Paul Krugman: Smart economist, or all-knowing being?

Let us not get worked up with Krugman. It is true that today he stole the show along with Geithner. But we ought to go beyond who won the Media cycles here. Geithner here might have even won the day on Wall Street but we are all adults trying to argue about a policy.

The thing which I want to push forward without any shame is a possible third alternative (one being Geithner approach, second being Krugman's Nationalization): why not Obama Administration attempts to route this new money via ‘new start up' banks as well those banks which are not saddled with toxic assets? Why are we so hung up with Wells Fargos and BofAs of this world? Why this obsession to improve their ‘balance sheets' when in the first place these banks themselves are to be blamed for this mess along with utter destruction of American Economy? Why again and again Obama wants to insult by saying that ‘he has to give Millions to these super rich, accountability free, Wall Street Bankers to help Main Street America'? We don't need Obama's this help!

These banks are on record boasting that they would return the TARP money as soon as Fed wants. Then why not take that and ‘bypass' these banks while restarting the ‘lending to Main Street'? In any case Geithner is busy in creating new banks essentially. That work is not avoided. Then why make these banks to buy ‘toxic assets' of Wells Fargo and BofA and again depend on their favors when it comes to lending? Why not make these PPIP firm to lend to American businesses instead of buying CDOs?

Bernanke's Fed has essentially solved Commercial Paper Market. Marc Chandler on RealMoney is on record saying that there can be recovery without ‘bank recovery / bailout'. And we all know that as economy starts improving, without doing anything ‘toxic assets' of Wall Street banks will start shining again. So then why carry water for these Wall Street Bankers?

This is one of the most frustrating things with Obama Administration – it is hell bend in serving favors to Wall Street when it can serve Americans without being so ‘sucker'. And it is the same Wall Street which has played havoc with people's life by destroying their retirement, by making them to loose their houses and jobs. This is nothing but betrayal of American People by Obama. Geithner may be the reason, but Obama is responsible for that.

http://21stcenturypolitics.blogspot.com/

First, Mr. Fox, let me tell you how flattered I am that my earlier misspelled post (I was working a deal) merited your slightest attention. I actually think you are one of the most rational and insightful commentators I regularly peruse.

Secondly, Dr. Krugman is hardly omniscient. Certainly, he has clear biases, and is a subject to error as anyone. However, it is a truism of scientific method that a hypothesis is tested by the verifiable non-obvious predictions it allows. This is what separates a hypothesis from a rationalization. I know you understand this at some level –you are always testing the claims made by various parties against the best facts you can find.

As an aside, the ability to predict the bending of light by the gravity of Juniper –and then verify it –is what led to the rapid acceptance of Einstein's theory of special relativity.

So one thing I do –as a consumer of policy information and all around busybody citizen –is track people's predictions, against what actually happens. Again, I believe Dr. Krugman's predictions stand up pretty well. This hardly makes him omniscient.

As an aside, many of your predictions have stood up pretty well. I am pretty sure, from your modest demeanor, that you are not making any claims of omniscience.

And you are certainly entitled to post whatever you want on your blog. My ability to even post a comment is clearly a privilege I have done nothing to earn. I will also say that Brad DeLong makes a fair argument against Mr. Krugman's position.

But there are a mixed bag of people agreeing with you (Ezra Klein, for example) and mixed bag that disagree (Felix Salmon, in addition to Henry Blodget, who you have already cited.) So a number of smart people do not agree about this, and it's not clear that those on any given side share an identifiable ideology.

Thus, Mr. Hempstead's implication that people do not agree with him lack the facility to handle numbers is fatuous. In addition, his use of purple pejoratives shows that –at bottom –his position is driven by the strongly held belief (not a proven hypothesis) that nationalization is a disastrous occurrence worth –what --$500 billion? A trillion? --of taxpayer's money to avoid.

Maybe he's right. And since Geithner's plan seems to be going forward, I really hope it works somewhat. In other words, I hope Brad DeLong's view that it is a “glass half-full” turns out to be correct.

But honestly, I think what really bothered you about my post is that you really don't know. None of you do. My father had an adage that it was a lot easier to stay out of trouble than to get out of it.

That appears to be our current plight. My populist rage is well contained, and I am perfectly capable of supporting the rewarding of smarmy people if it will right the economy. I do find it disturbing that these are the same smarmy people that got us into trouble, and I don't think that your prediction that they will help us out of the hole has been remotely proven.

But I do hope you are correct. Otherwise we are in for a very rough ride.

GEITHNER'S PUBLIC PRIVATE TOXIC ASSET TANK
(Fidelity Fiduciary Bank, Mary Poppins)
WilliamBanzai7

Sing along link: http://www.youtube.com/watch?v=jt9JpYRulSk

Father, these are private equity investors....

If you invest your tuppence
Wisely in Geithner's public/private toxic asset tank
Safe and sound?
Soon that tuppence,
Safely invested in the toxic asset tank,
Might compound!

And you'll achieve that sense of conquest
As the Fed's non-recourse loans expand
In the hands of the private asset managers
Who invest as propriety demands

You see, you'll be part of
McMansions in the Nevada desert
Toxic assets from Detroit to Fresno
Fleets of repossessed trailer parks
Majestic negative-amortizing Miami coops
Plantations of ripening securitised sub-prime....

All from tuppence, prudently
Fruitfully, frugally invested
In the, to be specific,
Geithner's Federal
Financial Stability
Public Private
Toxic Asset Tank!

Now,
When you co-invest your tuppence in the Feds toxic asset tank
Soon you'll see
That it blooms into equity returns of a generous amount
Semiannually
And you'll achieve that sense of stature
As your NAV expands
To the high financial strata
That established private equity now commands

You can indirectly purchase first and second home equity loans
Think of the foreclosures!
Mortgages! CLOs! CDOs, synthetic CDOs!
Bankruptcies! Debtor sales!

Opportunities!
All manner of public/private enterprise!
Auctioned ALT A! Subprime!
Collateralized schlock! SPVs!
Distressed SIVs! Amalgamations! Bad banks!

You see,
Tuppence, patiently, cautiously trustingly invested
In the, to be specific,
Tim Geithner's
Federal Financial Stability
Public Private
Toxic Asset Tank!

Welcome to our joyful family of private investors!!!!!!

The clearest case of this in the past year was at Washington Mutual, where the FDIC seized the bank and largely wiped out its unsecured creditors even though WaMu was not obviously insolvent.

This is the rule, not the exception. Too Big To Fail banks provide desks for dozens of full-time regulators, who have priveleged access to financials. Smaller banks get less intense, but still close regulation.

Transparency is one of the highest goods in my ranking, but it's well-known that suspected trouble invites a run on a bank. So, everything "looks fine" to depositors until the bank is shut down. One has to trust the process of regulation, while not operating with the same insight.

So the question moves to, "what were the FDIC's motives and competency?"

The Hannity blog accuses the IndyMac takeover of being "democrat [sic] fiduciary terrorism;" it seems the insolvency was not transparent enough to many interested Americans, despite subsequent reports of massive FDIC losses from the nation's largest issuer of guaranteed-to-fail loans. Here is the sort of claim that presents no data and seems undergirded by motivations very different from protecting the US economy from present danger and taking unconscionable risks with Other People's Money.

(Note that the argument against Chuck Schumer, that he spilled secrets about IndyMac, is falsified by the company's share price sinking steadily in the year prior. The Word was out.)

Likewise, if WaMu was really solvent, let the Fifth Amendment wrongful taking court cases, with perhaps at least a shred of evidence, be presented. Given the fact that the FDIC was not taken over by Democrats, and the FDIC's long history of forebearance in the face of troubles, the claim of political terrorism/interference ought to be subject to an extremely high level of proof, rather than propagandistic claims.

Very good post.

.

(This is the commenter formerly known as TomT so you know I rarely say things like that.)

Well I am not an economist, just a psychologist but I must say that this post demonstrates some really infantile defenses, not to mention the narcissistic ones. Calling Dr. Krugman shrill? Saying he has some "emotional biases." What does that mean? Aren't emotions always biased? How do you know what his emotions are? He is a liberal and pretty damn straight up about it. I would call that a political or philosophical bias, not emotional. Now I ask you to please find something warm and cuddly to hug until you calm yourself down and then you can return to being a grown up.

FWIW, it should also be noted that Dr. Nouriel Roubini was the one who predicted this mess way back. and FWIW again, Roubini supports the Geithner plan (I don't have the link handy to his article but it came out only today and a quick google search can find it).

I have also wondered what the world expects out of Paul Krugman. He is a smart economist who has the balls to trot out a view and stand by it like a man. He doesn't mind taking on Larry Summers if that is what it takes (or for that matter a litany of PhDs like Christina Romer, Austan Goolsbee, Jason Furman). That is some serious brain power and Krugman doesn't back down one bit. Giving him credit for not simply sucking up to the Obama administration that he steadfastly supported (and still supports I guess).

What are your thoughts on the May 2003 article "Bursting Bubbles" (http://www.inthesetimes.com/article/583/bursting_bubbles/) in In These Times by Dean Baker of CEPR? As an aside his "apology" (tongue in my check) in December 2007 for predicting the start of a recession in 2007 that didn't happen still makes me smile when I look at my 401k.

I think all things considered, this wasn't too bad: http://www.youtube.com/watch?v=4XhvG_fD0HA

I actually had to go back and check the date he gave this talk because it amazed me how much of it was quite spot on.

Jason Fox: your only issue is with people like me? People that point out that your commentary is no longer a rationale analysis of the virtues of this economic plan, but has veered off course into a personal drama? I don't know your back ground relationship with Paul Krugman, all I know is that this post was not what I would expect from someone of your stature and was not a sober unbiased professional discourse . By suggesting that people like me are the problem for perhaps pointing out how you are coming off to to others is a convenient way to deflect criticism and continues to be defensive.

Great discussion -- you (and Hempton) are absolutely right to call attention to the issue of equity investor expectations, which few people recognize is important to the administration's thinking.

But I think there's a better example than WaMu: Treasury's actions on Fannie Mae and Freddie Mac. If not for that move, it can be argued that additional private-sector equity capital might have been available to Lehman, and that seminal failure might have been avoided. But once that action was taken (precipitously, in the view of Fannie Mae holders, at least), investors lost their appetite to shore up any organization that could be seen as troubled, believing that the Federal government would act before the institutions were visibly insolvent, and thus, that time was no longer on their side (an impression validated by WaMu a few weeks later).

Assuming that's true, it means that any move to nationalize more banks is likely to be much broader, and more expensive, than forecast at the outset, as a number of otherwise-viable institutions see their stock price come under extreme pressure and their reputation to investors suffer in step. The alternative -- Hempton's vision of a system that leads to more transparency, and thus, more rational equity-investor decision-making -- is far more atractive...

omg so meta!