the insolvent bank’s assets”. What are the consequences of this, especially if done all at once ? Aren’t a lot of their assets such things as non-performing loans, foreclosed properties, and other toxic financial instruments ? Would selling these assets be equivalent to dumping a lot of foreclosed properties onto an already depressed real estate market ? This should probably be done, but perhaps not all at once, but in a measured, disciplined manner.
I’m on board with [b]Sick & Tired of Nuance[/b] too.
Let the banks fail and let the FDIC cover the customer accounts. Otherwise all the government is doing is rewarding bad managers and looking to take control of more of people’s lives. The government should not be competing with banks that are fiscally sound. It’s not a level playing field when the government is involved.
Sulik, I don’t follow the content of your argument. Some guy thinks that Krugman is a hack because he thinks that people (e.g. social outcomes) are more important than ideology (maximal utility)?
Krugman’s argument seems to be that Obama’s plan is “lemon socialism” – the stockholders get the money, the taxpayers foot the bill. Is that what your guy thinks is desireable?
Or is “preprivatization” desirable? The bank is forced to open its books; obligations are met, the taxpayers get a stake, and everything is cleaned up. Sweden did it. So could we. Right now banks don’t trust each other.
John, look beyond the language of the economist and understand what the quoted passage is saying. “People” is not equal to “social outcomes” – that is a lazy sophistry. Krugman is committed to “social outcomes” he likes, which his friends in government engineer. These outcomes may be good for a few people, but they aren’t necessarily good for all of us as a whole. Google “rent seeking.”
#1: “By what conceivable stretch of the Constitution does the government have the right to take my money and give it to rich share holders?” I don’t have a clue as to how to handle insolvent banks and what to do with the economy right now. But the one thing I do know is that we need to stop the class warfare. It is no longer true that, in general, people who own stock in banks are “rich share holders.” Everyone who has a 401k or an IRA in mutual funds probably owns some shares of some bank somewhere. To let the stockholders hold the bag on all of this means that most of the citizens of our country, who, since at least 1994 (and often longer), have been saving for their own retirement (as they were told to do, since SS is no longer going to be enough – nor was it every originally intended to be) are going to be severely damaged, even more than they already have been – and will have to keep working longer or, if they have already retired, will have to find work again or will have to ask for more government assistance. Though liberal politicians (especially our President) love to play the class warfare game, it not only is wrong on capitalistic principal, it’s wrong in economic reality today and needs to stop. Otherwise our country is going to be torn apart. Also, I would challenge anyone to look at the cultural revolution when Mao began taking over China – the persecution of anyone who was wealthy or well-educated was the first thing done – those folks were sent to re-education camps. Can’t happen here? Think about the eroding of our capitalistic system. Think of the CEOs of the big companies who were hauled before Congress solely for the purpose of publicly humiliation a few weeks ago, some of them just because of their salaries (set well before this economic crisis) and because their companies had corporate jets (that were purchased well before the current economic crisis).
Agree with 1. We have a system in place. Let’s use it.
9) billy, you mean the class warfare of the rich upon the middle class? I think the middle class and the poor are simply asking for self-defense.
Look, I’m not sure what you think “class warfare” is, but I see Enron, Tyco, Madoff, and lots of people who won’t pay for their fair share.
Um – when is hodling the rich accountable for their actions “class warfare.” I think its called responsibility.
And second, there is a long distance between asking people to have some empathy for those losing their homes and taking responsibility for one another and the cultural revolution. After all, most of Obama’s guys are of the same class of people as the wealthy.
And as far as eroding the “capitalistic” system, the capitalists did it themselves. And if it were working, then it would be working, magically now. But nobody is buying. And nobody is lending. And that’s not good for a commercial / capitalist society.
John, #11, you are using terms the same way Obama and his mouthpieces use them. Who is the poor and who is the middle class. If the middle class is $250,000 down, then they own a lot of stock in their retirement mutual funds and won’t like being called “rich share holders.” Who is the poor? Where are you drawing the line? What is someone’s “fair share?” Who decides what someone else’s fair share is and how? What makes $250K a cut-off – because Obama said someone is rich if he/she makes that much money? If the government takes 50% of that (and it actually takes more than that right now), is that person who makes $250K still rich. What if the government takes 60-90% of it? Are they still rich? No one likes the excesses or fraud of Enron, Tyco, Madoff or Stanford. Tyco and Enron execs are in jail. Madoff and Stanford are likely to be there soon. Is that accountability for them? Who are the rich you want to hold accountable and for what actions? Do you want to hold Barney Frank or Chris Dodd accountable for their actions? How about the heads of Fannie and Fredddie during the 90s and 2000s? No one is asking anyone else not to have empathy for those losing their jobs or homes; but there are some on both sides of many of these mortgages who knew better and did it anyway. Should we hold them responsible for their actions? As far as our capitalistic system, it is not acting as such a system now because it is not being allowed to by the government. No one is buying or lending because the government won’t step back and allow the system to work within itself … just like #1 said. The government (liberal Democratic led government) right now is obviously more interested in using this crisis to pass all of its pay-back agenda for its voters and to try to keep itself in power for the future. This government does not appear interested in helping the economy, only in buying votes. And our children and grandchildren will pay for it for many years to come. And believe me, raising taxes on those making over $250K will not cut the deficit down – it will, in fact, send the economy down even further, because there will be less investing in the economy. Also, the tax base will shrink because those people will quit working, go overseas, do anything they can to avoid onerous tax rates, just like the Brits did in the 60s and 70s, when their tax rates hit 90% – remember, they all moved to the States. Redistributing money through tax “credits” to people who make so little that they do not pay taxes is attempting to build the economy from the ground up, as Obama said he would. Unfortunately, those folks don’t employ other people or build businesses to employ people. Small businesses and venture capitalists and entrepreneurs put people to work – the same people whose capital our brilliant government is going to raise taxes, which will take away their capital to start and sustain businesses that will employ and re-employ people, who are now out of work and losing their homes. Our economy is built from the top down. Subsidizing and stimulating the bottom up will produce bottom up and nothing else – and bottoms up ain’t pretty.
#6, you have got it baby!! This is the way the game was played in the 30’s and it seemed to work.
Billy paragraphs would help. We know that JW is a “liberal”.
You seem to be saying that many people are shareholders. Yes. People do own stock. Given the number of people in my parish who have seen their returns plummet to 1997 levels, it would have been better if they had never invested in the first place.
You assert that the government is preventing banks from loaning. How so? It’s an interesting claim. The government is giving away a lot of money to banks. And they still aren’t loaning. The government is GiVING them money and they aren’t loaning. Why would they loan if they didn’t have money?
What’s going on?
You seem to be arguing that the stimulus is Democratic payback, but it seems that a lot of Republican districts will be getting some of the money. And then you make some pretty odd statements about raising taxes. But cutting taxes didn’t bring our deficit down over the last 8 years. Cutting taxes doesn’t increase revenue in the long term; it may in the short term. Targeted taxes does increase revenue. And during the clinton years, it brought wealth to every percentile.
I think the most telling statement you make is that “our economy is built from the top down.” That sounds a lot like tyranny for me. Our economy is built because people buy and sell goods. If a lot of poor people want a pizza parlor or a liquor store, one of those people will realize they can make some money by opening a store. They may go to a bank to get some cash for some investment. Unfortunately, those banks aren’t lending.
Poor people do create jobs by spending. They buy pizzas, they go to movies, and are more likely to spend than those who are wealthy. Those who are wealthy may put money, for example, in banks. who aren’t lending to businesses right now. And they might be recapitalizing.
Raising taxes actually can – to some extent – discourage people from simply putting money in Swiss bank accounts and putting it back into their business. Instead of taking it as personal wealth, they seek to grow their business, because there are more tax incentives for improvements and the like. Granted, I think we both agree that 90% isn’t a great way to tax (although I do think that all income that is more than $4,000,000 a year could be taxed at that rate).