Volatility

November 20, 2009

Krugman Tries to Defend Himself

Paul Krugman has fretted a lot about the likelihood that the Obama administration would undertake government action which was insufficient and half-assed but which at the same time could be represented by the Republicans as massively obtrusive. Then, when the measures inevitably failed, government action in itself, rather than Obama’s incompetence, would be discredited.
 
So far this looks to be the likely outcome. The stimulus was way too small and not rationally planned, so it couldn’t accomplish much beyond phony palliatives like Cash for Clunkers. 
 
(It was also a case study in Democrats’ monumental political incompetence. Most of the top beneficiaries were Republican districts! These idiots can’t even get to-the-victors-go-the-spoils right!)
 
But already, at least in Obama’s mind, the very word stimulus is mud. A second, bigger stimulus? No – “deficit reduction”. The utter pusillanimity, and apparent stupidity, of this “president” is manifest. (Of course the MSM, criminally antisocial as always, has happily taken up the deficit terrorist cheer.)
 
[That’s also clearly the plan with health care. By passing with great fanfare something called a “public option” which is really not a public plan at all, they intend to discredit government involvement in health care once and for all. It’s a Republican bill.]
 
So Krugman is dead on about Obama’s fiscal policy.
 
But he has a problem in that he also supported the bailouts. As the absolute failure of these even according to their original premise becomes clear, Krugman has to scramble to somehow reframe the truth along the same lines as the rest of government policy.
 
So he has to argue, paraphrasing some Germans of some decades back, that there was a “good” bailout concept which was hijacked and distorted toward bad ends.
 
Somehow, in ways that seem too subtle for many of us to comprehend, the bailout was in principle a virtuous policy. It could have and should have been something far more than just a gift of stolen public money to some rich thieves. But through a combination of bad faith, weakness, and incompetence the good bailout was overcome by the bad bailout, and now we’re stuck with it.
 
To maintain his position of eminent dissenter within the system, Krugman has to acknowledge that Goldman Sachs is “bad for America”, yet still claim that the bailout was the right thing to do, and that we must now simply submit to living under their thumb.
 
He sees this as the key to maintaining any kind of credibility at all for the government, as well as the credibility of his own place in history.
 
While I take it no one cares much about the latter, we have to look for signs that he may be right about the government. It’s unfortunate, but it looks like the opportunity for constructive fiscal policy is lost. Not because of Republican bleating, but because of Obama’s cowardice. (While he may be a corporatist at heart, he’s also a politician who wants reelection. It’s very clear by now that his best hope is real populism. But that he can’t see this, or seeing it is too timid to go ahead with it, is simply a bedrock character flaw. He’s a decadent coward.) 
 
So the people’s best hope is that the people reject the corporatist government. To the extent that we see signs of this, these may be our own green shoots.
 
The new SIGTARP revelations about the corruption and fecklessness of how the bailout was conducted are having salutary effects. A week ago it looked like Ron Paul’s Audit the Fed bill was dead for another year. But the expose of the Fed’s criminal actions in the AIG money laundering scheme has given it new life.
 
This had to be passed out of committee over the resistance of head banker waterboy Barney Frank, and it may still be defeated one way or another, but I’d call its progress so far a green shoot.
 
This is what scares Krugman, and what animates today’s jeremiad:
 

Earlier this week, the inspector general for the Troubled Asset Relief Program, a k a, the bank bailout fund, released his report on the 2008 rescue of the American International Group, the insurer. The gist of the report is that government officials made no serious attempt to extract concessions from bankers, even though these bankers received huge benefits from the rescue. And more than money was lost. By making what was in effect a multibillion-dollar gift to Wall Street, policy makers undermined their own credibility — and put the broader economy at risk.

For the A.I.G. rescue was part of a pattern: Throughout the financial crisis key officials — most notably Timothy Geithner, who was president of the New York Fed in 2008 and is now Treasury secretary — have shied away from doing anything that might rattle Wall Street. And the bitter paradox is that this play-it-safe approach has ended up undermining prospects for economic recovery. For the job of fixing the broken economy is far from done — yet finishing the job has become nearly impossible now that the public has lost faith in the government’s efforts, viewing them as little more than handouts to the people who got us into this mess.

 
(My emphasis.)
 
He explains, with some hesitancy, why the whole mess was “probably” necessary.
 

So why protect bankers from the consequences of their errors? Well, by the time A.I.G.’s hollowness became apparent, the world financial system was on the edge of collapse and officials judged — probably correctly — that letting A.I.G. go bankrupt would push the financial system over that edge. So A.I.G. was effectively nationalized; its promises became taxpayer liabilities.

 
He goes on to explain how the negotiation should have been conducted. But I agree with the critics who have pointed out that once the administration and the Fed were committed to shoveling as much taxpayer money as possible as quickly as possible to these crooks, it would have been to say the least inconsistent for the Fed to have played the hardass on any particular point. Goldman’s refusal to make any concession was in the spirit of the thing. They correctly calculated that Geithner’s haircut request was a joke.
 
Of course, this is what Krugman and other “dissenting supporters” of the bailout have to deny. They have to stick with the lie that bailing out AIG in the first place made sense and wasn’t a plunder excursion, but that it only went bad in the details.
 

So officials could have called on bankers to offer a better deal, for their own sake, and simultaneously threatened to name and shame those who balked. It was their choice not to do that, just as it was their choice not to push for more control over bailed-out banks in early 2009.

And, as I said, these seemingly safe choices have now placed the economy in grave danger.

For the economy is still in deep trouble and needs much more government help. Unemployment is in double-digits; we desperately need more government spending on job creation. Banks are still weak, and credit is still tight; we desperately need more government aid to the financial sector. But try to talk to an ordinary voter about this, and the response you’re likely to get is: “No way. All they’ll do is hand out more money to Wall Street.”

So here’s the real tragedy of the botched bailout: Government officials, perhaps influenced by spending too much time with bankers, forgot that if you want to govern effectively you have retain the trust of the people. And by treating the financial industry — which got us into this mess in the first place — with kid gloves, they have squandered that trust.

 
Yes, these benighted “ordinary voters” keep getting it wrong, don’t they?
 
Like I said, I agree with him on the stimulus. But the prospects for stimulus are among the victims of the bailout in itself, not of some illegitimate hijacking of what was originally a legitimate policy. (And certainly not of public misconceptions of the matter. Here, as in more and more instances, the public was way out ahead of the establishment elites. On the bailout, the public was right and guys like Krugman were wrong.)
 
The bailout was never legitimate. It was never anything other than disaster capitalism. If Krugman ever believed the lies Paulson was peddling, or if on account of his acculturation he simply forces himself to believe in the basic soundness of the policy, that’s his misconception, not the public’s.
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6 Comments

  1. Sooner or later you have to admit that relying on government to fix economic problems leads inexorably to what we have, what you so clearly describe. Yet, you hope for a good stimulus? Govt job creation? More leaf raking? When govt creates jobs the jobs are ALWAYS created for political reasons. Spend some time inside ANY govt agency. These jobs are simply a tax on production.

    Now, let us suppose there had been no bailout, no rescure of AIG, no stimulus- what would have happened? A good many banks would have gone bankrupt. Unsecured creditors and stockholders would have been punished, executives fired, asset values allowed to fall. Who would have lost? Largely, the capitalist class, the top 1/2%. Prices would have adjusted downward, production would have resumed, probably by now. No physical asset would have been affected, merely a reshuffling of asset values.

    All this crying for govt action is what leads inevitably to the mess we have. Don’t have time to explain this properly, but I think you can see what I mean. Will try to expand this later. Meanwhile, I expect your cronies will file their objections.

    Comment by jake chase — November 20, 2009 @ 10:16 am

    • reshuffling of asset values should have read reshuffling of ownership.

      Comment by jake chase — November 20, 2009 @ 10:18 am

  2. My cronies? Who would that be? I wish. 🙂

    You’ve read enough of my stuff to know I have zero confidence in this government to do anything right. As I’ve said on several occasions, the stimulus was botched. The point in mentioning it was simply to highlight what could in theory have been good policy, whereas the bailout was atrocious policy even in principle.

    Your second paragraph summarizes with precision what I think of the bailout.

    BTW, I think in a mass society, which by definition has to have a strong, aggressive government, pretty much all the jobs created are going to have a political element going into them.

    The American auto industry? Interstate highways? Aerospace? Military-industrial complex? Suburban construction? Consumer marketing and retailing? The internet and IT?

    Nope – no politics there!

    Comment by Russ — November 20, 2009 @ 10:58 am

  3. The missing piece in this discussion is that our entire economic framework is in a state of terminal sclerosis. As such, stimulus, which is only modestly effective in “optimum” conditions, is, doomed to failure in our far less than optimum conditions.

    The problems in the financial/banking realm, and in the obvious “capture” of government, speak directly to the aforesaid state of affairs. Let me swerve away from my vague pronouncements to offer that the U.S. swapped a productive, manufacturing economy for our present crumbling/sclerotic FIRE economy in the great labor arbitrage (euphemistically referred to as globalization) of the late eighties and nineties.

    The F in the FIRE acronym gained immense advantage, and so, here we are now, in a world of hurt.

    Government isn’t just cowardly and corrupt- I must say I am enjoying your barbs at Obama as he is one of the emptiest suits to occupy The White House in generations. And that is saying a lot.-it lacks any imagination regarding how to move forward, because policy maker’s (and commentators like Krugman, who, in the end is but a snake oil salesman, albeit a well meaning one-if that is possible) conception of what an economy is, or can be, is either hopelessly outdated or unattainable.

    Suffice it to say that am afraid we are in the most unenviable position of being like a drunk who must hit rock bottom before he can begin to overcome his huge disability.

    Comment by Edwardo — November 20, 2009 @ 11:26 am

  4. Yeah, it’s too late for stimulus. The system is too far gone, too rotted in the head.

    We are that drunk. Or we’re the dope fiend who knows he’ll OD soon but would rather stay high for now even at that price rather than undergo the ordeal of a few days of withdrawal.

    Krugman’s problem as a snake oil salesman is exactly that he means well, so although he’s probably convinced himself that the snake oil really is a miracle elixir, deep down he knows it’s not, and this bothers him. Ergo his ambivalent positions.

    So Edwardo, you must’ve been happy to see your buddy Frank get trounced before the eyes of the country, and on such an important point!

    I mentioned the Audit the Fed bill above, but I’ll have to give that its own post as well.

    Comment by Russ — November 20, 2009 @ 12:08 pm

  5. Pleased indeed. Any time that toad Frank gets a smack down adds a ray of sunshine to one’s day.

    Comment by Edwardo — November 20, 2009 @ 2:13 pm


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