History is Happening Now

I have employer-based health insurance. Like most Americans, you probably do, too. One question I’ve been asking myself — given the anger that exploded over the last week between progressives who favored and those who opposed the Senate health-care reform bill — is what the excise tax in this version will do to those of us who have employer-provided plans.

The Senate excise tax will tax employee health care benefits 40% for plans valued over $8,500 for individuals and $23,000 for families. The tax is indexed to inflation (+ 1%). Right now, this tax will affect 3% of premiums. Multiple people call this a tax on “Cadillac” health care plans. Over time, more and more plans will be affected by this tax, given the current rate of medical inflation, which far exceeds the general rate of inflation. If you aren’t affected by the 40% excise tax today, you will be tomorrow.

A substantial group of progressives who support the tax claim that it’s one of the Senate bill’s primary means of controlling medical inflation. Ezra Klein lists it among his “five cost control mechanisms in the Senate health-care bill,” arguing that the excise tax “is, essentially, a tax on the unchecked growth in premiums.” Klein and many health care economists say that the excise tax will control costs by making plans below the threshold much more appealing, and will increase worker salaries because health care plans more expensive than the cap will be taxed at a higher rate than income. That is, it’ll be cheaper for employees to give you a dollar in salary than a dollar of health insurance.

Unions have objected to the excise tax because it will affect their health care plans, which are often negotiated for knowing that a dollar of health care coverage is worth more than a dollar of income. At Fire Dog Lake, Jon Walker has objected that the tax will “reduce the quality of millions of Americans’ health insurance coverage, will technically ‘bend the cost curve’ by just barely 0.3% in 2019. All that for a measly 0.3% reduction in national health expenditures,” i.e., that companies will tend toward cheaper plans but that an increasing number of workers will find that those savings will come out of the benefits their plans provide. At the Web site of Physicians for a National Health Program, Leonard Rosenberg is quoted as saying that the tax will give employers “a strong incentive to cut back on their benefits. Instead of reducing underinsurance, this part of the Plan will increase it.” My — and your — health insurance will get worse over time. We pay relatively lower premiums, health inflation remains unabated, and we get less coverage.

The crux of the argument seems to be based on different ideas about the causes of differences between health care costs. What’s responsible for this difference? Overly generous (“Cadillac”) benefits? Lazy insurance companies? Inefficient medical providers? The clearest case I’ve found against the excise tax is available on Slate. Timothy Noah goes over the facts — including a peer-reviewed study in Health Affairs — and concludes that “benefit design” had little to do with the variation between different plans: “excess” or wasteful health care doesn’t have much to do with why expensive plans are expensive relative to less expensive plans. Health care inflation, meanwhile, will continue, sucking in more and more employer-based plans into the grip of the excise tax. In fact, “[i]t’s therefore easy to imagine the Cadillac tax squeezing patients between ever-lowering benefits and still-rising prices for medical care”; a growing number of people may “see the value of their health insurance decline relative to doctor and hospital fees.” It’s worth reading the whole thing.

Addressing some of the same facts, Klein comes to an opposite conclusion (referencing what I think is the same Health Affairs study): “if the insurance market is really so mysterious and inefficient that we can’t confidently say why one plan is pricier than the next, that’s good evidence that there’s a place for strong cost controls penalizing fast growth in premiums. It is, at least, worth a try.” And: “I don’t deny that the excise tax might fall flat. But right now, we need to err on the side of trying cost controls, not ruling them out. I have no doubt that if the excise tax proves overly aggressive, it will quickly be declawed.” But this seems to go back to the point of my previous post. The “wonky” case for the excise-tax is based on the decidedly non-wonky admission that it may very well not work to do what it’s supposed to do, since we don’t have a very good idea what causes variation between plans, but the ultimate reassurance that if it doesn’t work, well, some political incentive magic will undo what’s bad about the policy.

Is this a risk we want to take? It looks like one we’ll be asked to take. Did I mention the title of the Health Affairs study? It’s “Taxing Cadillac Health Plans May Produce Chevy Results.”

Let’s begin with a quote from the New York Times:

In the great health care debate of 2009, President Obama has cast himself as a cold-eyed pragmatist, willing to compromise in exchange for votes. Now ideology — an uprising on the Democratic left — is smacking the pragmatic president in the face.

Stung by the intense White House effort to court the votes of moderate holdouts like Senator Joseph I. Lieberman, independent of Connecticut, and Senator Ben Nelson, Democrat of Nebraska, liberals are signaling that they have compromised enough. Grass-roots groups are balking, liberal commentators are becoming more critical of the president, some unions are threatening to withhold support and Howard Dean, the former Democratic Party chief, is urging the Senate to kill its health bill.

This description of the debate over the Senate version of health insurance reform reproduces conventional journalistic wisdom about politics in America. On one side are the moderates, the compromisers, the policy wonks. These are the good guys.

On the other side of the ledger, are the lefty villains: the unreasonable, the unserious, those who are moved more by ideology than understanding.

Meanwhile, Joe Lieberman is never an ideologue; neither is Ben Nelson. They’re moderate centrists resisting the vicious Hard Left. It’s grass-roots groups, unions, and complainers like Howard Dean who are thwarting the pragmatism of the president.

The problem with this narrative is that — if you judge based on the conversations happening in the blogoverse — both groups claim to be wonky, pragmatic, clear-eyed undeceived realists; both sides accuse the other of not seeing the forest for the trees. As Steve Benen argues, this is a serious debate.

Serious is fine, but who’s right?

* * *

For me, the bottom line is this: if you’re an anti-corporate liberal — and I’m probably more in this camp, though I am willing to be convinced to support the Senate version of the bill — who thinks that the system in Washington is oriented toward the interests of large companies, at the expense of the needs of people, then the Senate version of this bill will confirm all your fears about how Washington works.

Those who argue — as most who advocate for the bill do — that yes the technical details of the Senate bill are more or less as bad as everyone is saying but that it will be improved over time have the harder argument to make. Take Ezra Klein, who argues:

In a world with an individual mandate, large premium increases are Congress’ problem. It focuses the mind on cost control. Given a choice between passively letting people become uninsured and taking on providers and insurers, Congress will choose the path of inaction. But given a choice between voting to take people’s insurance away and taking on providers and insurers? That’s a harder decision. Right now, the pressure in the political system comes from organized interests. The mandate levels the playing field.

Advocates of imperfect reform assume what they need to argue for: that when it comes time to reform the inadequate bill, to address its lingering structural problems, there will be no choice but progressive change, or an increased likelihood for improvement. Instead of stripping care from people, serious cost cutting measures will be implemented. But why? What will have changed in Washington? The main difference will be that health care corporations will earn more income — their stocks are rightly soaring now — Democratic politicians will depend more than ever on donations by the insurance and Pharma industries to win reelection, and there will be companies on the exchanges that are now “too big to fail.”

Klein offers the most detailed and persuasive case for supporting the bill that I have found, but I think his claims are based on a lot of supposition and incorrect analysis. After all, wouldn’t a private exchange system packed with high-deductable, low-care “coverage” be cheaper, a very plausible way to control costs? What if this is what universal “coverage” will ultimately look like? Is there anything in the Senate bill that does anything to undermine this outcome?

If I had to put on my speculative hat, I would guess that insurance companies on the exchange will cut costs by technically following the letter of the law, and lobbying to make coverage universal but effectively meaningless for many poor people. If you have insurance but can’t afford to pay your high deductible, aren’t you back to square one in some sense? No, haven’t you been pushed back a few squares, since you’re out of that money you’re being forced to pay for inadequate care?

I’m certainly not the first blogger to draw attention to this stunning New York Times op-ed written by Ali Soufan, but it’s worth quoting at length in case you missed it:

One of the most striking parts of the memos is the false premises on which they are based. The first, dated August 2002, grants authorization to use harsh interrogation techniques on a high-ranking terrorist, Abu Zubaydah, on the grounds that previous methods hadn’t been working. The next three memos cite the successes of those methods as a justification for their continued use.

It is inaccurate, however, to say that Abu Zubaydah had been uncooperative. Along with another F.B.I. agent, and with several C.I.A. officers present, I questioned him from March to June 2002, before the harsh techniques were introduced later in August. Under traditional interrogation methods, he provided us with important actionable intelligence.

We discovered, for example, that Khalid Shaikh Mohammed was the mastermind of the 9/11 attacks. Abu Zubaydah also told us about Jose Padilla, the so-called dirty bomber. This experience fit what I had found throughout my counterterrorism career: traditional interrogation techniques are successful in identifying operatives, uncovering plots and saving lives.

There was no actionable intelligence gained from using enhanced interrogation techniques on Abu Zubaydah that wasn’t, or couldn’t have been, gained from regular tactics. In addition, I saw that using these alternative methods on other terrorists backfired on more than a few occasions — all of which are still classified. The short sightedness behind the use of these techniques ignored the unreliability of the methods, the nature of the threat, the mentality and modus operandi of the terrorists, and due process.

So: all the useful intelligence gained from Abu Zubaydah was the result of “traditional interrogation methods.” “No actionable intelligence” came from “enhanced” interrogation–what the rest of the civilized world would call torture–and torture often “backfired.”

Can there be any doubt about the total intellectual and moral bankruptcy of torture defenders? It’s not as if Cheney and company didn’t know that they were distorting the record in the way Soufan indicates. They know torture doesn’t work, and when they say otherwise I presume they’re simply lying. After reading this op-ed, can anyone continue to believe that using torture as an “interrgation” technique has anything to do with protecting the U.S. from terrorist attack? Read it for yourself, as they say, and let me know.

It’s clear that New York Times columnist Paul Krugman and his followers on the left don’t think the Obama Administration’s plan to rescue our financial system will work, and the reason is simple: the banks are so badly screwed up that they cannot be saved. As far as they’re concerned, the only real solution is to scrap the banks altogether, which means the government will have to step in and take over the job of issuing credit to people and businesses.

There’s only one problem with their theory: It’s pure speculation, unsupported by any facts. In fact, the news in recent days seems to indicate that this theory is just plain wrong. We all know the banks are in trouble, which is why they aren’t lending the way they used to — but the news coming out of the mainstream media suggests the banks are in better shape than some of us thought.

For example, take a look at two recent pieces of text from the New York Times. The first is lifted from Paul Krugman’s March 23, 2009 column, “Financial Policy Despair“:

But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

If I understand Krugman correctly — a dubious proposition, as Krugman is an expert at draping obscurities and amibiguities in “plain” language — it seems Krugman is saying that the banks are dead. They are like the dead parrot in that famous Monty Python sketch, and the Obama Administration is like the pet store clerk insisting that the banks are merely “resting.” The executives made a bet on their banks and they lost that bet and nothing can change the fact that the banks are now gone forever.

The other piece of text is from an April 8, 2009 New York Times article entitled, “Banks Holding up in Tests, But May Still Need Aid“:

For the last eight weeks, nearly 200 federal examiners have labored inside some of the nation’s biggest banks to determine how those institutions would hold up if the recession deepened.

What they are discovering may come as a relief to both the financial industry and the public: the banking industry, broadly speaking, seems to be in better shape than many people think, officials involved in the examinations say.

That is the good news. The bad news is that many of the largest American lenders, despite all those bailouts, probably need to be bailed out again, either by private investors or, more likely, the federal government. After receiving many millions, and in some cases, many billions of taxpayer dollars, banks still need more capital, these officials say.

So while Krugman is proclaiming the banks dead as doornails (with no evidence to point to except his Nobel Prize, apparently), federal officials who have spent the last two months studying the banks say they may be “resting” after all. The banks aren’t dead — they just need more capital, and that’s precisely why Treasury Secretary Tim Geithner is advancing a plan to partner up with private investors and buy trillions of the banks’ so-called “toxic assets.”

The news doesn’t conclusively prove that Krugman and his followers are wrong. But it won’t take long for the proof to arrive. Here’s another excerpt from the New York Times article:

The state of the industry will come into sharper focus next week, when big banks like Citigroup and JPMorgan Chase start reporting first-quarter results. Many analysts predict the reports will show banks are on the mend, with help from low interest rates, fat lending margins, dwindling competition and profits from trading in the financial markets in January and February. In the last six weeks, financial shares have soared on hopes that the worst for the industry is over.

But some analysts say investors’ hopes are misplaced. With the recession, banks are likely to record further large losses on credit cards, corporate loans and real estate.

“Nothing has changed with the fundamentals,” said Meredith A. Whitney, a prominent banking analyst who has been bearish on most financial institutions.

I can’t say I understand what Whitney means when she says “nothing has changed with the fundamentals,” but I think her point is that anybody who thinks the banks have found their footing is kidding himself. Perhaps. But “many analysts” apparently think the banks are on the road to solvency again.

So here’s my question to Krugman’s fans out there: What happens if the news continues to be good? What happens if the results of Geithner’s “stress tests,” and other news reports continue to suggest that the banks can rise again with taxpayer support? What happens if Geithner’s plan works?

You know what will be dead then? Krugman’s credibility. Along with the credibility of all those other economists who insist that Geithner’s plan can’t possibly work.

Although I’m sure it will be hard to convince Krugman’s hard-core following that the Nobel Prize winner was wrong about something so crucially important.

Krugman’s credibility isn’t dead, they’ll say. It’s resting.

I desperately wish some big-shot left-wing pundit could explain to me why they are all so certain that the Obama Administration’s bank bailout plan won’t work.

Unfortunately, their attempts to explain themselves are (a) increasingly bizzare, and (b) not persuasive at all.

A classic example of the bizzare, unpersuasive criticism of Obama’s plan came recently from Arianna Huffington in her blog post entitled “The Obama Economic Team’s Flawed Cosmology: Still Believing the Universe Revolves Around the Banks.”

Huffington makes her opinion about the bank bailout perfectly clear: She thinks the bailout bill is based on false assumptions, and if Obama doesn’t alter his approach, it “can only lead to our being lost at sea for years to come.”

But why?

According to Huffington, it’s about “cosmology”:

Talking about our financial crisis with them is like beaming back to the 2nd century and discussing astronomy with Ptolemy. Just as Ptolemy was convinced we live in a geocentric universe — and made the math work to “prove” his flawed theories — Obama’s senior economic team is convinced we live in a bank-centric universe, and keeps offering its versions of “epicycles” and “eccentric circles” to rationalize their approach to the bailout. And because, like Ptolemy, they are really smart, they are really good at rationalizing.

It’s easy to get lost debating the complexity of each new iteration of each new bailout, but the devil here is not in the details — but in the obsolete cosmology.

If you believe the universe is revolving around the earth — when, in fact, it isn’t — all the good intentions in the world, and all the endless nights spent coming up with plans like Tim Geithner’s Public-Private Investment Program will be for naught.

Get it? When it comes to the Obama Administration’s approach to rescuing our financial system, “the devil here is not in the details.” So people like me who want to hear a clear, detailed analysis of why the plan will fail are apparently out of luck — since clear, detailed analysis apparently won’t lead us to that conclusion. The “really smart” economists advising Obama are “really good at rationalizing” and “it’s easy to get lost debating the complexity of each new iteration of each new bailout,” Arianna says — so why bother debating the individual merits of these plans, right? Instead, we should just take a giant step back and consider this idea: that Geithner’s plan to rescue our financial system is fundamentally based on the idea that the entire universe revolves around the earth.

Not literally, of course. Geithner doesn’t actually believe the universe revolves around the earth. But he believes something Arianna thinks is comparably ridiculous — what ”we live in a bank-centric universe.” Again, not literally. We can only assume that by “universe,” Arianna means the economy. So Geithner’s assumption — the laughable idea that’s comparable to believing the sun revolves around the earth — is that the U.S. economy revolves around banks.

Here is one example. Everybody agrees on the paramount importance of freeing up credit for individuals and businesses. In a bank-centric universe, the solution was a bailout plan giving hundreds of billions to banks. It failed because, instead of using the money to make loans, the banks “are keeping it in the bank because their balance sheets had gotten so bad,” as the president himself acknowledged on Jay Leno. As a result, the administration, again according to the president, had to “set up a securitized market for student loans and auto loans outside of the banking system” in order to “get credit flowing again.”

But think of all the time we wasted while the first scheme predictably failed. And how much better off we’d now be if we had provided credit directly through credit unions or small healthy community banks or, as happened during the Depression, through a new entity like the Reconstruction Finance Corporation.

Luckily, there is a plethora of economic Galileos out there who recognize that the old bank-centric cosmology is just plain wrong. But while Joseph Stiglitz, Simon Johnson, Jeffrey Sachs, Nassim Taleb, Niall Ferguson, Paul Krugman, etc. are not being imprisoned for life for their heretical views — they are also not being listened to. Which is really surprising for an administration that has prided itself on a “team of rivals” approach.

In other words, saying Geithner believes we live in a “bank-centric” economy is another way of saying that Geithner believes we’d rather have banks lending money than have the U.S. government lending money. Now, we’ve never lived in a universe that revolves around the earth — but we did live in a universe where most of the credit extended to people and businesses in America came from banks, rather than the federal government. What Geithner’s critics believe is that the universe should change from a “bank-centric” economy to a “government-centric” economy. (Imagine what we’d think of Gallileo if he suggested we should change our universe so the earth revolves around the sun – that’s crazier than anything Ptolemy ever believed.)

This is all very interesting – and quite compelling if you’re looking to exploit the current crisis in order to ram through a government takeover of the country’s banking system. But it doesn’t explain why the “bank-centric” view is fundamentally flawed. And as an economic argument, it is simply bizzare.

To the extent that Arianna makes an argument about the actual merits of Obama plan, the basic claim at the center of her argument is that this is a “solvency” crisis rather than a “liquidity crisis.” In other words, her claim is apparently that the banks aren’t lending because they are insolvent, and they will remain insolvent no matter how much money the government pours into them.

I am in no way suggesting there is anything corrupt about this or any quid pro quo involved. It’s just that in a bank-centric universe, funneling no-strings-attached money to too-big-to-fail banks is the logical thing to do.

So is arguing that the banking crisis is just a liquidity problem rather than an insolvency one, as Geithner continues to do (and if the stress tests come back declaring Citi solvent, it will be high time to start stress testing the stress testers).

Get it? Citibank is “insolvent,” and won’t lend money no matter how many billions of taxpayer dollars are dumped onto its balance sheet. Of course, Geithner is conducting “stress-tests” to determine whether Arianna’s claim is correct — but the stress-test will only be valid if it confirms what Arianna somehow already knows: Citibank is insolvent.

The “details” don’t matter to Arianna. What matters is that (a) the banks are insolvent, and anybody who tells you different is lying or blinded by their obsolete cosmology, and (b) the only non-crazy solution to this problem is a solution that involves the federal government taking over the bank’s role of providing the credit that allows our economy to function. And Geithner and Obama’s other economic advisers are “blinded” by an “obsolete cosmology” because they refuse to acknowledge the truth: that the government must take over our financial system, and any solution short of that is doomed to fail.

I suppose it’s possible that Arianna is correct.

But it’s also possible that Citibank and the other banks aren’t lending because their balance sheets are prohibitively bad — and the banks’ balance sheets are bad because they contain so many of these “toxic assets” that they’re forced to value as worthless because the market is frozen. It’s possible that once these assets are removed from the banks’ balance sheets, the banks will be in a position to lend and will do so.

In other words, it may be possible to get credit flowing again without a government takeover of the financial system.

I know that Arianna and Paul Krugman and a whole host of other left-wing pundits think I’m crazy-like-Ptolemy for thinking the sentence above is right.

But why? I’m not afraid of getting lost in the complexity. I’m not afraid of the details. I want to know. Why won’t Geithner’s bank plan work?

There’s a reason why “Joseph Stiglitz, Simon Johnson, Jeffrey Sachs, Nassim Taleb, Niall Ferguson, Paul Krugman, etc.” aren’t being listened to. That’s because their argument relies more on grand notions of “cosmology” than on clear arguments based on facts and analysis.

If these people want to be listened to more closely, they need to stop insisting that Obama is wrong and start explaining why he is wrong. Otherwise, they will remain trees that fall in the forest but don’t make a sound in the White House.

People who pay attention to New York Times columnist and Nobel Prize-winning economist Paul Krugman are certainly aware that he doesn’t support the Obama Administration’s plan to stabilize our financial system.

Obama and Krugman clearly disagree about what should be done. But what is the disagreement? I’ve been struggling to understand the disagreement — something far too few Krugman fans actually try to do, I suspect. 

The Congressional Oversight Panel’s recent report on the U.S. Treasury Department’s plan to try to rescue our financial system includes a critical section (on page 76), which allows us to clarify the nature of the debate. The section refers to the “toxic assets” that the mainstream media constantly talks about when it describes the reasons for the crisis in our financial system.

The debate over the ultimate effectiveness of efforts designed to utilize market mechanisms to restore the values of impaired assets turns on whether current prices, particularly for mortgage-related assets, reflect fundamental values or whether prices are artificially depressed by a liquidity discount due to the market strain. If the liquidity discount is real, public-private sector solutions are not only viable but preferable, as they avoid creating new and unpredictable risks that arise from preemptive government seizure of private interests. It is reasonable to assume that a liquidity discount is impairing these assets, for which there is limited trading. Current prices cannot be fully explained without the liquidity factor. Even in areas of the country where home prices have declined precipitously, the collateral behind mortgage related assets still retains substantial value. In a liquid market, even under-collateralized assets should not be untradable or trading at pennies on the dollar. Prices are being partially subjected to a downward self-reinforcing cycle.

In the view of some, it is this notion of a liquidity discount that supports the potential of future gain for taxpayers and makes transactions under the CAP and the PPIP investments, and not subsidies in the usual sense. This is an issue that will continue to divide observers of Treasury’s actions, and ultimately events will bear out whether this approach will work. The Panel notes that Treasury’s approach may prove to be a viable and successful strategy, and offers historical context and the discussion of alternate approaches in the event that changes to Treasury’s current plans become necessary. The Panel has not reached agreement as to whethera change in strategy is currently needed.

It is important to see how the panel’s analysis differs from the analysis Krugman has offered in his influential column in the New York Times. Consider this oft-quoted column of Krugman’s from March 22:

But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

You might say, why not try the plan and see what happens? One answer is that time is wasting: every month that we fail to come to grips with the economic crisis another 600,000 jobs are lost.

Even more important, however, is the way Mr. Obama is squandering his credibility. If this plan fails — as it almost surely will — it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place.

It seems clear that the Obama Administration — along with the entire mainstream media, it seems — believes the banking crisis is a direct result of a rapid decline in the market value of the “toxic assets” on their balance sheets. The Obama Administration believes that these banks would be solvent — or at least close to solvent — were it not for these mortgage based assets, which are considered “toxic” because nobody wants to buy them right now.

The Obama Administration believes these assets will ultimately be worth more than their current market values indicate, and both the panel and Krugman support this idea: The report states, “it is reasonable to assume that a liquidity discount is impairing these assets, for which there is limited trading,” and Krugman states, “yes, troubled assets may be somewhat undervalued.”

So the disagreement between Krugman and Obama isn’t about whether these assets are undervalued. The disagreement is about what our financial system will look like after these assets’ market values are brought in line with their actual worth.

The report touches on this disagreement earlier in the report (on page 11):

This (the Obama Administration’s) diagnosis of the financial crisis is driving the Administration’s aggressive interagency effort to revive credit markets and strengthen the balance sheets of financial institutions through capital injections and the removal of toxic assets. Yet this approach assumes that the decline in asset values and the accompanying drop in net wealth across the country are in large part the products of temporary liquidity discounts due to nonfunctioning markets for these assets and, thus, are reversible once market confidence is restored. While critics of this approach warn against a more fundamental solvency problem plaguing the financial institutions holding onto these toxic assets,10 Treasury and key policymakers in the Administration argue that the recently-passed fiscal stimulus passage, Treasury’s foreclosure mitigation plan, and the public-private program to revive markets for toxic assets will strengthen the fundamental value of these assets.

So the crux of the debate is this: Once the market value of these toxic assets rises to a level that matches what these assets are actually worth, will the banks be solvent enough to start functioning properly? Once these assets are valued properly, will the banks feel comfortable enough about their balance sheets to start lending again? Or will they still be so screwed up that they won’t be able to function, even then?

Which leaves me with three lines of questioning for Krugman — and his supporters: What makes you so sure that the Obama Administration is wrong? What makes you so sure that the banks won’t be in OK shape once they’re no longer burdened by these assets, which are artifically dragging down their balance sheets? After all, the banks were clearly playing an effective role in our economy prior to the bursting of the housing bubble — and every explanation I’ve heard of how we got into this crisis points to these “toxic assets” as the catalyst. You say the plan will “almost surely fail.” But what makes you so sure?

Second, how is Obama “squandering his credibility” in moving forward with this plan, and why will this make future action by Congress less likely? No matter how bad things get, it makes no sense that a Democratic Congress would simply give up on saving the economy. Bank bailouts may be unpopular — but premature bank nationalization would be even more unpopular — and economic catastrophe would be even more unpopular than bank nationalization. By taking strong steps now to solve the crisis without nationalization, Obama is setting himself up to make an effective argument later on that nationalization is necessary.

(Obama would be more successful arguing for bank nationalization if he could point to some evidence to support Krugman’s claim that the banks are insolvent for reasons unrelated to the “toxic” assets. So I ask again: Is there any evidence to suggest the banks wouldn’t be OK if these assets were valued properly? What makes you think they have a “fundamental solvency problem” as the panel puts it?)

Third, why do you call Geithner’s plan “hocus pocus”? The problem with the term “hocus pocus” is that it suggests the Obama Administration isn’t making a good faith effort to rescue our economy, but is instead trying to con us with something that obviously won’t work. Yet, the report states, “the Panel notes that Treasury’s approach may prove to be a viable and successful strategy.”

To complain about how Obama is “squandering his credibility” and then accuse him of “hocus pocus” strikes me as disingenuous. If Krugman believes it is important for Obama to maintain his credibility, then Krugman should be defending Obama’s credibility rather than doing everything he can to undermine it. Krugman knows quite well that most people who read his columns are willing to accept his arguments without fully — or even minimally — understanding them. When Krugman accuses the Obama Administration of “hocus pocus,” he does more to hurt Obama than anyone.