History is Happening Now

New York Times columnist Paul Krugman has a lot of fans on the left who seem to regard his views as gospel when it comes to economic issues – such as the $700 billion bailout of the financial industry put forward by Treasury Secretary Hank Paulson.

Opposition to this plan from Krugman and others has provided political cover for politicians in Washington, allowing them to voice their own objections. We can only hope that this push-back from the plan’s critics will compel Congress and the White House to improve the plan before it passes.

But if opposition to the plan causes it to die, and the result is catastrophe for the American economy, I’ll be angry at Krugman for feeding the fires of self-serving political posturing and obstructionism. My anger is based, in part, on some rather stupid and manipulative aspects of his recent column on this issue.

Let’s examine how this column, from Sept. 21, 2008, begins:

Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes.

Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

It may be that the federal government will hugely overpay for the assets it buys. That’s why it’s called a bailout. The low market value of these assets is the problem, isn’t it? — So obviously a bailout would require paying more for these assets than market value. It may also be that Paulson’s plan will provide the stockholders and executives of financial firms with giant windfalls at taxpayer expense. But that has no bearing whatsoever on the central point Krugman claims he’s making — that the plan doesn’t make sense. If the purpose of this plan were to punish those responsible for the current crisis, then I agree that it would not make sense to buy their bad debt. But if the purpose of this plan is to stabilize the financial industry for the sake of the overall economy — and in fact, it is — then the plan is probably going to benefit financial firms. It wouldn’t make sense to expect anything different.

Krugman uses words such as “logic” and “sense” to give the impression that his arguments are grounded in his understanding of the economy. I have no doubt that Krugman understands the economy better than I do — but the arguments he uses are moral arguments, not economic ones. When he refers to “a giant windfall at taxpayer expense,” he’s trying to draw attention to injustice, pure and simple.

Here’s another example of Krugman disguising a moral argument with economic-sounding language:

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

When Krugman says the government “should get what people who provide capital are entitled to,” the “should” represents a moral imperative rather than an economic imperative. His concern isn’t that the plan won’t work, but only, once again, that it is unjust. He’s worried that “the gains” will “go to the people who made the mess in the first place.”

It terrifies me that the federal government might be prevented from doing what is necessary to protect millions of American jobs because of moral concerns about rewarding corporate executives. Again: there will be plenty of time to punish the people responsible for creating this mess, but we need to get out of the mess first. That’s according to Democrats I respect, including Senator Christopher Dodd and Congressman Barney Frank.

But Krugman is fueling the idea that we should be afraid of what would happen if the plan passes. Here’s how he ends his column:

But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.

Again, Krugman is saying this bailout plan won’t address the real problem — another lie, as is clear if you read the rest of the column. The problem is that financial firms hold too much bad paper, which has the potential to cause a severe tightening of credit. So how does the bailout plan, which would enable the government to buy this debt, not address the real problem? Krugman’s argument doesn’t make any sense. Perhaps Krugman is saying the bailout plan should address the crisis’ root causes — but that can be done over the course of the next several years, after a newly-elected slate of politicians have had time to study the situation more closely.

Here’s a question for Krugman fans. When Krugman writes that if the current proposal is passed, we’ll “all be very sorry in the not-too-distant future,” does anybody have the faintest clue what he is talking about? Is Krugman merely saying the injustice of rewarding corporate executives for their misbehavior will offend our moral sensibilities? Is he actually arguing that passing this plan would have a negative economic impact?

This economic catastrophe came about because of stupid Republican ideology. Smart Democratic ideology — in other words, a “big government” intervention — can rescue the country from the mess the stupid Republicans have wrought. Over time, this whole sorry affair will provide plenty of powerful talking points that will empower Democrats to improve the rules and regulations by which our economy is run. And for those who hate “the trash,” there will be plenty of time for appropriate retribution.

But first, we have to save the economy. So please take off your self-righteous hat and put on your economist hat, Mr. Krugman — and stop treating me in ways that suggest you think I care more about hating Bush and hating executives than I care about this country’s prosperity.