Paul Krugman, on the Obama administration's bank rescue plan:
This is more than disappointing. In fact, it fills me with a sense of despair...It is that sort of risky market manipulation that landed us in this fix in the first place. To use the same methodology to dig us out of this mess is like pouring a fountain of gasoline on an out of control fire.
Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets.
As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.
That’s what Sweden did in the early 1990s. It’s also what we ourselves did after the savings and loan debacle of the Reagan years. And there’s no reason we can’t do the same thing now.
Mr. Geithner...proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use “the expertise of the market” to set the value of toxic assets.
I understand that this problem will take years to solve. But I expected a solid plan to be put in place by now and it seems President Obama's economic team is flailing.
Geithner and Summers are creatures of Wall Street. They've had their chance to offer a solid fix for the mistakes of the last decade, and they have failed. I believe it's time for the President to ask them to step aside and bring some solid liberal credentials to the table.
