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.