Romer Seems To Break With Geithner On Cause Of Crisis; Agrees with Krugman

[TeamJordan23]

Romer Seems To Break With Geithner On Cause Of Crisis

Christina Romer, at a speech at the Brookings Institution Monday afternoon, appeared to give support to critics of Treasury Secretary Timothy Geithner who say that he is wrongly treating the economic collapse as a "liquidity crisis" when it is instead a crisis of solvency in the banking system brought on by a collapse in asset prices.

"Most obviously, like the Great Depression, today's downturn had its fundamental cause in the decline in asset prices and the failure or near-failure of financial institutions," she said in prepared remarks, where she compared and contrasted the current crisis with the Great Depression. The assets in question are, by and large, houses and other real estate.

Asked by the Huffington Post if she specifically disagrees with Geithner as to whether the nation faces a liquidity crisis, however, she said that she does not.

"Let me be very clear. No, I absolutely don't disagree with him," said Romer, head of the president's Council of Economic Advisers. Treasury spokeswoman Stephanie Cutter also said that there was "no contradiction" between the two economic officials' views.

It's more than just an academic question. The administration can't fix the economy if it can't accurately diagnose the problem. But if Romer did say publicly, in an explicit way, that the banking system faced a solvency crisis, that statement in itself could cause chaos in the markets as was seen on a smaller level when Sens. Chris Dodd (D-Conn.) and Charles Schumer (D-N.Y.) said they were open to nationalizing insolvent banks, causing CitiGroup and other bank stocks to dive.

Critics of Geithner, including Nobel Prize winning economist Paul Krugman, insist that the real problem is an asset collapse that led to a crisis of solvency in the banking system. In other words, Krugman argues that home values have come back to Earth, while Geithner hopes to solve the problem by pushing home values back to where they were. The conflict is a serious one because it dictates what response is appropriate.

Continue Reading: http://www.huffingtonpost.com/2009/03/10/howd-we-get-here-romer-di_n_173426.html

[uponit7771]

1. Everyone knows Krug is correct, don't know where Geithner is coming from...the housing market

...was overinflated in 4 states and the rest of the states had moderate inflation of house prices.

[MannyGoldstein]

2. In The 1970s, An Average House Cost 1-2 Years Average Salary

It's still more than twice that today. We may have a long way to go on housing prices.