My Main Question

I’ve seen this sort of thing talked about at a few places, but my big question for right now is how this plan from Geithner is going to impact all the regional banks and players who didn’t play fast and loose.

And is there any movement to regulate all these areas that were heretofore unregulated? Yesterday on GPS, Spitzer seemed to claim there was no need for new regulations, which I found rather astonishing:

ZAKARIA: Was the regulation — was the regulatory regime in place strong enough? And I’m thinking particularly of the New York Fed, which was headed by Tim Geithner, of the SEC?

Where do you see the flaw having been over the last few years?

SPITZER: Here’s my answer to that. The regulatory system was structurally flawed, but that’s not why this happened.

After the last round of scandals — Enron, et al. — we passed Sarbanes-Oxley. And we said, aha, we’ve solved the problem. Now we have another set of scandals.

There are enough laws, enough regulations on the books for smart, aggressive regulators and prosecutors to make all the cases. What was missing was judgment. And you can’t legislate judgment. You can’t regulate judgment. Either the people who are the regulators will walk into a bank and say “Your leverage is too great. We are going to take actions to pull it back,” or “This type of investment is flawed,” or they won’t. You can’t pass a law that says, you must use sound judgment.

Bubbles have been there through history, through over-regulation and under-regulation. This is a question of judgment and of failure of judgment.

When I was attorney general, people said, “Oh, you’re using this crazy little statute,” the Martin Act in New York, “to bring all these cases.” The Martin Act had a simple anti-fraud provision. That’s all we used.

The federal government has exponentially more regulatory power than we did. What was lacking was the judgment, the tenacity, the desire to rein in a financial system that was spiraling out of control.

I sort of almost have the attitude and feeling that what is going to happen is going to happen, and there is not much we can do about it. What concerns me is that we at the very least try to stop this from happening again.

Also, Sullivan notes that Krugman is about as caustic towards Obama these days as he was towards Bush. I read several right-wing blogs over the weekend who seemed shocked to hear Krugman criticize “the One,” and I just had to laugh. Krugman has never been in the tank for Obama, was a Clinton supporter, and took shots at Obama all through the primary and basically was of the opinion that the choice was between Obama where there was some hope and the lost cause that was McCain/Palin. In other words, there wasn’t a choice at all. Hardly a ringing endorsement of Obama, and even Obama’s budget was met with a luke-warm endorsement from Krugman.

It remains amusing to me that all these guys hate Krugman, but seem to have no idea what he thinks.

*** Update ***

I stand corrected. Krugman saw some flaws in the budget, but overall said it was very good. It was the stimulus package he savaged at every opportunity. Regardless, the point remains. Krugman has been anything but in the tank for Obama.






124 replies
  1. 1
    Lola says:

    Funny thing is I saw Krugman speak last summer at Netroots Nation and he said Obama had no more than three months to pass an agenda before the media turned on him like they did the Clintons. I guess he should have included himself in that group. His vicious attacks bother me because I think it will hurt Obama when he tries to pass the budget and do health care in the coming months. Krugman could find a way to tone it down, but I think he must be enjoying his newfound power.

  2. 2
    schrodinger's cat says:

    I sort of almost have the attitude and feeling that what is going to happen is going to happen, and there is not much we can do about it. What concerns me is that we at the very least try to stop this from happening again.

    My feelings exactly, clear up the current mess and put in place regulations so that we don’t have another implosion fueled by derivatives.

  3. 3
    cleek says:

    which is one reason i think people should take Krugman’s criticisms of the Obama administration with a grain of salt. Krugman’s a smart guy, no doubt, but nobody should pretend he’s unbiased.

  4. 4
    geg6 says:

    You are spot on about how the right misjudges Krugman as some sort of Obamamaniac. He never was and is even less of one and may possibly, IMHO, be tougher on Obama than Shrub because he expected slightly more from a Dem. His "shrillness" over the weekend has even me backing off and remembering that Krugman isn’t always right and, even when he is, his political radar is non-existent.

    As for the plan, I’ve read so much about this stuff lately and, not being an economist or even a lowly business major, that I don’t feel I have any sort of accurate judgment about what might work and what might not. However, as a political science major, I see how some of the plan’s components have some small political advantages that might help make it a success. I don’t think I like it, but I understand that we will have to assuage the Wall Street greedheads in the short term, at least. And I think much of the disagreeable parts of the plan are meant to do that.

    I think we’re all just swimming in circles and perhaps need to just tread water in place for a little while to see how it all shakes out. It’s making my head hurt.

  5. 5
    Steeplejack says:

    Spitzer: Either the people who are the regulators will walk into a bank and say, “Your leverage is too great. We are going to take actions to pull it back,” or “This type of investment is flawed,” or they won’t. You can’t pass a law that says you must use sound judgment.

    I am pretty clueless about the whole crisis, but I thought a big part of the whole problem was that banks were doing non-bank-y things, and doing them "in the shadows," so to speak. E.g., using weird mutant financial instruments to disguise the extent of their leverage for reporting purposes. So how would the hypothetical regulator walking into that bank even know what to look for? Hell, how would the regulator even know if he or she was in the right bank (to investigate), absent better transparency or reporting? Which is not required now and seemingly would need new regulation to implement.

  6. 6
    Doctor Gonzo says:

    What the right-wing blogs truly don’t understand is that when you’re a liberal, you are allowed to criticize your leaders’ stupid ideas. That’s what Krugman is doing, and he is 100% right about it: this bailout plan is a steaming pile of crap.

    I doubt that Krugman even disagrees all that much with Obama on non-economic things. But Krugman is an economist, and he writes about the economy. So he’s going to call out any stupid ideas, no matter where they come from.

    Contrast this with the right, where an idea becomes great once it is uttered by their dear leaders no matter what the reality is, and any criticism is not allowed.

  7. 7
    Dennis-SGMM says:

    Derivatives trading is completely unregulated. I think Spitzer’s statement was just his way of saying that he could prosecute these guys if it wasn’t for that unfortunate bimbo eruption.

  8. 8
    BenA says:

    I understand what Spitzer is saying… that you can find ways to prosecute people without adding regulation. I’d just rather have more spelled out in black and white.

    I’d also love to have Glass-Stegall back on the book… while it wouldn’t have necessarily stopped the meltdown that we have now… it would have certainly minimized the impact on lending institutions.

    Krugman certainly isn’t temporing his criticism of Obama at all. I’m sure he’d be pulling his punches a little bit more with Hillary… but Hillary would almost certainly be doing the EXACT SAME THING as Obama when it comes to the Wall St. bailout and anyone who thinks otherwise isn’t paying attention…. I’m not exactly sure it’s a bad thing that he isn’t taking a softer line.

    The silliest thing is Republicans using Krugman as fodder against Obama… especially when you have the Rushosphere running out to defend the AIG bonuses. Remember TARP version 1.0 was from a Republican administration.

  9. 9

    It remains amusing to me that all these guys hate Krugman, but seem to have no idea what he thinks.

    There’s that, and then there’s the right wing’s attitude about the role of authority and subservience in a political movement.

    Those people prostrate themselves before the leaders of the conservative movement, and use their soap boxes as propaganda organs in the service of those leaders, so they assume that people on the left will do that same thing.

    A political activist, with a prominent media outlet, using it to disparage the most prominent leader on his side of the aisle? In-con-theev-able!

  10. 10
    geg6 says:

    @Steeplejack:

    I agree with Spitzer to a certain extent. However, we do need one particular regulation put in place, based on everything I’ve read regarding how this all started. And that’s putting Glass-Steagall or legislation almost exactly like it back on the books. From what I can tell, a lot of this mess could never have happened had it still been operative. Phil Gramm should be taken out. Period.

  11. 11
    Dennis-SGMM says:

    What the right-wing blogs truly don’t understand is that when you’re a liberal, you are allowed to criticize your leaders’ stupid ideas.

    They’re always confusing our temporary disarray with our permanent disarray.

  12. 12
    Comrade Stuck says:

    Meanwhile, in a sign of recovery, JPMorgan announces it’s plan to purchase 2, count em, two new luxury corporate jets at 130 million. Not to worry, they have assured us that no TARP money will be used, as all taxpayer money is clearly labeled with a TARP stamp. Banker smart, we dumb.

  13. 13
    The Moar You Know says:

    Spitzer has a point. What good are any of the laws if you’re not going to bother to enforce them, or even look at what is going on?

    The poster child for this is Madoff. Everyone knew what was going on, he could have easily been prosecuted under any number of laws, but no one bothered to even launch the most perfunctory of investigations on the guy’s operations even though people had begged the SEC for more than a decade to do so. If you’re not going to even look at what’s going on, all the laws in the world won’t help keep your financial system solvent.

  14. 14
    argh says:

    I sort of almost have the attitude and feeling that what is going to happen is going to happen, and there is not much we can do about it.

    Ain’t it the way of humanity, though. Agitate aggressively in a time of peace (irrational exuberance, aggressive Right-wing Conservatism, Shock and Awe and war and demonizing liberals/gays/immigrants/poor/etc) and when action is needed the species throws up its hands and sits spellbound in despair.

    Thanks for the fish, Cons. You showed us (again) why the world is but a sweet cesspool as we dwindle into that long-sought goal of being a Conservative society: depressed, gray, fearful, crouching and in pain.

    A Great Victory for the Cause.

    I think Spitzer’s statement was just his way of saying that he could prosecute these guys if it wasn’t for that unfortunate bimbo eruption.

    I’ve never heard Cole and the fruit-tossers called bimbos before, but okay.

  15. 15
    p.a. says:

    I read several right-wing blogs over the weekend who seemed shocked to hear Krugman criticize “the One,” and I just had to laugh.

    The hive mind can not comprehend individualism and reality-based thought. And I apologize to social bees everywhere for smearing them by comparison with conservative bloggers.

    Very belated comment on ‘conservatism as the calm water between the waves’ stuff yesterday. What digby said : "Conservativism is whatever conservatives say it is at any given point in time." (paraphrase)

    What FDR said: "Conseratives were born with 2 good legs but never learned to walk forward."

    Although I am partial to the definition as: "Hey world, get off my lawn!!"

  16. 16
    Brian J says:

    There seems to some idea that this plan will hurt the smaller, regional banks, which are probably healthier to begin with. As Dean Baker claims:

    This point is pretty straightforward. There are junk mortgages all around. If the Treasury/Fed subsidize the purchase of the junk (or mortgage backed securities based on the junk) at Citigroup and other banks, then these assets become more attractive than the junk mortgages at smaller less politically connected banks, which don’t come with government subsidies. So, this means that there will be less money for the potentially bad assets at these smaller banks.

    In other words, by helping the big banks, the Geithner plan will likely to be sending more smaller banks into insolvency. This deserves some attention from the media.

    I wonder what the administration’s response to this claim is.

  17. 17
    Elie says:

    This is a test — do we have the patience and character to do something that requires patience and willingness to pursue consistently?

    Seems to me like we mostly like the easy, quick everything, from profits to policy — from AIG to Krugman — all fast, only one way, my way — and that is the model that everyone seems to admire and echo across the internet and our public policy arena. Don’t hear many admonitions to wait, to let things evolve, to weigh competing and important alternatives. There is only one right way, one right answer and lets just pretend that there are no up and down sides to many complex solutions…

    We are an intemperate people with very shaky values but we are also capable of great courage and also try to do the right thing — eventually.

    I am counting on the last attribute/s because without it – the courage and wanting to do the right thing – well…

  18. 18
    Brian J says:

    Hardly a ringing endorsement of Obama, and even Obama’s budget was met with a luke-warm endorsement from Krugman.

    I’m not sure about that one. The stimulus legislation has been roundly criticized by Krugman, so much so that Rahm Emmanuel called him out, but he said Obama’s budget looked pretty damn good.

  19. 19
    mr. whipple says:

    And is there any movement to regulate all these areas that were heretofore unregulated?

    IIUC, there is in congress. I don’t think Spitzer was referring to things that are totally unregulated, like CDS’s.

  20. 20
    TheFountainHead says:

    I’ve been reading this stuff all over the intertrons this morning, and as little as I claim to know about economic theory, Geithner’s plan seems to be trying to pluck a bunch of maybe-good ideas and cobble them together in hopes of getting an actual good idea. That being said, for all the shrill fucks out there wailing about how awful it is, I have yet to read one, including Krugman, who offers a viable (in both the political and financial sense) alternative. Until they do i say we let the man keep his job…

  21. 21
    jenniebee says:

    Everything these Wall Street fuckers did was legal. They could have been shut down by regulatory agencies anyway, granted, but they maneuvered to make sure that they were being regulated by the most understaffed, lackadaisical, ideologically friendly agency possible. So if we accept Spitzer’s analysis, then we’ve got to face the conclusion of his reasoning: that no matter what regulation we pass, we are utterly dependent on a vigilant executive branch – one that considers oversight and governance an essential and valuable part of a functioning capitalist economy, and is constantly shoring up its weakest regulatory links to make sure that oversight is adequate to the task.

    In other words: we’re only safe so long as we keep free-marketers out of the White House, and we should expect meltdowns every time we let them in.

    Personally, I don’t find that very comforting.

  22. 22
    Comrade Dread says:

    I sort of almost have the attitude and feeling that what is going to happen is going to happen, and there is not much we can do about it. What concerns me is that we at the very least try to stop this from happening again.

    The thing is, and maybe it’s just me, I don’t get a sense from any of our ‘leaders’ that they believe that there was a fundamental problem in our banking system.

    Then again, since most of them are in bed with large banks and corporations, maybe they don’t think we have any problems aside from a ‘lack of confidence’.

  23. 23
    Doctor Gonzo says:

    I have yet to read one, including Krugman, who offers a viable (in both the political and financial sense) alternative. Until they do i say we let the man keep his job…

    There is a clearly viable alternative that has been put forward by all economists, including Krugman: put the insolvent banks into receivership, fire the management, insure the small depositors, and sell off the pieces to new investors.

    Economically, this is the only sane choice. Politically, how is shoveling even more taxpayer guarantees to the idiots who got us into this mess more politically viable than the receivership option?

  24. 24
    TheHatOnMyCat says:

    It remains amusing to me that all these guys hate Krugman, but seem to have no idea what he thinks.

    Right, right, lack of complete understanding of technical issues has always been a major concern here at BJ.

    And, can you point me to two people who do in fact "understand what Krugman thinks" and can explain why he, and not Obama, should have been elected president?

    TIA.

  25. 25
    passerby says:

    @The Moar You Know:

    If you’re not going to even look at what’s going on, all the laws in the world won’t help keep your financial system solvent

    This is true and Spitzer has a point here. During the Madoff hearings, one of the points Markopolis brought out about the SEC is that it is filled will lawyers who don’t understand jack about the financial markets that they’re supposed to be regulating.

    But this (Spitzer):

    And you can’t legislate judgment. You can’t regulate judgment.

    is complete and utter Bullshit. Of course you can set up clear and specific rules that eliminate the need for "judgement".

  26. 26
    someguy says:

    clear up the current mess and put in place regulations so that we don’t have another implosion fueled by derivatives.

    And hedge funds and short futures contracts too. These bastards shouldn’t be allowed to bet that the markets will tank and make a profit from it. It just gives incentive to drive the markets down.

    I am counting on the last attribute/s because without it – the courage and wanting to do the right thing – well…

    As long as the one right thing involves limiting bank & wall street executives pay to a reasonable level, say $400k, I’m with you. Too much incentive for wrongdoing.

  27. 27
    gwangung says:

    There is a clearly viable alternative that has been put forward by all economists, including Krugman: put the insolvent banks into receivership, fire the management, insure the small depositors, and sell off the pieces to new investors.

    Legally, is this possible, given that the insolvent banks are mostly holding companies and that much of the troubled units are international in nature? Is that going to play out as people think?

  28. 28
    Mr Furious says:

    Separate deposit banks from investment banks.

    Treat insurance like AIGFP sold the same any other kind of insurance—or treat it like gambling: you’re on your own.

    Break up any entity that was big enough to require TARP money.

    Oh, and fucking fire Tim Geithner.

  29. 29
    JenJen says:

    It’s a shame, it really is, about Spitzer. Seems to me we could use his help right now but I can only imagine the hysterical shrieking if POTUS reached out to him in earnest.

    Spot on summary of Krugman. It boggles the mind why nobody seems to remember his position during the primaries, and his warmed-over, unenthusiastic support for Obama after Clinton had lost. What has been more surprising to me is the way opinion on the left (mostly blogs) seems to be shoring up behind Krugman. I’m not there at all, personally.

    The Daily Beast was calling the phenomenon of NYT columnists criticizing Obama "Friendly Fire" yesterday. I’m not sure I’d call it "friendly."

  30. 30

    what is going to happen is going to happen

    Yes, because the corruption and rot aren’t being addressed, which shows that the administration isn’t capable of dealing with the forces currently at work. Probably no administration would be, but for the longest time, I had hope that Obama knew what he had to do. He doesn’t, obviously, and we’re stuck.

    Things will play out in predictable fashion until all who had anything to do with this are thoroughly discredited. Unfortunately, anyone who took fake equity out of a home , bought one at cheap interest rates, filled his home with Chinese electronics, or surfed along on the general wave of financial froth and raping the goddamn planet is on the take as much as the banksters. We’re all in this, and except for a few intuitive survivors burrowed away on their organic refuges, we’ll all be discredited. As much as I would like to throw a few thousand people into jail and have a big party, I don’t see how we can just pin this on a criminal class and walk away.

    Bummer.

    [And on a personal note to other commenters, “No excuse, sir!” It all just got to me yesterday, and it’s a good thing I wasn’t driving a bulldozer.]

  31. 31
    Doctor Gonzo says:

    There’s a difference between the banks and everything else. AIG is not a bank. There are no depositors to pay off. It would simply go bankrupt, or it would spin off its Financial Products section into bankruptcy.

    The banks, with depositors, would be put into receivership and sold off. Ma and Pa would have their checking account moved to a new bank, which is exactly what happens when the FDIC takes over a bank. Large institutional investors would get a haircut, but that’s what happens when you take risks. The bad assets (or, "legacy loans" as is apparently the new Doublespeak term for them) would be off the books because those books would no longer exist, as those banks would not exist. New banks would buy those assets at prices closer to their true value.

    The sooner all of these assets are priced, the sooner credit markets will correct. The quickest way to price these assets is to unwind the huge CF we have by putting the large banks into receivership.

  32. 32
    Comrade Stuck says:

    @Comrade Dread:

    The thing is, and maybe it’s just me, I don’t get a sense from any of our ‘leaders’ that they believe that there was a fundamental problem in our banking system.

    No, it’s not just you. But we will learn more this week when Obama’s financial markets re-regulation plan comes out. But right now, it seems that wunderkind Geightner is bending over backwards to see that his buds on Wall Street have a soft landing.

    Barack Obama appeals to the ‘good guys’ of Wall Street in $1 trillion rescue

    "Good Guys". Seems to me this is a non sequitor where few if any are without blame. But maybe I’m wrong, and would like to be shown to be.

  33. 33
    passerby says:

    @Doctor Gonzo:

    put the insolvent banks into receivership, fire the management, insure the small depositors, and sell off the pieces to new investors.

    This idea seems so straight forward. Why can’t we just do it already?

    Mind boggling to me is that information regarding the details of the who, what, where and how much at these companies is kept secret. What are they hiding and why?

    Edited to add to Gonzo: I think AIG is avoiding bankruptcy because that would force them to open their books by which ALL their dealing would be divulged. They are hiding something.

    So this "too big to fail" excuse is quite convenient for them.

  34. 34
    jhh says:

    I have been chewing over the analyses of various plans for how to engineer a recovery from this mess, led by the discussions on Brad Delong’s and Paul Krugman’s economics-focused blogs, both of which contain important insights.

    But as regards causes and what-to-do-on-the enforcement-side-to-keep-this-from-happening-in-the-future, Mr. Spitzer’s comments strike me as sane and wise. And parenthetically, a damning indictment of G W Bush and the GOP, and perhaps Geithner as well. And if Spitzer is indeed correct, I reckon there is hope that the present problems, if handled "right" (not sure yet what that is, and the fact that Geithner is in charge of execution is a worry), could well pass.

    It is sad that what sounds like careful judgement on the part of Mr Spitzer in legal matters did not extend to the personal indiscretions that caused his exit from political life.

  35. 35
    jhh says:

    I have been chewing over the analyses of various plans for how to engineer a recovery from this mess, led by the discussions on Brad Delong’s and Paul Krugman’s economics-focused blogs, both of which contain important insights.

    But as regards causes and what-to-do-on-the enforcement-side-to-keep-this-from-happening-in-the-future, Mr. Spitzer’s comments strike me as sane and wise. And parenthetically, a damning indictment of G W Bush and the GOP, and perhaps Geithner as well. And if Spitzer is indeed correct, I reckon there is hope that the present problems, if handled "right" (not sure yet what that is, and the fact that Geithner is in charge of execution is a worry), could well pass.

    It is sad that what sounds like careful judgement on the part of Mr Spitzer in legal matters did not extend to the personal indiscretions that caused his exit from political life.

  36. 36
    Doctor Gonzo says:

    Spot on summary of Krugman. It boggles the mind why nobody seems to remember his position during the primaries, and his warmed-over, unenthusiastic support for Obama after Clinton had lost.

    Say what you will about Krugman’s lukewarm support for Obama, but you can’t say that Krugman is wrong on this issue. Technically, he is 100% right. It really comes down to simple math, and the unarguable fact that the Geithner plan socializes the losses and privatizes the profits. This is what the plan does.

    I was an Obama supporter and I agree totally with Krugman’s (and Duncan Black’s, and just about every other sane economists’) take on this. They are all right. If this plan goes forward, we will be outright sending hundreds of billions of taxpayer dollars straight into the pockets of Wall Street, again.

  37. 37

    Actually, John, the regional (and local) banks who didn’t play fast and loose won’t be hurt at all, because they will have little to no "legacy assets" on their books.

    My bank has never bought, sold, or owned a mortgage-backed security. The credit union my daughter’s account is building a new office tower, the first in downtown Lowell in a decade.

    Hey, seven stories counts as a tower in Lowell! You ah wicked queeah.

  38. 38
    mr. whipple says:

    There is a clearly viable alternative that has been put forward by all economists, including Krugman: put the insolvent banks into receivership, fire the management, insure the small depositors, and sell off the pieces to new investors.

    True. But from what I’ve seen these advocates never talk about the downside of doing this. It’s always presented as a cure-all without cost or risk. For starters, I’d like to know which banks they believe are insolvent and why.

  39. 39
    Tim H. says:

    There are several reasons to go with Krugman on this:

    -Geithner’s plan is just Paulson’s original plan redux.

    -if all you’re worried about is that investment banks and hedge funds make out OK, the plan’s a winner. The taxpayer only makes out if these guys manage to inflate a bubble. Slim odds on that, I think.

    -no bank’s going to loan while the real economy’s in the toilet. Fix that, and you’ll fix lending. Not the other way around.

  40. 40
    Brian J says:

    @Elie:

    One of the arguments people who haven’t been impressed with the plan, like Krugman, have been making is that this might be the administration’s only shot. I have no idea whether that’s true, but it’s not a ridiculous suggestion.

    Part of me believes this is a way to ease us into nationalizing some of the big banks. It’s as if the administration has many weapons in its arsenal, and most outside academics, financial types, and experienced government employees insist that it tries out every last one before it brings out the most powerful one. Obama is nothing if not a long term thinker, and since there seems to be a consensus that this plan is the older Paulson plan rehashed, it seems odd that he’d make short-term moves like bringing this back again and again.

  41. 41
    kay says:

    @Doctor Gonzo:

    There is a clearly viable alternative that has been put forward by all economists, including Krugman: put the insolvent banks into receivership, fire the management, insure the small depositors, and sell off the pieces to new investors.

    Krugman dodges an important difference. He cites Sweden. He cites the S and L debacle. This is bigger, by an order of magnitude. Why doesn’t Krugman defend on that point? Obama has raised it. Geithner has raised it. It’s important, because it has to do with money up-front. I have yet to see any of the Geithner critics address it, other than to mention it in passing. Can Krugman do that? Can he cite a model that worked on a much smaller scale as completely applicable?

  42. 42
    Ash says:

    but you can’t say that Krugman is wrong on this issue.

    Yes you can. Krugman has ALWAYS been completely politically tone deaf. He’s an economist, he doesn’t have a damn clue how to legislate any of his ideas.

  43. 43
    TheFountainHead says:

    Economically, this is the only sane choice. Politically, how is shoveling even more taxpayer guarantees to the idiots who got us into this mess more politically viable than the receivership option?

    Because the US Government can’t seize an international bank without some SERIOUS foreign policy goin’ down?

    Sometimes you people act as though the law of any one government applies to these companies.

  44. 44
    Doctor Gonzo says:

    True. But from what I’ve seen these advocates never talk about the downside of doing this. It’s always presented as a cure-all without cost or risk. For starters, I’d like to know which banks they believe are insolvent and why.

    Citi and BoA, for sure. Perhaps Wells Fargo. A number of other of the largest banks in the country. They are insolvent because they have large numbers of CDOs on their books that are massively overvalued. Plain and simple.

    What’s the downside to this plan? Well, those banks would no longer exist. A lot of people would lose their jobs. Furthermore, a lot of investors would lose a lot of money. The small depositors wouldn’t, but the large, institutional investors would. We’re talking billions here.

    Here’s what it boils down to: a lot of people made hugely leveraged bets that the housing market would not stop going up. They were wrong, and their bets have destroyed the economy. That the economy is destroyed is a moot point now: nothing can undo that. What we can choose is how we deal with it.

    The receivership plan punishes those that made this mistake by forcing them to lose a lot of money, and quite possibly getting them fired. It might even serve as a cautionary tale for the future.

    The Geithner plan punishes taxpayers by having US insure the big boys so they don’t lose money on their bets.

    Which plan has the bigger downside?

  45. 45

    I personally don’t agree with Spitzer that the regulations were there. For instance we don’t have regulations that cover derivatives because they were basically invented fairly recently. Especially the ones AIG came up with. And thats part of the reason that AIG ended up being over seen by the OTC instead of the SEC. But even the SEC made over leveraging ok because the regulations permitted it. There have to be some regulations that at least catch up with the new shenanigans that Wall Street has come up with since Sarbanes/Oxley.

  46. 46
    Johnny Pez says:

    Yeah, but what has all this got to do with college basketball?

  47. 47
    Doctor Gonzo says:

    Yes you can. Krugman has ALWAYS been completely politically tone deaf. He’s an economist, he doesn’t have a damn clue how to legislate any of his ideas.

    That doesn’t make his ideas wrong, which was my point.

    Obama’s the political expert here. I worked my ass off for him expecting him to listen to the experts and find a way to use his political genius to convince everybody to go his way. With regards to this issue, he is certainly not doing this.

  48. 48
    mr. whipple says:

    Krugman dodges an important difference. He cites Sweden. He cites the S and L debacle.

    IIUC, Sweden had to nationalize all of 1 and a half(?) banks. How many do we need to nationalize here?

  49. 49
    gwangung says:

    The receivership plan punishes those that made this mistake by forcing them to lose a lot of money, and quite possibly getting them fired. It might even serve as a cautionary tale for the future.

    What are the international ramifications?

    Also, is it true that nationalization can only be done now, and not further down the line?

  50. 50
    Taylor says:

    even Obama’s budget was met with a luke-warm endorsement from Krugman.

    Not true, Krugman described Obama’s budget as "very good indeed." WTF is luke-warm about that?

    I think Krugman was taken aback during the primaries when he criticized Obama’s health plan for not being economically sustainable, due to lack of mandates, and found himself the target of a hit job by the Obama campaign.

    I put a hell of a lot more stock in Krugman than the Obama administration, whose economic policy is being run by the same people (Rubin, Summers, Geithner) who got us into this clusterfuck in the first place. If you don’t want to believe Krugman, read Simon Johnson, hardly a soulmate of Krugman, who has seen all of this before in third world banana republics that the IMF ended up bailing out. Johnson makes clear that the first thing you have to do is get rid of the oligarchs. Obama has clearly decided not to do that, probably because in actuality Rubin put him in office.

  51. 51
    TheHatOnMyCat says:

    the unarguable fact that the Geithner plan socializes the losses and privatizes the profits.

    That’s just a slogan, it has nothing to do with the process that produced the plan, the imperatives that drove that process, nor the decision points that drove the shape of the plan.

    Nor does the rest of the comment take into account the fact that whether or not one agrees with the technical details of the plan, it is being presented in a methodical way and without a lot of breathless arm-flapping such as we saw last fall when the Republicans were in charge. That fact in itself is an indication that we made a good choice by firing the former keepers of the government and hiring a new crew.

    So let’s see what they can do. I for one welcome our new ballsy overlords who can tell the NYT and the clueless blogosphere to go fuck themselves. That one feature in itself convinces me that we are on the right track.

  52. 52
    kay says:

    @Ash:

    He’s an economist, he doesn’t have a damn clue how to legislate any of his ideas.

    I’ll say. He raved about Obama’s budget. He’s spent nearly every day since trying to convince anyone who will listen that Obama can’t be trusted to balance his own checkbook.
    I don’t expect him to be some political strategist, but the things he likes about Obama are, um, RELATED to to other things.
    You know he’ll be mad as hell when they can’t pass health care. He’ll feign ignorance when every jack-off in the world uses his columns to "prove" the gubmint can’t handle reforming health care.

  53. 53
    Doctor Gonzo says:

    IIUC, Sweden had to nationalize all of 1 and a half(?) banks. How many do we need to nationalize here?

    No more than a dozen, probably single digits. Comparable to Sweden when you consider the size of our economy versus theirs.

    Remember, it is just the hugest banks that are insolvent. The smaller local and regional banks were never big enough to get into these shenanigans and are doing just fine. Of course, the Geithner plan puts them at a competitive disadvantage by rewarding the banks that screwed up.

    Here’s another tidbit as to why the Geithner plan is bad: the Geithner plan will give investors non-recourse loans so they can buy bad assets. Investors could make a lot of money on the upside, and have limited risk on the downside. This sounds like a great idea, and I would like to get one of these loans. Are they available to anybody? No, of course not, they are available only to the large investors that got us here.

    So even though my tax money is paying for it, I have no chance of getting any of the windfall profits. Thanks!

  54. 54
    Rick Taylor says:

    Hilzoy makes an interesting point. Under this plan, wouldn’t the banks have a huge incentive to buy their own assets? They only put up 5% of the money, they get collect the purchase price, and if the asset goes bad, we take the main hit.

    Presumably banks will not be allowed to bid on their own assets. But that means they have incentive to do so indirectly through third parties; the people they do business with. It might not take much incentive either if we’re talking about their creditors, just whisper, you want us to stay in business, right? People would bid up the prices on these securities, not because they expected a good return, but because their risk was limited, they only put up 5% of the money, and they had a stake in the banks being rescued.

  55. 55
    Doctor Gonzo says:

    What are the international ramifications?

    Frankly, I’m confused as to why "international" stuff keeps on coming up. What international banks are the ones in trouble here? Are Citigroup and BoA not U.S. companies?

  56. 56
    Shinobi says:

    Sometimes I wonder if Geithner and the Obama administration are just seeing how much they can coddle Wall Street before the proletariat revolts.

  57. 57
    kay says:

    @mr. whipple:

    I just think he has to address it. I’m giving him the benefit of the doubt, maybe he’s just relying on theory, but he can’t continue to ignore that one is much, much bigger than the other because we’re talking about money. A dollar figure is going to be attached to Krugman’s plan, at some point. Inserting "X" sort of doesn’t cut it.

  58. 58
    Brian J says:

    read Simon Johnson, hardly a soulmate of Krugman

    What makes them so different? I know nothing about Johnson’s thinking aside from what I read on his blog.

  59. 59
    Brachiator says:

    I sort of almost have the attitude and feeling that what is going to happen is going to happen, and there is not much we can do about it. What concerns me is that we at the very least try to stop this from happening again.

    Spitzer has half a point about whether there is a need for regulation. Part of the issue here is that free-marketers and most conservatives seem to think that whatever business does is OK, or at least should not be subject to government regulation.

    The Bush Administration’s take on this was to become the chief cheerleader for "the ownership society." But what if the federal government had put out an ad campaign of public service announcements warning homebuyers against getting entangled in home loans that they probably could not afford? This would not have involved any regulation, but would have been a case of the government trying to increase consumer knowledge (kinda like a "Just say ‘No’ to crappy loans" campaign).

    The Bush era FCC loved to try to punish the occaisional outbreak of an exposed breast with hefty fines. Imagine if the SEC or other appropriate agency said to lenders, "We won’t regulate you too hard, but we will fine you $1,000,000 per incident" if a consumer complains that your loan documents were confusing or misleading.

    But still, some regulations need to be re-thought. It is aburd and criminal for lenders to disregard the credit scoring system which they created themselves and make loans to people who did not remotely qualify, especially when lenders then turn to the government to rescue them from their own greed.

    Subprime mortgages, CDOs and similar instruments need to be regulated bigtime. And here it amazes me that some lenders and economists want to try to hold onto the idea that their financial models were partly valid.

    Lastly, the inconvenient truth that no one want to confront is that the ratings provided by Moodys and others are often totally fictitious, and some of these companies are suggesting that they have a First Amendment right to make ratings even if they have no foundation whatsoever. This kind of crap cannot be allowed to stand.

    As for Krugman, he knows tons about the economy, but not much about business, financial markets and tax policy. He reminds me a bit of a math professor I heard being interviewed the other day who admitted that he is terrible at Algebra and lets his wife handle all their investments.

  60. 60
    kay says:

    @Doctor Gonzo:

    Great. There’s a number then. Take what Sweden put up and do the proportion, relative to size of banks and size of economy. That’s the up-front money he’ll need to nationalize, right?
    Why isn’t that in his columns? Geithner gave a number.

  61. 61
    Doctor Gonzo says:

    That’s just a slogan, it has nothing to do with the process that produced the plan, the imperatives that drove that process, nor the decision points that drove the shape of the plan.

    It’s not "just a slogan", it’s what this plan is.

    The explanation can’t be any simpler than this: I (or, rather, some large investor because as I said above, regular folks won’t get this deal) buy a CDO for $20. I pay $1, the U.S. government loans me $19.

    It goes up to $30. Woohoo! I pay off my loan, and I’ve got a huge profit, maybe $9 after paying off the loan. $9 profit on a $1 investment, sweet! And it’s all mine! AFAIK, the Geithner plan does not have the government getting any profits other than the repayment of the loan.

    Or it goes down to $10. I just lost my $1, but oh well. The U.S. taxpayer lost $9. C’est la vie.

    How can you quibble with this math?

  62. 62
    gwangung says:

    Frankly, I’m confused as to why "international" stuff keeps on coming up. What international banks are the ones in trouble here? Are Citigroup and BoA not U.S. companies?

    They are US companies with international assets. With many international counterparties, some of which are sovereign states. What happens to the international assets when the banks are nationalized.

    That’s not rocket science. There’s nothing to be confused about here.

    Again, what are the international ramifications? I am not being combative here; it’s a serious question.

  63. 63
    jcricket says:

    IIUC, Sweden had to nationalize all of 1 and a half(?) banks. How many do we need to nationalize here?

    Ultimately it doesn’t matter whether Sweden is a good analogue for what we’re facing or not. The fundamentals that caused Sweden to decide nationalization was the only option are still in existence here. Many of our "too big to fail" banks are insolvent, and we’re just pretending they’re not because the politics of temporary receivership are apparently too complicated. But just because something’s hard, and the waters are uncharted, doesn’t mean it’s not necessary.

    The best Geithner’s plan will do is overpay (with money from the taxpayer) for assets, and put the banks on solid ground – effectively bailing out not just the institutions, but all the morons who made these bad beds (bank management, shareholders, counterparties). At worst, it’s just more good money after bad, and we’ll eventually end up at nationalization, only at a much much higher cost than if we had gone there some point earlier in the year. So far, we look like we’re headed for the "worst".

    Had we intervened a little earlier (i’m not talking about regulations that would have stopped this, just more like october) the stimulus and bailouts could have been smaller, and the wind-downs/receiverships more orderly. It’s like any systemic infection. The earlier you catch and address it, the less costly and involved the treatment.

  64. 64
    kay says:

    @gwangung:

    I heard Geraldine Ferrarro express shock and outrage that US banks were doing business with foreign banks, yesterday, and that their obligations were entertwined.
    Come on. Give me a break. She didn’t know that? I understand wanting to climb on the populist bandwagon, but she knew that.
    American money stays within our borders! She’s auditioning for Lou Dobbs.

  65. 65
    geg6 says:

    @Doctor Gonzo:

    I’m certainly not an expert so take what I say with a grain of salt.

    But…

    I believe it has to do with the exposure foreign banks, investment firms, governments, and retirement funds have as a result of their purchase of said "financial instruments" that have caused all of this trouble.

    I wish I could remember which couple of the zillion articles I’ve read in the past week that discussed how receivership/bankruptcy would affect all of the EU, not to mention many of our "friends" in Asia.

  66. 66
    Face says:

    As long as teh market goes up, Obama is doing great.

    Hugs and Kisses,
    Mainstream Media

  67. 67
    TheHatOnMyCat says:

    @Doctor Gonzo:

    I understand the slogan, Doc. I understood it last year when it first started appearing on the radar.

    But that doesn’t make the slogan useful. It’s the equivalent of saying that giving birth control to teenagers "sends the wrong message about values." Maybe, but it prevents unwanted pregnancies better than "stop having sex!"

    Maybe the slogan is technically accurate, but so what? This is a crisis, not a lab experiment or a school play about financial theories. So a few potatoheads make out well for their spudness. If we prevent a disaster, who will care about that?

  68. 68
    jcricket says:

    Lastly, the inconvenient truth that no one want to confront is that the ratings provided by Moodys and others are often totally fictitious

    It’s the conflict of interest. The big three ratings agencies all get paid from private industry. They get paid more if they rate securities "higher" (less risk, AAA, etc.). Anyone with 1/10th a brain could see where this would lead.

    We basically need a systemic, 100% coverage regulation scheme. And yes, this will make banks, ratings agencies, brokerage houses, insurers, etc. a lot "less profitable" in the short term. But who fucking cares? Those profits were fake, and here we are bailing the banks out because the damage to society would be too great to let them fail.

    It’s like having a kid/teenager. You know you’re not going to let them die in the street from the consequence of a bad decision, but you know it would be costly/painful if you got to that place, so you do what you can to shield your kid from that situation to begin with (e.g. sensible curfew, periodic check-ins, grounding for bad behavior, "rewards" for getting good grades/doing the right thing, knowing their friends).

    Capitalists are like teenagers. Of course they "chafe" and get whiney when they have to conform to rules, but it’s for both their good and ours to be the "parents"

  69. 69
    JenJen says:

    @Doctor Gonzo: Ya know, I’m not an economist, and I don’t have the kind of financial breadth of knowledge necessary to either agree or disagree with you about Krugman’s position. But Krugman doesn’t always get it right, and I’m not any more convinced he’s right here than I am that Geithner’s wrong.

    But I do know politics, and so my eye is on that side of the equation. This almost united-from-the-left call for Geithner’s head is batshit insane. Can anyone tell us if any other Treasury Secretary would do anything different than what Geithner is proposing? Do people really think that President Obama is taking a "hands-off" approach to the economic crisis? Is Geithner acting alone, is he some kind of renegade?

    In other words, to say Geithner is wrong is to say The President’s entire economic philosophy is wrong. Now, many people feel that way, and that’s fine, it really is, but 60 days in, I’m taking the wait-and-see approach, rather than strangle POTUS in the crib.

    Let’s say Obama listens to the Krugmans and Atrioses and Bowers and Hamshers of the world and asks for Geithner’s resignation tomorrow. Great. Then what?

    Al Giordano has been putting this far more elegantly than I can lately; BooMan, too.

    DISCLAIMER: Having been laid off for much longer than I ever imagined now, and in Ohio, I have a very strong feeling my perspective on this is going to be vastly different from employed people who live elsewhere. Nobody around me is "outraged" about Geithner or AIG… they’re worried about jobs, and health insurance and housing, and just want to see something get better, faster.

  70. 70
    jwb says:

    I think Krugman’s opposition is generally useful for Obama because it allows Obama to position himself as a centrist. In fact, I think it was a bit of a political disaster when Krugman came out liking Obama’s budget, because that seemed to give credence to those hacks, like David Brooks, who want to portray Obama as attempting to do too much. It’s much better for Obama when Krugman is yelling that Obama isn’t doing enough, that he is overly cautious, etc.

  71. 71
    Doctor Gonzo says:

    I’m not sure how "international" banks are set up. I would be surprised, though, given the differences between banking regulations in different countries, if they were not set up as independent units for each country.

    In that case, just put the U.S. arm into receivership. If that isn’t possible, well, I’m assuming those foreign units are profitable. Investors in those countries could buy those units.

    And yes, other countries, pension plans, sovereign wealth funds, etc. are going to be affected and lose money. That’s because these companies are bankrupt. Their liabilities exceed their assets. Now, we can either acknowledge that fact, or we can try to reinflate those assets indefinitely until on paper they aren’t bankrupt again. I’d prefer the former.

  72. 72
    geg6 says:

    @jcricket:

    TIME had a discussion of the ratings agencies this past week. I had no real understanding of how they worked until I read that article. And when I finished, I was convinced that they are one of the main perpetrators of this entire fiasco. I couldn’t believe what a major conflict their entire system is. They just do whatever they want to do with those ratings and because the industry pays them, they have every incentive to lie and post ridiculous ratings on funds that have little to no value. And also every incentive to post low ratings on anyone who doesn’t want to go along with any scams they and their sugar daddies want.

  73. 73

    Doctor Gonzo

    Actually you’re wrong. They don’t get all of the profits. They get 17% of the profits which means the tax payers will participate in the profits as well. It does socialize the risk no doubt but it also socializes the profits. Go read DeLong’s explanation on it.

  74. 74
    geg6 says:

    @Doctor Gonzo:

    I don’t know that I’m correct about this, but I think you might be missing the point that the EU financial community is also in a world of hurt and is having it’s own problems shoring up its financial system. Pretty much all of any assets that any major European banks (and you can include those insurance, retirement/pension, and government entities here) are as tied up in this mess as ours are. If you want the whole financial system of the world to do a complete meltdown (which would lead to what politically, pray tell?), then bankruptcy/receivership is the way to go.

    Or so I understand the argument. I’m not saying it’s correct. But I think this is how the argument goes.

  75. 75
    Elie says:

    #38 Mr Whipple —

    I agree — very little discussion of the downside risks with the Krugman team. I think balled up in this is a lot of anger and need for revenge on the financial sector by the blogosphere in general (not that I disagree with that but if you make policy from emotion, you can really screw up even though it seems a righteous emotion). Much of the anger that I read between the lines is that the financial folks are getting bailed out again and people want them to suffer..

    Geithner takes the heat, but I think its Obama calling the shots and the style is distinctly his. So will be the blame if it doesnt work out…But I see his influence in the comment that he made in the 60 minutes interview last night about the need to develop policy without emotion…

    Also, as many have pointed out here, Geithner may be accused of not having enforced regulations adequately but at least he wasn’t a revolving door dude. To my knowledge (and I admit it may be incomplete), he has remained a public servant (for better or worse). I would think if he really liked the other side, he could have found many great havens for his talents and be spending less time now "taking one – several" for team Obama.

  76. 76
    JL says:

    Although I copied this on Tim’s post yesterday, it’s also relevant to this post. Bernanke’s speech from 3/20 is worth reading in it’s entirety and this paragraph highlights changes that policy makers should enact. The speech is here.

    Third, as the recent financial crisis has highlighted, risks to the financial system may arise not only in the banking sector, but also from financial firms that traditionally have been outside the regulatory and supervisory framework applied to banking organizations. Under federal law, all banking organizations–regardless of size–are subject to consolidated supervision for safety and soundness purposes. At a minimum, policymakers must ensure that a similar statutory framework is put in place for all systemically important financial firms organized as holding companies. The agencies responsible for implementing this framework also must vigorously exercise their authority to help ensure the safety and soundness of nonbank firms whose failure could threaten the stability of the financial system. Broad-based application of the principle of consolidated supervision would also serve to eliminate gaps in oversight that would otherwise allow risk-taking to migrate from more-regulated to less-regulated sectors.

  77. 77

    They write that "the government will provide the overwhelming bulk of the money — possibly more than 95 percent…"–that is true, but they don’t say that the government gets 80% of the equity profits and what it is owed the FDIC on the debt tranche. That what Andrews, Dash, and Bowley say sounds different is a big problem: they did not explain the plan very well.

  78. 78
    Doctor Gonzo says:

    Actually you’re wrong. They don’t get all of the profits. They get 17% of the profits which means the tax payers will participate in the profits as well. It does socialize the risk no doubt but it also socializes the profits. Go read DeLong’s explanation on it.

    Okay, I was wrong about that. But apparently the plan is leveraged at least 5-1, and up to more than 30-1 ($970 billion of tax money, $30 billion of private money). Thus, the government should get at least 80% of the profits, and more like 95% of the profits, since we are putting up the vast, vast majority of the dough. Still a huge windfall for those private investors.

    If you want the whole financial system of the world to do a complete meltdown (which would lead to what politically, pray tell?), then bankruptcy/receivership is the way to go.

    Either way, the collective governments of the world are going to be doing a lot of bailing out. It comes down to the question I posed before: do we bail out the little guys who got caught up in this through no fault of their own, or do we bail out the people that caused this mess in the first place?

  79. 79
    mr. whipple says:

    "I’m not sure how "international" banks are set up. I would be surprised, though, given the differences between banking regulations in different countries, if they were not set up as independent units for each country."

    Maybe I heard wrong, but I could have sworn that fdic head sheila bair said they don’t even have the authority to take over an international bank.

    "The best Geithner’s plan will do is overpay (with money from the taxpayer) for assets, and put the banks on solid ground – effectively bailing out not just the institutions, but all the morons who made these bad beds"

    The way I understand it, if a bank does auction off this stuff, they have to book their loss on it. If the loss is as big as some say, won’t that make them more likely to be nationalized, rather then less?

    And let’s say the gvt did nationalize immediately. IIUC, they have to sell off all of these assets but would do it over time, knowing they’d be worth more in a good economy than a recession. But isn’t that exactly the same as what the banks are claiming now, that is, their size of their piles of crap is really as big as it is because the economy sucks?

  80. 80
    Hyperion says:

    @sgwhiteinfla:

    I personally don’t agree with Spitzer that the regulations were there.

    what Madoff did was clearly illegal.
    but regulators did not want to hear about it.
    i don’t see how passing another law will address this.

    i realize that the banking meltdown is not entirely due to regulators failing to regulate but ultimately we have to depend on them. and so far that has not worked out for taxpayers.

  81. 81
    Ricky Bobby says:

    As far as I know (from my limited plebian stanpoint) there is still no regulation in the credit derivatives markets. Does anyone know if this is correct? The reason these markets got so gigantic is that there was no one to put the brakes on anyone so the immense leverage could take place. The traders go to where the unregulated action is, and will continue to make bubbles if allowed to do so.

    In that regard, Spitzer is dead wrong.

  82. 82
    Doctor Gonzo says:

    There’s another reason why I want to be hard on the people who caused this: so far, I haven’t seen ANY regulations enacted to prevent this from happening in the future. No regulations to eliminate the huge conflicts of interest that ratings agencies have. No regulations to treat derivatives like CDSs as insurance or outright gambles (which they are).

    Call me cynical, but I expect that if we don’t pass regulations before we bail people out, once everything is hunky-dory those regulations will be quietly forgotten. Punishing the people who caused this is a hedge against that outcome.

  83. 83

    Doctor Gonzo

    See here is what I don’t get. On the one hand a lot of people say the toxic assets are worthless which is why Geitner shouldn’t do the deal. On the other hand a lot of the same people say that the hedgefunders are going to make shitloads of money off the deal and thats why Obama shouldn’t do it. Which one is it?? Krugman is worried because he thinks the nonrecourse loans will be defaulted on after hedgefunders figure out they are worthless. I get his point but I believe the hedgefunders won’t want to just throw even the little bit of money they put down away if they think they can sell it at all. But here is the thing, in order for the hedgefunders to make any money at all they actually have to build up the value of those toxic assets and then either sell them off or hold them to maturity. And if they happen to do that we actually make money off the deal. So what we really should be doing, as crazy as it sounds, is cheering on these hedgefund guys to make shitloads of money so we the taxpayer can make shitloads of money also. But again if anyone really think the toxic assets aren’t worth shit then they should sleep peacefully knowing the hedgefunders won’t make any money. Of course that means our taxpayer money is going to be going in a burn pit if that is the case but hey at least those greedy bastards didn’t make any more money!

    Right?

  84. 84
    John Cole says:

    @geg6: I have been bitching about this for months.

  85. 85
    passerby says:

    Does Krugman, or any of these media monkeys jabbering their opinions on the administration’s plan to resolve the biggest crises facing our nation since the Great Depression, have access to the inner circles and behind doors meetings regarding what’s really happening in the financial industry?

    Doubt it. Seems all we’re getting is pre-digested pap from them. Does Krugman even know Geithner’s reasoning. Has he tried to get a meeting? Doubt it.

    If Krugman’s only getting his information thru documents that are published for public consumption then it’s no wonder his commentary doesn’t help to illuminate the problem.

    Are legal investigations into to the insolvency of these institutions being conducted?

    No one in the corporate media has asked that question or reported on that aspect so, many would assume that the answer is ‘no’. But there’s a new sheriff in town and I’ll bet dollars to donuts someone is keeping legal eyes on these proceedings.

    Madoff and his minions have been made the poster children for fraud in the system and I just won’t believe they were the only ones scamming (skimming).

  86. 86
    JenJen says:

    Atrios has no fewer than six posts up today, each one a swipe at Geithner, which is his wont, of course. No problem there.

    But when Duncan writes "this is just like the Bush Administration" and then links to an article quoting Jake Tapper, and in another post links to a tweet from Ana Marie Cox, I have to shake my head a little bit.

  87. 87
    Elie says:

    JenJen@ 69 —

    You stated my perspective perfectly and I would add, somewhere in the current left blogosphere, there is a breakdown of some sort between understanding means and ends.

    Somehow, many seem to want to get to a "promised land" outcome without a realistic process of getting from here to there. I think that they are discounting the power and reality of the financial barons because they are extremely angry (understandable) at them and just don’t really care enough about how important that transition is from where we are to where we have to go. They have temperaments, in my opinion, of revolutionaries. Lets just get rid of it (the current system) and get to where we want to be NOW. Aint gonna happen and they are really pissed about it.

    I truly don’t think, for whatever reason, people either learned their civics or really understand how to do big complex things with complex and multilayered political constituencies. Its not a surprise that their hero is therefore Krugman — an "expert" (READ:unassailable opinion monger) who eschews "politics"(politicians are just people pleasers in the worst sense) and by his own admission is "temperamentally unsuited" to holding any role in the political/ formal leadership arena. That way, he and his supporters can just tend to ignore or discount the weight and necessity of politics and sociology necessary in their equation to successfully change the system.

  88. 88

    The more important point is that the Left is always more willing to criticize their own. It shouldn’t surprise anyone that Obama is being criticized by factions on the Left. That is one of the key strengths of the Left, isn’t it. The Righties didn’t start criticizing Bush until it looked like they would pay a political price for following lockstep with him for more than six years.

    I personally think most of the criticism of the Obama administration is unwarranted, but it doesn’t bother me a bit that he is being criticized from within. We know the wingnuts are going to give him hell, but if their are those on the Left who have a gripe with Obama then they should speak up. It really is the most patriotic thing you can do as far as I am concerned. You have to speak up when you have misgivings over policy matters. The last thing we need is a one way street. That didn’t work out so well for us during the Bush years.

  89. 89
    Doctor Gonzo says:

    See here is what I don’t get. On the one hand a lot of people say the toxic assets are worthless which is why Geitner shouldn’t do the deal. On the other hand a lot of the same people say that the hedgefunders are going to make shitloads of money off the deal and thats why Obama shouldn’t do it. Which one is it??

    It can be both, very easily.

    Again, here are some numbers. Let’s say that a CDO is nominally worth $100, but everybody knows that’s not true. Let’s say it’s probably worth $30 once you unwind everything. However, the market for these is so locked up that if you had to sell it, right now, you could only get $10 for it.

    So the Geithner plan floods the market with buyers, pushing prices up. The price will no longer be $10, it may be $20. So the hedgefunders will make their money, because it is really worth $30. The banks get to sell it for $20 instead of $10, so yay for them….right?

    Except for this part (and this is a HUGE reason why the Geithner plan will still probably fail): The bank is bankrupt if the true value of the CDO is less than $50. Since it is (the bank managed to sell it for $20 instead of $10, which is better, but not $50), the bank still goes under. The Geithner plan will provide a better market for these financial instruments, but there is ZERO guarantee that the banks will be solvent even after they get these assets off of their books. The only way to do that would be to buy those assets at hugely inflated prices.

  90. 90

    Hyperion

    I wasn’t actually talking about the Maddoff situation as I believe that was clearly a failure on the SEC’s part and not one of regulation. However here is how I COULD say they could regulate better and that is the issue of hedgefunds. I believe that because hedgefunds play by their own sets of rules they should also have their own sets of regulations. Most hedgefunds have ridiculously high limits when it comes to a minimum investment. That means most off them are handling an assload of money. For that reason there is a tendency by some that they MUST know what they are doing. Nothing could be further from the truth. So I would say at the very least hedgefunds should be made to show proof that they are actually conducting trades on behalf of their clients to the SEC. Just that one little step would have stopped Maddoff long before he bilked all these people of their life savings which instead of being traded was sitting in a damn bank account.

  91. 91
    JenJen says:

    @The Grand Panjandrum: It doesn’t bother me either, the critique from the Left. It’s healthy, and yes, to be expected.

    But, it is getting to the point where it does sound echo-chamberish, and it does seem to be more coordinated, and less independent.

  92. 92
    Emma Anne says:

    Ah, now I see the disconnect I was so puzzled about with respect to Krugman and the folks here yesterday. Krugman doesn’t see his role as supporting the administration and helping them sell their policy. He sees his role as analyzing economic policies to the best of his abilities and giving his opinion without varnish. I have been reading him for a long time and this is what he has always done. He liked Obama’s budget and said so. He thought the stimulus was too small and too tilted towards tax cuts and said so. He thought health care reform wouldn’t work without mandates and said so.

    So when people talk about "friendly fire" they are missing the point. Krugman isn’t part of the Obama "army". He has a different role. I feel that this is the best role for him. We need people who are smart about economics and say what they actually think. I also disagree that he wouldn’t have criticized Hillary in exactly the same way. I think he would have.

    Now whether his plan or Geithner’s is right? I hope Geithner’s. Brad DeLong has some hope and he is smart about economics too. But usually whenever Krugman has been dark and pessimistic in the past, he’s been right, however annoying and shrill the optimists have found him. And Krugman’s argument makes more sense to me. We have a few models to look at and keeping zombie banks moving hasn’t worked, while nationalizing has. Yes, nationalizing will open cans of worms and reveal nasty secrets, but I am guessing those things need to happen.

  93. 93
    ksmiami says:

    Shorter me:

    The system IS rigged, but it is still the best one on the planet for building wealth.

  94. 94

    Doctor Gonzo

    Wait wait wait. One of the main concerns of Krugman et al isn’t that the hedgefunders are going to buy low and sell high. Its that they are going to OVER PAY for bullshit and after they figure out its bullshit they are going say fuck it and default on the loan. I haven’t seen anybody talking about the hedgefund crowd getting a great deal on the toxic assets then turning around and selling for some kind of quick profit. And in what world would somebody be hankering to buy some shitty assets at more than what the hedgefunders paid for them? Again this is all TOTALLY contradictory.

  95. 95
    Doctor Gonzo says:

    Again this is all TOTALLY contradictory.

    Not really. The #1 problem here is that these assets are so complicated, and the banks have been so secretive, that there is almost no information out there to price these assets. Putting a price on some of these CDOs is like throwing darts at a dartboard.

    So perhaps the hedge funds will buy low and sell high (and, to be accurate, Krugman et al have been concerned about this, insofar as they have been concerned that the government doesn’t get enough of the benefits on the upside).

    But go back to the example I gave above: The CDO is nominally worth $100, and if it is worth less than $50, the bank will go bankrupt. So the banks absolutely NEED the price to be at least $50, otherwise this is all for naught. Remember that: the banks must GUARANTEE a sale price above $50, or it will go under.

    So what does the bank do? Maybe they fudge a bit as to what the CDO consists of, so people think it’s worth more. Or, as Hilzoy did point out, maybe the bank works with some 3rd party to bid $60 for that CDO, knowing full well it’s not worth anything close to that. In the end, the CDO is worth less, the buyer walks away, the taxpayer eats it.

    That’s where all the concern is about the downside risk, because to keep the banks solvent, the prices have to be far, far higher than they are now. To ensure the banks stay solvent, we may have to overpay for a LOT of these assets. If we don’t pay enough, the banks go under anyway.

  96. 96
    ksmiami says:

    NO NO NO EMMA ANNE:
    I have read Krugman (prefer Uwe Reinhardt) and actually think nationalization will destroy our financial system and take down the small banks too. Not to mention what happens to all the stock owning pensioners. This is my problem with Krugman – he doesn’t really come forward and discuss what the outcome of His idea looks like and it is a bad, painful one that would probably lead to Republican governance until we became a full on fascist society…

    Instead, Krugman and Atrios shoot daggers at Geithner and Obama who are dealing with a heaping pile of bushit. It is not simple to take over an organization as large as BOFA or Citigroup, separate the good from the bad and then sell off assets. This is Utopian caca. Instead, you would create havoc in the financial markets and a new generation of people stuffing their money into mattresses. I still love America as it is and believe that we can get through this and if it means I have to buy off some hedge fund managers that is a cheap price to pay versus an all out collapse of capitalism.

  97. 97
    JenJen says:

    @The Moar You Know: Re: Madoff, do not miss Josh Marshall’s careful reading of the Victim Letters submitted by the US Attorney’s office, describing their losses, and what they believe Madoff’s punishment should be.

    Seriously, don’t miss it. Heartiest laugh I’ll likely have today.

  98. 98
    Doctor Gonzo says:

    Here’s an example balance sheet for Bank of Idiots (BoI):

    Liabilities: $100
    Assets: $10 cash, $100 CDO, $40 other assets.

    On paper, this bank is doing great, with $150 in assets and only $100 in liabilities. But everybody knows that CDO is not worth $100. How much is it worth then?

    If the bank gets less than $50 for it, it will no longer be in great shape. So in order for the bank to stay solvent, it needs to ensure that selling price is above $50. If not, it will still go under.

    If I buy it for $60, I save the bank, but if it is only worth $30, I lose money. Under the Geithner plan, the taxpayer loses the money.

  99. 99
    Elie says:

    #96 KSMiami —

    ..and I think that the Kruganites do not correctly addresss the impact of the "collapse of capitalism" on the "little guy" they are purportedly protecting. As I said upstring, these guys have some aspects of revolutionaries in their temperaments and that makes them, like the old time communists and other utopian movements like the Khmer Rouge, somewhat likely to overlook that downside to their approach…

  100. 100

    Doctor Gonzo

    Can you provide a link to the "they have to get over $50 or they are bankrupt" information you keep referring to?

  101. 101
    Brachiator says:

    @Doctor Gonzo:

    Either way, the collective governments of the world are going to be doing a lot of bailing out. It comes down to the question I posed before: do we bail out the little guys who got caught up in this through no fault of their own, or do we bail out the people that caused this mess in the first place?

    I’m not sure this is the right question. One of the things that Treasury and the Fed is trying to do is to restore liquidity to financial markets. This is not the same thing as deciding whether to bail out banks or the little guy. Treasury thinks that if they don’t bail out the major banks, the entire credit market will collapse.

    Perhaps credit markets would find a way to rebound if some major banks and companies like AIG were allowed to fail. And even though overall lending is down, banks and investment houses find ways to structure deals that they like, such as the recent big drug company mergers. Markets may be very liquid and bankers are just playng governments for suckers, knowing that they are so afraid of the possibilty of a Depression that they will do anything to aid financial markets.

    In that case, just put the U.S. arm into receivership. If that isn’t possible, well, I’m assuming those foreign units are profitable.

    Bad assumption. As a related aside, there was an NPR story last week noting that some Italian companies were having to get lending from the Mafia, because they could not get money from the banks.

  102. 102
    JenJen says:

    @Elie: The last time I felt myself this at-odds with the left blogosphere was… during the primaries.

    I’m not discounting them simply because of some leftover resentment I may have with many of them, but I don’t think it should go without saying.

  103. 103
    ksmiami says:

    Elie – agreed:

    When you talk about blowing stuff up (Krugman discussing the US financial system) the then you better be prepared for all the fall out landing on innocent victims (Average American – Homo consumeramus) This is the dimension that is probably keeping Obama up at night that Krugman doesn’t have to consider… such things like:

    the small businessman who needs lending to make his business continue

    the doctor that needs to borrow money to buy new diagnostic equipment…

    Small restauranteurs

    I could go on, but if we blow up our lending system in a nationalization scheme, who will provide money to these people???

  104. 104
    SBW says:

    Um, let’s see – we’re like the Khmer Rouge – a genocidal regime responsible for several million deaths — for not wanting to be ripped off?

    Do you have any clue how disturbing you sound? This is politics, not some cult membership.

    Look, here are some links to other solutions to this clusterfuck — be careful, however, I think a few of them may practice cannibalism:

    Stiglitz – http://www.thenation.com/doc/2.....l=hp_picks

    Galbraith – http://www.washingtonmonthly.c.....raith.html

    Johnson – http://baselinescenario.com/20.....#more-2982

    Roubini – http://www.rgemonitor.com/ — Need to register for the good stuff.

    Notice very carefully, none of these economists have the last name of K-r-u-g-m-a-n.

  105. 105
    MNPundit says:

    I hope you can see also that the lefty blogosphere has been about as far from being in the tank for Obama as can be.

    Whether the constant criticism is better than the mindless Bush-bots of the right is debatable but remember: lefties don’t just follow along.

  106. 106
    HyperIon says:

    @ksmiami:

    Shorter me: The system IS rigged, but it is still the best one on the planet for building wealth.

    Shorter me: The system IS rigged but as long as folks think it’s all about building wealth and that they can succeed where others have failed, the ponzi scheme that is modern capitalism will continue.

  107. 107
    ksmiami says:

    I don’t think Elie meant to compare Krugman or Dr. Doom to the Khmer Rouge, but I do not think that Krugman and friends are not looking at all the dimensions of their own plans and they need to be a bit more wary of the law of unintended consequences. The fact that they either do not discuss, or gloss over the fall out from a nationalization scheme makes their views more suspect to me.

    Then again, I like moderation in all things and many of the "experts" scare me since they mostly cheerleaded into the messes we have now. Additionally, economics is more of a social science BECAUSE people do not always act rationally so what looks good in a white paper may have the exact opposite effect on well – real people. I am not sure we can withstand a 500 point DOW drop right now and I am convinced that if Geithner came out and followed Krugman, that is exactly what would happen… But go ahead worship the guy, maybe he can run for office in 2012.

  108. 108

    Krugman is an interesting case. I have seen people shocked when he criticized Obama. But I have also seen people convinced that Krugman is out to destroy Obama. Neither position is supported by the facts. Krugman was critical of Obama during the campaign, but that criticism was actually rather mild compared to the kind of scorn he heaped on Bush.

    Krugman is getting harsher on Obama of late, but I don’t criticize him for that because his position on Obama’s policies are clear and well thought out. If Krugman honestly believes Obama is making a severe mistake then he would be wrong NOT to criticize him.

    I don’t know if Obama is making a mistake, but it is good to have oppositional voices out there who can make a good argument against him from the left.

  109. 109
    SBW says:

    ksmiami

    Sure, I have links to four ‘non-Krugman’ economists, and read a host of others but I worship the guy — you know, the one and only.

    And experts scare you, but Geithner doesn’t? That’s perfect.

  110. 110
    ksmiami says:

    I read Stiglitz and Reinhardt and DeLong and CR too as well as Graham and Dodd, but as I said economics is an inexact social science and the structural issues confronting our economy have been building for years. This is why it is completely disingenous to blurt out Nationalization as a cure all when in fact it carries a lot of risk as well. Oh, and in case you didn’t notice, not one of these eminent scholars has built a true business (except for CR, but I don’t know his profit margin) and as much as I love Princeton, a lot of academics misinterpret human behavior as being rooted in rationality when at least half the time, this isn’t the case. Case in point, the Snuggie is one of the top selling items today even though it is ridiculous.

  111. 111
    geg6 says:

    @Elie:

    There was a post on FDL yesterday by Stirling Newberry (??) that addressed this, sort of. It was about how there are three kinds of "liberals." One kind is the financial types, another comes labor points of view, and I forget the third. And the problem is that, because each faction has a different starting point about what is most important, they end up talking past each other instead of working together. I thought it summed up this type of intra-party bickering perfectly.

  112. 112
    Doctor Gonzo says:

    @sgwhiteinfla

    The fake balance sheet that I gave above is what I am talking about when I say that unless those bad assets are valued at some certain level, the banks will fail anyway.

    The recovery rates on some of these debt obligations has been around 10 or 20 cents on the dollar. If those are the true values of those obligations, all the hedge funds in the world aren’t going to be able to save the banks…unless those hedge funds buy those CDOs at prices far above what they are worth. And the only way they would do that is if they are playing with the house’s money.

  113. 113
    Elie says:

    SBW – my friend, I was after you on another thread to spell out what YOU advocated and an honest appraisal of its downsides. Silence. How about it?

    The Khmer Rouge, apart from their bloody murder of millions of their countrymen to "cleanse" the culture of the effect of the elite were utopians — and that was what my somewhat ham handed reference was attempting to do. Knew it would get your attention though ;-) (no — not really)

    I think that there are lessons in history and psychosociology for both pragmatists and utopians. I tend to respect those who are honest about that.

    Do you?

  114. 114
    Jim says:

    Krugman has also blasted Timmeh’s plan for the toxic assets. He is being consistent in his views and not simply backing the Dems reflexively. Conservative hacks are amazed by this because it is in their blood to back their own, no matter ruinous the policies.

    I’m not thrilled with everything Obama is doing, not by a long stretch, but my loathing of Republicans has only increased in the past few months. They truly have no sense of decency.

  115. 115
    Will says:

    I really used to like Paul Krugman, but the consistent and often unhinged nature of his attacks on Obama, coupled with his Clinton loyalties during the primary, practically make him a PUMA.

  116. 116
    ksmiami says:

    Will –

    You are exactly right about the TONE of Krugman’s attacks. The other guys make reasoned arguments without sounding like teenage drama queens; Roubini at least seems to have some sense of the political reality facing the Obama administration whereas Krugman lives in econutopia and that is why he is increasingly harder to listen to.

  117. 117
    Rick Taylor says:

    =*whoops, wrong thread*

  118. 118
    SBW says:

    Elie,

    The first action is to not continue to throw good money after bad. Not continuing corruption is a plan — and not a utopian one, either.

    I am for receivership if a bank is determined insolvent — I haven’t seen any mention of stress test results, however. I think it is critical to replace top management — I don’t believe in irreplaceable men or women, and think it is idiotic to believe a problem will be solved by continual injection of public monies into institutions under no public control — unless I’m mistaken, the ostensible point to all this is to increase lending (which in my opinion would only partially help even if it worked perfectly, due to other factors)–and hundreds of billions in capital injections later, the Federal government still cannot force private banks to loan out money. Or can it? Can the Federal government force –force — banks to use capital injections for lending? If you can show that, then yes, I would modify some of my views. If not, then it doesn’t matter how complicated receivership would be, it would ultimately need to be done. Presently I see both an immoral and ineffectual course of action being pursued, a course that has not changed since Paulson. I don’t see how this new particular Public-Private partnership guarantees lending any more than TARP I did. Yes, after even more public money is given to banks, banks could lend. Is there a legal requirement for them to do so? Where are the controls to assure the public benefits as it should?

    Small businesses need credit? This is a plan I like:
    http://www.whitehouse.gov/the_.....for-Small/

    geg6 — I would be coming from the labor point of view (though not in an industry with unions — I’m actually in IT), which has minimal representation in the modern Democratic party. There are some very positive signs that that may change soon after a long period of neglect — including through the Clinton era (the views of the other recent presidents towards workers would be obvious).

  119. 119
    terry chay says:

    As far as I can tell, these people think all DFH’s are the same, including Krugman—they never looked passed any label they’ve given.

    They also probably think the Nobel Prize has an affirmative action program for bearded white males.

    If anyone else had Krugman’s economic aptitude, lack of care of political consequences, and mouthpiece (NYT editorial), they’d be saying the same thing about the bailout. Many of us on this blog feel the same thing about what’s going on and there is increasing evidence that the DFH’s are right about this one too.

  120. 120
    HyperIon says:

    @ksmiami:

    I am not sure we can withstand a 500 point DOW drop right now

    if by "we" you mean "i", does this mean you are still in stocks?
    i got out last march when BS crashed.
    now i find myself much more ambivalent about day-to-day fluctuations in the market.

    best investment advice i ever got: if you cannot afford for the market to go down, you should not be in the market.

    but this requires first understanding that the market can go down.

    in other news: a colleague has had a rate locked on a refi at BECU (B = boeing) since dec. it’s a credit union and yet they haven’t been able to process the loan for almost 4 months. understaffed? or something to do with banks not lending to each other? i wonder.

  121. 121
  122. 122
    ksmiami says:

    Hyperlon – we are mostly in bonds. I agree that most people should stay the hell out of the market unless they can afford to lose a lot and win very little. Same with real estate. the dow comment I meant was far as the punditry clasping their necklaces and hoping for Obama’s failure. WE can’t afford that esp. as the Republican party has devolved into something really fucking scary. See Palin (aerial wolf hunter) and Jindal (who likes volcano monitoring now asswipe?)

  123. 123
    terry chay says:

    @passerby:

    Does Krugman, or any of these media monkeys jabbering their opinions on the administration’s plan to resolve the biggest crises facing our nation since the Great Depression, have access to the inner circles and behind doors meetings regarding what’s really happening in the financial industry?

    Careful there. You’re starting to sound exactly like some administration official that assured us that if we didn’t invade Iraq, “the smoking gun would be a mushroom cloud.” and we didn’t have the information they had to argue that the all those brains in the Pentagon wasn’t preparing for the aftermath of that war.

    @Ash:

    Krugman has ALWAYS been completely politically tone deaf. He’s an economist, he doesn’t have a damn clue how to legislate any of his ideas.

    Paul Krugman would be the first person to agree with that statement. But engaging in this line doesn’t actually address the points about what is wrong with the bailout plan. In fact, it’s a red herring esp. in light of the populist outrage against AIG.

    @Brachiator:

    As for Krugman, he knows tons about the economy, but not much about business, financial markets and tax policy. He reminds me a bit of a math professor I heard being interviewed the other day who admitted that he is terrible at Algebra and lets his wife handle all their investments.

    You mean arithmetic, not algebra. This is an ad hominem. Clearly Paul Krugman has a lot more sense than the Alan Greenspans of the world who claimed to have all this knowledge and treated our economy as an Ayn Rand novel.

    Krugman admits his limitations as a politically unsavvy academic with liberal leanings and a specialty in trade and labor and moves on. Why can’t you?

    Why are you being Rahm Emanuel’s puppet?

    There are serious problems with the bailout that requires serious debate. We have already spent just close to three trillion dollars(!) on this path on the advice of those who helped design the economic policy which created this mess giving money to those who blew up the bubble… we should be asking if the alternatives are so risky as they sounded back when we thought a billion was a big deal.

  124. 124
    Elie says:

    Thanks SBW for your reply —

    Question: You speak about receivership for banks — which is fine and we have a process for that for straight ahead banks. What about Citi and AIG — huge financial organnizations but not just banks?

    Also, I can’t really find a description of any downsides or caveats to what you propose. Surely its not cost free — or risk free if part of your solution is to let some of it just crash. Your contention that the public can only fund so much is fair — but isnt the public going to fund your solution too? Do you think that the process of "nationalization" or some sort of structured receivership is cost free in terms of dollars or other fall out? If all sides of this are truly honest here, we can have a true discussion of alternatives and weight the downsides appropriately. if both sides are just flinging accusations and projecting various visions of doom, the public stays confused and on the sidelines of a very important discussion.

    As much as many of the economists such as Krugman and Rubini are important contributors to the discussion, they are also elitists ; by definition "The belief that certain persons or members of certain classes or groups deserve favored treatment by virtue of their perceived superiority, as in intellect, social status, or financial resources".
    There is no way that one could think anything other than that Krugman and some of the others believe in their own superiority and therefore that not only should the admistration and others take their advice, but that they MUST take their advice or else….

    That is not the tone that one sets if an open discussion of risks pros and cons is desired. It is one that the recipients of the advice should just acquiesce…

    Again. We are all citizens. Lets share from that common respect and not from just anger and fear.

Comments are closed.