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.
Given that Geithner and Summers are clearly not going to listen to anything their critics say, we have before us a great opportunity to test the ideas of those who are skeptical of Geithner’s plan.
I endorse the assumption that underlies your claim that a reputation should be linked to the accuracy of predictions…
Let’s call it the Accountability Stress Test, and let’s say it works this way:
(i) When person X says something that proves to be disastrously wrong, person X’s credibility should diminish. Consequently, we should become more skeptical of subsequent things person X says, keeping in mind that past performance is no guarantee of future success (or failure).
(ii) When Person X is correct about something big that other people miss — like the existence of a housing bubble, the dangers of financialization — we should pay more attention to that person’s views in the future (keeping in mind the same caveat).
So when Robert Rubin, Alan Greenspan, and Larry Summers worked together to prevent the regulation of credit-default swaps and other derivatives, on the theory that firms like AIG would never if unregulated take on potentially self- and system-destroying risk, then we discover — as critics predicted — that AIG and other firms did exactly that — we should think in the future that the burden of proof is on them, not those who were right in warning us about the dangers of the financialized economy in the first place.
Reputation is of course a loose way to assess the seriousness of someone’s claims. Rubin may be right about one thing, wrong about something else, right today, wrong tomorrow, right the day after. And the world economy is a complex system even the most talented and educated economist understands only poorly and partially.
Nonetheless, we would be right to observe that the credibility of Rubin, Summers, Greenspan, etc.–though dead–seems to be no barrier to their preferred solution becoming U.S. policy. It is as if a surgeon botched an operation, leaving you on the cusp of death, then was allowed to resume operating on you, this time to save your life. You would never let that be done to you, whether or not you understood the technical details of how medicine works; but in areas of economics, the U.S. seems eager to do just that to itself.
Imagine if we lived in a country where those who proved to be correct/competent were also those who made policy. What a novel fantasy! Not in our America.
Comment by Lee — April 12, 2009 @ 9:31 pm
You may be right that Larry Summers, Robert Rubin and Tim Geithner don’t deserve to be in charge of running our recovery.
But the reality is that Summers and Geithner are in charge. You can blame Obama for this injustice. But critizing the financial rescue plan put forward by Geithner just because you think it’s unfair that he’s in charge is childish and highly irresponsible. If we’re going to criticize their plan, it should be because we honestly think their plan won’t work.
Furthermore, there is no doubt whatsoever that the burden of proof rests squarely on the sholders of Obama, Geithner and Summers. If their plan fails, it will be their failure and nobody else’s, and the American people will have learned their lesson, which is that they cannot trust Democrats to make sound fiscal policy.
There is no question that the next two years will provide plenty of evidence to show who was correct when the rubber met the road. Was it Obama, who wisely put Larry Summers and Tim Geithner in charge of rescuing our financial system? Or was it Krugman and his followers, who said over and over again that their plan wouldn’t work.
My point in criticizing Krugman is merely to point out that he isn’t a great beacon of insight when it comes to the economy. He’s just a man with an opinion, and people who pay attention to Krugman should actually understand Krugman’s arguments before adopting them as their own.
Comment by Ian — April 12, 2009 @ 9:54 pm
“But the reality is that Summers and Geithner are in charge. You can blame Obama for this injustice. But critizing the financial rescue plan put forward by Geithner just because you think it’s unfair that he’s in charge is childish and highly irresponsible. If we’re going to criticize their plan, it should be because we honestly think their plan won’t work.”
I completely agree. The plan should be assessed on its own merits and demerits. If Hitler were to say that 2+2=4, we’d have to concede the point, ’cause it’s true.
Also, I think Krugman should be criticized for his errors in judgment, analysis, etc. I think in fact that there’s plenty of ground to criticize his blanket dismissal of the Geithner plan.
My own relatively poorly informed gut assessment of the Geithner plan goes something like this: no one really knows if Geithner’s plan will work. No one even quite knows how to define the criteria for “work,” either. Geithner’s strongest independent defender (that I’ve been able to find), Brad DeLong, explains his support for the plan with a sort of rhetorical shrug of the shoulders, by saying something like: it can’t hurt, and if it doesn’t work we can just go on and nationalize.
Comment by Lee — April 12, 2009 @ 10:07 pm
I think it is relevant to point out that Krugman has never done anything in his life except academic work and writing. He has never been in a position of responsibility similar to the positions held by Summers, Geithner, etc. There’s nothing wrong with being an academic and a columnist, but the reality is that Krugman lives in a world where important mistakes are never made. If Krugman makes a profound mistake — such as warning that a trillion-dollar-plus plan won’t work when actually it will — the only consequences are that Krugman’s reputation diminishes. If Tim Geithner or Larry Summers make a similar mistake, the consequences will affect hundreds of millions of people all over the world. It’s right for us to blame them for the part they played in screwing up our economy — but if they can fix their mistake, it will be an accomplishment far more admirable and significant than anything Krugman is likely to do in his life. Perhaps some of us would like to give Krugman the opportunity to acheive or fail on this massive scale — but the opportunity belongs, rightly or wrongly, to Summers and Geithner.
My only hope is that liberals who think Larry Summers and Tim Geithner MUST be wrong about this bailout plan will realize their mistake when Summers and Geithner lead us back to economic growth, reasonable levels of unemployment, etc. If you want an America where “those who proved to be correct/competent were also those who made policy,” you can start by giving Geithner and Summers credit when the economy is back on track in three years.
Comment by Ian — April 12, 2009 @ 10:08 pm
Not that it matters much, but Krugman spent a year on Reagan’s Council of Economic Advisers, and was considered for a position in the Clinton White House; he claims to be temperamentally disinclined to work in government.
Comment by Lee — April 12, 2009 @ 10:20 pm