Paul Krugman v. Tim Geithner

It is no secret that I’m not an economist.  I have long depended on Paul Krugman to help me understand what was going on.  And given the current state of the world, I seem to be blogging about economics a lot.

So is the Tim Geithner toxic assets plan viable or not?    Larry Summers (against whom I have a grudge because of what he did to Cornel West while president of Harvard) took at slap at Paul Krugman’s op-ed piece saying “I wish he waited for the plan to be announced before he wrote his column.” 

What exactly did Paul write?

And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.

It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.

Let’s talk for a moment about the economics of the situation.

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.

If I understand him correctly, what Krugman is worried about is 1) should we have just gone ahead and nationalized the banks temporarily and gotten it over with and 2) if the plan doesn’t work does it will Congress vote more money to nationalize.

I think Krugman is a great economist, but he maybe underestimating the larger political situation.  I think President Obama believes that health care reform and, to a less extent, eduational reform are additional keys to turning the economy around.  Obama is already hearing the footsteps of those in Congress who are looking at the deficit and wanting to put the breaks on.  Obama wants to pass his budget. Therefore he didn’t want to pick my option 1 and nationalize the banks.  If the plan doesn’t work, option 2 is an unknown.

One thing I do know is that while the market did go up today and that Tim Geithner did do marginally better that his first disasterous press conference, I love Jonathan Mann of Rock Bottom Cookie’s new song, “Hey Paul Krugman”.  Mann extoles Krugman while putting Geithner down.  Great catchy song.  Listen to the song and sing along with the refrain.” When I listen to you it seems to make sense, when I listen to him [Geithner] all I hear is blah, blah, blah.”

At this point all we can do is hope that the Geithner gamble works out.  I’m sure that Paul Krugman will be the first to be happy if it does.

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