Will the Geithner Plan Work? Four Leading Economists Speak Out

(Credit: Evan Vucci/Associated Press) Demonstrators standing behind Treasury Secretary Timothy Geithner before the start of a hearing of the House Financial Services Committee on Tuesday.

In Room for Debate, editors at the NY Times invited economists Paul Krugman, Op-Ed columnist, Princeton University; Simon Johnson, M.I.T.; Brad DeLong, U.C. Berkeley; and Mark Thoma, University of Oregon to respond to this question:

“…But is this plan {Geithner’s bank rescue plan} sufficient to restore the banking system to health?”

As far as I could tell, neither of the above named economists gave Geithner’s plan a wholehearted thumbs up, especially not Paul Krugman who writes:

Well, the stock market loved the Geithner plan, which proves … nothing. Stock investors have no special knowledge here; they’re groping like everyone else. For what it’s worth, credit markets didn’t react much at all.

But let’s back up and focus on the fundamentals.

In essence, the Geithner plan is the same as the Paulson plan from six months ago: buy up the toxic assets, and hope that this unfreezes the markets. Don’t be fooled by the apparent role of private enterprise: more than 90 percent of the funds will come from taxpayers. And the way the funds are structured provides a strong incentive for investors to overpay for assets (see my explanation on my blog).

So can this work?

Since the beginning of the crisis, there have been two views of what’s going on.

View #1 is that we’re looking at an unnecessary panic. The housing bust, so the story goes, has spooked the public, and made people nervous about banks. In response, banks have pulled back, which has led to ridiculously low prices for assets, which makes banks look even weaker, forcing them to pull back even more. On this view what the market really needs is a slap in the face to calm it down. And if we can get the market in troubled assets going, people will see that things aren’t really that bad, and — as Larry Summers said on yesterday’s Newshour – the vicious circles will turn into virtuous circles.

View #2 is that the banks really, truly messed up: they bet heavily on unrealistic beliefs about housing and consumer debt, and lost those bets. Confidence is low because people have become realistic.

The Geithner plan can only work if view #1 is right. If view #2 is right – if the banks are really in deep trouble that goes beyond lack of confidence — subsidizing investor purchases of toxic assets, many of which aren’t even held by the most troubled banks, has no real chance of turning things around.

As you can guess, I believe in view #2. We had vast excesses during the bubble years, and I don’t think we can fix the damage with the power of positive thinking plus a bit of financial engineering.

But that’s where the issue lies.

To read the responses of the other three economists, go here.

“Obama Overwhelmed, and Unappreciative of Tsunami of Populist Outrage”

Jonathan Martin at Politico wraps it up this morning for the Gray Lady whose liberal columnists not very long ago were gushing over the ever so smooth and clever presidential candidate whom they once declared heralded a new age to be hereafter known as “the Time of Obama.”

Martin reports:

The leading liberal voices of the New York Times editorial pages all criticized—and, in some cases, clobbered—President Obama on Sunday for his handling of the economy and national security.

It's not unusual for Barack Obama to take a little friendly fire from the Times. But it's perhaps unprecedented for him to get hit on the same day by columnists Frank Rich, Thomas Friedman and Maureen Dowd—and in the paper's lead editorial. Their critique punctuated a weekend that started with a widely circulated blog post by Paul Krugman that said the president’s yet to be announced bank rescue plan would almost certainly fail. {It should be noted that Krugman was a Hillary Clinton supporter during the Democratic primary.}

The sentiment, coming just two months after the president was sworn in, reflects elite opinion in the Washington-New York corridor that Obama is increasingly overwhelmed, and not fully appreciative of the building tsunami of populist outrage.

Unlike with President Bush, the Obama administration is less apt to dismiss such commentary, at least publicly, as so much carping from an out-of-touch peanut gallery. These are voices that have been sympathetic, and at times gushing toward Obama, during the campaign and in his administration’s early days.

Read More:

The Verdict on Obama’s Response to the Financial Crisis: “No We Can’t”

Nobel prize-winning economist Paul Krugman gently turns the Obama Administration’s response to the nation’s economic crisis inside out and concludes there’s not much there.

Krugman writes:

(emphasis mine)

By any normal political standards, this week’s Congressional agreement on an economic stimulus package was a great victory for President Obama. He got more or less what he asked for: almost $800 billion to rescue the economy, with most of the money allocated to spending rather than tax cuts. Break out the Champagne!

Or maybe not. These aren’t normal times, so normal political standards don’t apply: Mr. Obama’s victory feels more than a bit like defeat. The stimulus bill looks helpful but inadequate, especially when combined with a disappointing plan for rescuing the banks. And the politics of the stimulus fight have made nonsense of Mr. Obama’s postpartisan dream.

Krugman continues:

For while Mr. Obama got more or less what he asked for, he almost certainly didn’t ask for enough. We’re probably facing the worst slump since the Great Depression. The Congressional Budget Office, not usually given to hyperbole, predicts that over the next three years there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce. And $800 billion, while it sounds like a lot of money, isn’t nearly enough to bridge that chasm.

Officially, the administration insists that the plan is adequate to the economy’s need. But few economists agree. And it’s widely believed that political considerations led to a plan that was weaker and contains more tax cuts than it should have — that Mr. Obama compromised in advance in the hope of gaining broad bipartisan support. We’ve just seen how well that worked.

Now, the chances that the fiscal stimulus will prove adequate would be higher if it were accompanied by an effective financial rescue, one that would unfreeze the credit markets and get money moving again. But the long-awaited announcement of the Obama administration’s plans on that front, which also came this week, landed with a dull thud.

And here’s the conclusion of Krugman’s disturbing reflections on the state of the economy this morning:

Over all, the effect was to kick the can down the road. And that’s not good enough. So far the Obama administration’s response to the economic crisis is all too reminiscent of Japan in the 1990s: a fiscal expansion large enough to avert the worst, but not enough to kick-start recovery; support for the banking system, but a reluctance to force banks to face up to their losses. It’s early days yet, but we’re falling behind the curve.

And I don’t know about you, but I’ve got a sick feeling in the pit of my stomach — a feeling that America just isn’t rising to the greatest economic challenge in 70 years. The best may not lack all conviction, but they seem alarmingly willing to settle for half-measures. And the worst are, as ever, full of passionate intensity, oblivious to the grotesque failure of their doctrine in practice.

There’s still time to turn this around. But Mr. Obama has to be stronger looking forward. Otherwise, the verdict on this crisis might be that no, we can’t.

Again, Americans, it's time to wake up. You voted for a charming, motivational speaker in 2008 and elected the least experienced candidate in either the Democratic or Republican primaries to lead us through the most challenging period in recent American history.

Were you really so idolatrous as to expect Mr. Obama to walk on water?

Latest Attempt by Obama’s Media Groupies and His Supporters to Smear Hillary Clinton Falls Flat

In today’s NY Times, Paul Krugman sets the record straight on the latest attempt by Obama's media groupies and his supporters to smear Hillary Clinton. Krugman’s op-ed piece is titled Healthcare Horrors, and he details how the Washington Post inappropriately identifies Trina Bachtel, the victim in a tragic anecdote that Hillary Clinton has woven into her campaign speeches on the trail.

Predictably, Obama supporters gleefully seized the opportunity to brand Hillary Clinton a liar.

But Krugman notes, “In fact, Mrs. Clinton was accurately repeating the story as it was told to her — and it turns out that while some of the details were slightly off, the essentials of her story were correct. After all the fuss, The Washington Post eventually conceded that “Bachtel’s medical tragedy began with circumstances very close to the essence” of Mrs. Clinton’s account.”

Krugman continues:

“And even more important, Mrs. Clinton was making a valid point about the state of health care in this country.

“In other words, this was a disgraceful episode. It was particularly sad to see a number of Obama supporters (though not the Obama campaign itself) join enthusiastically in the catcalls against Mrs. Clinton’s good-faith effort to put a human face on the cruelty and injustice of the American health care system.”

Krugman concludes by reminding overly zealous Obamaphiles, whose candidate has consistently offered himself as the harbinger of the “new politics,” about what being progressive really means:

“Look, I know that many progressives have their hearts set on seeing Barack Obama get the Democratic nomination. But politics is supposed to be about more than cheering your team and jeering the other side. It’s supposed to be about changing the country for the better.

“And if being a progressive means anything, it means believing that we need universal health care, so that terrible stories like those of Monique White, Trina Bachtel and the thousands of other Americans who die each year from lack of insurance become a thing of the past.”

Krugman: Of the Three Candidates, Clinton is the “Bold Progressive”

Photo credits: NY Times

Paul Krugman may not hold Alan Greenspan in high favor, but he knows a bold progressive when he sees one: Hillary Clinton. And according to the NY Times columnist, who also happens to be an economist, neither Barack Obama nor John McCain measures up.

In today’s op-ed piece, Krugman reminds us that a candidate’s policy proposals are a better indicator of what kind of president he or she will be than the latest “revealing anecdote or out-of-context quote.” He suggests we ought to have learned that lesson by experience from George W. Bush who came across as a “reasonable, moderate guy,” while the policies he advocated said something very different.

Krugman sizes up McCain, Clinton, and Obama on the basis of how each has responded to the mortgage crisis.

McCain:

Mr. McCain is often referred to as a maverick and a moderate, assessments based mainly on his engaging manner. But his speech on the economy was that of an orthodox, hard-line right-winger.

It’s true that the speech was more about what Mr. McCain wouldn’t do than about what he would. His main action proposal, as far as I can tell, was a call for a national summit of accountants. The whole tone of the speech, however, indicated that Mr. McCain has purged himself of any maverick tendencies he may once have had.

“Mr. McCain is often referred to as a ‘maverick’ and a ‘moderate,’ assessments based mainly on his engaging manner. But his speech on the economy was that of an orthodox, hard-line right-winger.

“Many news reports have pointed out that Mr. McCain more or less came out against aid for troubled homeowners: government assistance ‘should be based solely on preventing systemic risk,’ which means that big investment banks qualify but ordinary citizens don’t.

“But I was even more struck by Mr. McCain’s declaration that ‘our financial market approach should include encouraging increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital.’

“These days, even free-market enthusiasts are talking about increased regulation of securities firms now that the Fed has shown that it will rush to their rescue if they get into trouble. But Mr. McCain is selling the same old snake oil, claiming that deregulation and tax cuts cure all ills.”

Clinton:

Noting that the substance of Clinton’s policy proposals on mortgages, like that of her health care plan, suggests a strong progressive sensibility, Krugman contrasts her approach to McCain’s:

“Maybe the most notable contrast between Mr. McCain and Mrs. Clinton involves the problem of restructuring mortgages. Mr. McCain called for voluntary action on the part of lenders — that is, he proposed doing nothing. Mrs. Clinton wants a modern version of the Home Owners’ Loan Corporation, the New Deal institution that acquired the mortgages of people whose homes were worth less than their debts, then reduced payments to a level the homeowners could afford.”

Obama:

Describing Obama’s recent speech on the economy as falling into his previous cautious pattern, Krugman praises him for supporting broader financial structures, but faults him on a couple of other counts:

“I was pleased that Mr. Obama came out strongly for broader financial regulation, which might help avert future crises. But his proposals for aid to the victims of the current crisis, though significant, are less sweeping than Mrs. Clinton’s: he wants to nudge private lenders into restructuring mortgages rather than having the government simply step in and get the job done.

“Mr. Obama also continues to make permanent tax cuts — middle-class tax cuts, to be sure — a centerpiece of his economic plan. It’s not clear how he would pay both for these tax cuts and for initiatives like health care reform, so his tax-cut promises raise questions about how determined he really is to pursue a strongly progressive agenda.”

Krugman sums up:

“All in all, the candidates’ positions on the mortgage crisis tell the same tale as their positions on health care: a tale that is seriously at odds with the way they’re often portrayed.

“Mr. McCain, we’re told, is a straight-talking maverick. But on domestic policy, he offers neither straight talk nor originality; instead, he panders shamelessly to right-wing ideologues.

“Mrs. Clinton, we’re assured by sources right and left, tortures puppies and eats babies. But her policy proposals continue to be surprisingly bold and progressive.

“Finally, Mr. Obama is widely portrayed, not least by himself, as a transformational figure who will usher in a new era. But his actual policy proposals, though liberal, tend to be cautious and relatively orthodox.

“Do these policy comparisons really tell us what each candidate would be like as president? Not necessarily — but they’re the best guide we have.”

Krugman's Economics 101: Clinton Knows What She’s Talking About; Obama Leans Right

Photo credits: AP

Reminding readers of the potential for a recession, Paul Krugman, professor of Economics and International Affairs at Princeton University, critiques what the leading candidates have to say about economic policy in his op-ed column in today’s NY Times. Below are abbreviated versions of Krugman’s responses to each candidate's economic proposal (to read his original column, go here):

McCain:

But shouldn’t we worry about a candidate who’s so out of touch that he regards Mr. Bubble {Greenspan}, the man who refused to regulate subprime lending and assured us that there was at most some “froth” in the housing market, as a source of sage advice?

Giulani:

...his answer to the economy’s short-run problems is a huge permanent tax cut, which he claims would pay for itself. It wouldn’t.

Huckabee:

...well, what can you say about a candidate who talks populist while proposing to raise taxes on the middle class and cut them for the rich?

Romney:

He’s still offering nothing but standard-issue G.O.P. pablum about low taxes and a pro-business environment.

Edwards:

...he proposed a stimulus package including aid to unemployed workers, aid to cash-strapped state and local governments, public investment in alternative energy, and other measures.

Clinton:

Last week Hillary Clinton offered a broadly similar {to Edwards’} but somewhat larger proposal. (It also includes aid to families having trouble paying heating bills, which seems like a clever way to put cash in the hands of people likely to spend it.) The Edwards and Clinton proposals both contain provisions for bigger stimulus if the economy worsens.

And you have to say that Mrs. Clinton seems comfortable with and knowledgeable about economic policy. I’m sure the Hillary-haters will find some reason that’s a bad thing, but there’s something to be said for presidents who know what they’re talking about.

Obama:

The Obama campaign’s initial response to the latest wave of bad economic news was, I’m sorry to say, disreputable: Mr. Obama’s top economic adviser claimed that the long-term tax-cut plan the candidate announced months ago is just what we need to keep the slump from “morphing into a drastic decline in consumer spending.” Hmm: claiming that the candidate is all-seeing, and that a tax cut originally proposed for other reasons is also a recession-fighting measure — doesn’t that sound familiar?

Anyway, on Sunday Mr. Obama came out with a real stimulus plan. As was the case with his health care plan, which fell short of universal coverage, his stimulus proposal is similar to those of the other Democratic candidates, but tilted to the right.

Krugman concludes with an appropriate jab at the superficiality of media coverage of the 2008 campaign:

In short, the stimulus debate offers a pretty good portrait of the men and woman who would be president. And I haven’t said a word about their hairstyles.

On Universal Health Care, Obama Gives Aid and Comfort to the Enemies of Reform

As a former employee of one of the world’s largest insurance companies, I recall sitting in on workplace sessions in which management gave us talking points opposing the latest government-sponsored health insurance program to present to our state legislators. And of course, we were warned of the perils of socialized medicine. As I recall, we were even shown a film negatively portraying medical care under the Canadian system.

Later on, I began receiving notices of regular incremental increases in the cost to employees of our group health insurance at that same company. It’s my understanding that costs for both employees and retirees who opted to continue their group health insurance there have continued to rise.

That’s just one reason why health care coverage has become a major issue among Democratic candidates in the 2008 presidential campaign. In today’s NY Times, Paul Krugman describes how the left wing’s preferred candidate, Barrack Obama, has been resorting to right-wing rhetoric, akin to that of the corporate world, to promote his health care plan over those offered by Hillary Clinton and John Edwards:

“From the beginning,” Krugman says, “advocates of universal health care were troubled by the incompleteness of Barack Obama’s plan, which unlike those of his Democratic rivals wouldn’t cover everyone. But they were willing to cut Mr. Obama slack on the issue, assuming that in the end he would do the right thing.”

Krugman continues:

“Now, however, Mr. Obama is claiming that his plan’s weakness is actually a strength. What’s more, he’s doing the same thing in the health care debate he did when claiming that Social Security faces a “crisis” — attacking his rivals by echoing right-wing talking points.”

Krugman summarizes:

“What seems to have happened is that Mr. Obama’s caution, his reluctance to stake out a clearly partisan position, led him to propose a relatively weak, incomplete health care plan. Although he declared, in his speech announcing the plan, that “my plan begins by covering every American,” it didn’t — and he shied away from doing what was necessary to make his claim true.

“Now, in the effort to defend his plan’s weakness, he’s attacking his Democratic opponents from the right — and in so doing giving aid and comfort to the enemies of reform.”

That’s all we need this time around when true progressives in America have the opportunity to take back the White House and our country from the agenda of the radical right wing.