Sorry Krugman, Geithner's Plan is the Least Risky Option

[babylonsister]

http://tpmcafe.talkingpointsmemo.com/talk/blogs/dcdanny/2009/03/for-once-krugman-is-wrong-a-de.php?ref=recdc

Sorry Krugman, Geithner's Plan is the Least Risky Option
March 21, 2009, 11:59AM


Krugman, who shined so much light in the dark days of the Bush administration, and who is still doing more than anyone outside of This American Life to help non-economists understand the banking crisis, is fundamentally wrong in his assessment of Obama's plan to rescue the financial system.

The Obama administration 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. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

This is a straw man and suggests why Rahm Emanuel correctly dismissed Krugman as blind to the complexities of governing. Obama has not said that the financial system is fundamentally ok, nor has he said that the banks are "essentially sound." On Thursday, for instance, Obama diagnosed the ultimate cause of the AIG debacle as "a bubble-and-bust economy that valued reckless speculation over responsibility and hard work." Not exactly an endorsement of the status quo on Wall Street, and not a new position either.

There are only two real difference between Obama and Krugman. The first is Krugman's rejection of the argument, made first by Paulson and now Geithner and Obama, that the so-called troubled assets are worth more than anyone is currently willing to pay for them. To Krugman (at least in this debate), the real value of anything is what the market willing to pay right now. This is the principle of mark-to-market accounting, which in other circumstances allowed Enron to steal vast sums by claiming inflated boom-time asset values. Now, Krugman asserts that because a busted bubble has crushed asset values, banks like Citi should be regarded as fundamentally and hopelessly insolvent. He makes this case in the abstract, without having analyzed at all the cash flows that underlie the mortgage-backed securities.

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But could the Treasury Department run Citibank and Bank of America for the two to three years it would take to reprivatize them? With maybe a few weeks to prepare? The very thought of it makes me want to trade what's left of my 401K for a few gold coins and a shotgun.

That's my reaction, and I'm as liberal as anyone you're likely to find in my Blue State zip code. Now, imagine the reaction of the Republicans and their media abettors. And the foreign governments and financial markets. Shit flinging and raw fear, that seems to me the most likely outcome. Perhaps the takeover option would work in the end. But I'd rather bet on the Geithner plan.

A closing observation: much of the skepticism towards Geithner among progressives follows from a sense that he doesn't "get it" about what went wrong. His instincts and sensibilities align with the investment bankers, not the middle class. So it's natural to suspect that Geithner's plan will benefit those who should be punished, and that, left to his own devices, he would be happy to go back to the status quo that let the finance industry run completely amok for a generation.