Paul Krugman keeps ripping the Obama administration's financial policies

You have to hand it to Paul Krugman, at least he's consistent. He knows far more about economics than I do, his criticism of Obama feels valid to me. But does anyone really know the correct solution to our financial crisis?

But the Obama administration, like the Bush administration, apparently wants an easier way out. The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.

And so the plan is to use taxpayer funds to drive the prices of bad assets up to “fair” levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use “the expertise of the market” to set the value of toxic assets.

But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.

The likely cost to taxpayers aside, there’s something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different. This is starting to look obsessive.

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.

All is not lost: the public wants Mr. Obama to succeed, which means that he can still rescue his bank rescue plan. But time is running out.

Paul Krugman's "On The Edge"

I appreciate that Krugman wrote this column. The debate over the stimulus package by the Republicans feels disingenuous and very partisan to me. Instead of working with the president and the Democrats, many of the Republican senators are opposing the bill because of the old buzz words of "wasteful liberal spending" and "pork" and keep demanding more tax cuts to save the economy.

What they don't understand or don't seem to care is that the general theory of Keynesian economics advocates deficit spending during economic downturns to help create jobs and maintain employment. Sure, there is some waste in this stimulus bill. But most of the programs and money allocated in the bill are going to organizations with the express interest of creating more jobs.

Also, this Republican stance against hypocritical to me. We just went through 8 years of the largest increase in government size in the history of our nation and almost every Republican was behind the president on that, despite the many flaws in the Bush's White House thinking. Yet when a plan, created by many of the best economists today, to help a failing economy comes out, all they can do is rip it. Plus, I think after 8 years of Bush tax cuts and the state of our economy now, it's pretty obvious that tax cuts are not the only solution to fixing the economy. It stinks, I tells you.

Anyway, I've said my two cents. Here's Krugman:

A not-so-funny thing happened on the way to economic recovery. Over the last two weeks, what should have been a deadly serious debate about how to save an economy in desperate straits turned, instead, into hackneyed political theater, with Republicans spouting all the old clichés about wasteful government spending and the wonders of tax cuts.

It’s as if the dismal economic failure of the last eight years never happened — yet Democrats have, incredibly, been on the defensive. Even if a major stimulus bill does pass the Senate, there’s a real risk that important parts of the original plan, especially aid to state and local governments, will have been emasculated.

Somehow, Washington has lost any sense of what’s at stake — of the reality that we may well be falling into an economic abyss, and that if we do, it will be very hard to get out again.

It’s hard to exaggerate how much economic trouble we’re in. The crisis began with housing, but the implosion of the Bush-era housing bubble has set economic dominoes falling not just in the United States, but around the world.

Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving — a good thing in the long run, but a huge blow to the economy right now. Developers of commercial real estate, watching rents fall and financing costs soar, are slashing their investment plans. Businesses are canceling plans to expand capacity, since they aren’t selling enough to use the capacity they have. And exports, which were one of the U.S. economy’s few areas of strength over the past couple of years, are now plunging as the financial crisis hits our trading partners.

Meanwhile, our main line of defense against recessions — the Federal Reserve’s usual ability to support the economy by cutting interest rates — has already been overrun. The Fed has cut the rates it controls basically to zero, yet the economy is still in free fall.

It’s no wonder, then, that most economic forecasts warn that in the absence of government action we’re headed for a deep, prolonged slump. Some private analysts predict double-digit unemployment. The Congressional Budget Office is slightly more sanguine, but its director, nonetheless, recently warned that “absent a change in fiscal policy ... the shortfall in the nation’s output relative to potential levels will be the largest — in duration and depth — since the Depression of the 1930s.”

Worst of all is the possibility that the economy will, as it did in the ’30s, end up stuck in a prolonged deflationary trap.

We’re already closer to outright deflation than at any point since the Great Depression. In particular, the private sector is experiencing widespread wage cuts for the first time since the 1930s, and there will be much more of that if the economy continues to weaken.

As the great American economist Irving Fisher pointed out almost 80 years ago, deflation, once started, tends to feed on itself. As dollar incomes fall in the face of a depressed economy, the burden of debt becomes harder to bear, while the expectation of further price declines discourages investment spending. These effects of deflation depress the economy further, which leads to more deflation, and so on.

And deflationary traps can go on for a long time. Japan experienced a “lost decade” of deflation and stagnation in the 1990s — and the only thing that let Japan escape from its trap was a global boom that boosted the nation’s exports. Who will rescue America from a similar trap now that the whole world is slumping at the same time?

Would the Obama economic plan, if enacted, ensure that America won’t have its own lost decade? Not necessarily: a number of economists, myself included, think the plan falls short and should be substantially bigger. But the Obama plan would certainly improve our odds. And that’s why the efforts of Republicans to make the plan smaller and less effective — to turn it into little more than another round of Bush-style tax cuts — are so destructive.

So what should Mr. Obama do? Count me among those who think that the president made a big mistake in his initial approach, that his attempts to transcend partisanship ended up empowering politicians who take their marching orders from Rush Limbaugh. What matters now, however, is what he does next.

It’s time for Mr. Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nation’s future at risk. The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.

Paul Krugman's "Health Care Now"

I forgot to post this from the other day. Krugman goes after the Obama administration for not making health care a priority, and I can't help but agree:

Let’s talk about the magnitude of the looming health care disaster.

Just about all economic forecasts, including those of the Obama administration’s own economists, say that we’re in for a prolonged period of very high unemployment. And high unemployment means a sharp rise in the number of Americans without health insurance.

After the economy slumped at the beginning of this decade, five million people joined the ranks of the uninsured — and that was with the unemployment rate peaking at only 6.3 percent. This time the Obama administration says that even with its stimulus plan, unemployment will reach 8 percent, and that it will stay above 6 percent until 2012. Many independent forecasts are even more pessimistic.

Why, then, aren’t we hearing more about ensuring health care access?

Now, it’s possible that those of us who care about this issue are reading too much into the administration’s silence. But let me address three arguments that I suspect Mr. Obama is hearing against moving on health care, and explain why they’re wrong.

First, some people are arguing that a major expansion of health care access would just be too expensive right now, given the vast sums we’re about to spend trying to rescue the economy.

But research sponsored by the Commonwealth Fund shows that achieving universal coverage with a plan similar to Mr. Obama’s campaign proposals would add “only” about $104 billion to federal spending in 2010 — not a small sum, of course, but not large compared with, say, the tax cuts in the Obama stimulus plan.

It’s true that the cost of universal health care will be a continuing expense, reaching far into the future. But that has always been true, and Mr. Obama has always claimed that his health care plan was affordable. The temporary expenses of his stimulus plan shouldn’t change that calculation.

Second, some people in Mr. Obama’s circle may be arguing that health care reform isn’t a priority right now, in the face of economic crisis.

But helping families purchase health insurance as part of a universal coverage plan would be at least as effective a way of boosting the economy as the tax breaks that make up roughly a third of the stimulus plan — and it would have the added benefit of directly helping families get through the crisis, ending one of the major sources of Americans’ current anxiety.

Finally — and this is, I suspect, the real reason for the administration’s health care silence — there’s the political argument that this is a bad time to be pushing fundamental health care reform, because the nation’s attention is focused on the economic crisis. But if history is any guide, this argument is precisely wrong.

Don’t take my word for it. Rahm Emanuel, the White House chief of staff, has declared that “you never want a serious crisis to go to waste.” Indeed. F.D.R. was able to enact Social Security in part because the Great Depression highlighted the need for a stronger social safety net. And the current crisis presents a real opportunity to fix the gaping holes that remain in that safety net, especially with regard to health care.

And Mr. Obama really, really doesn’t want to repeat the mistakes of Bill Clinton, whose health care push failed politically partly because he moved too slowly: by the time his administration was ready to submit legislation, the economy was recovering from recession and the sense of urgency was fading.

Paul Krugman's "Bigger Than Bush"

Paul Krugman wrote a great column today about the Republican party:

But most of the whining takes the form of claims that the Bush administration’s failure was simply a matter of bad luck — either the bad luck of President Bush himself, who just happened to have disasters happen on his watch, or the bad luck of the G.O.P., which just happened to send the wrong man to the White House.

The fault, however, lies not in Republicans’ stars but in themselves. Forty years ago the G.O.P. decided, in effect, to make itself the party of racial backlash. And everything that has happened in recent years, from the choice of Mr. Bush as the party’s champion, to the Bush administration’s pervasive incompetence, to the party’s shrinking base, is a consequence of that decision.

If the Bush administration became a byword for policy bungles, for government by the unqualified, well, it was just following the advice of leading conservative think tanks: after the 2000 election the Heritage Foundation specifically urged the new team to “make appointments based on loyalty first and expertise second.”

Contempt for expertise, in turn, rested on contempt for government in general. “Government is not the solution to our problem,” declared Ronald Reagan. “Government is the problem.” So why worry about governing well?

Where did this hostility to government come from? In 1981 Lee Atwater, the famed Republican political consultant, explained the evolution of the G.O.P.’s “Southern strategy,” which originally focused on opposition to the Voting Rights Act but eventually took a more coded form: “You’re getting so abstract now you’re talking about cutting taxes, and all these things you’re talking about are totally economic things and a byproduct of them is blacks get hurt worse than whites.” In other words, government is the problem because it takes your money and gives it to Those People.

Oh, and the racial element isn’t all that abstract, even now: Chip Saltsman, currently a candidate for the chairmanship of the Republican National Committee, sent committee members a CD including a song titled “Barack the Magic Negro” — and according to some reports, the controversy over his action has actually helped his chances.

Its not something we in the political arena think about much these days because it is so coded in cryptic language, but as Krugman points out, the modern Republican party was founded as a party for black and white segregation.

As the years moved move, however, and obvious racism become more and more out of fashion, the racism became subtler and subtler. But those elements are still in the party.

This is one of the major reasons why Barack Obama's election is so important. It does not end racism in America. That is far from over. But what it does is end a period in American history, the history after civil rights until now, where blacks and minorities began the slow climb to equal treatment with whites, but had to fight against a racism that was far subtler but almost as insidious as what those in the past faced.

But the times, they are a changing. We have a smart as-hell, Harvard-educated president. And he just happens to be a black dude.

Paul Krugman is scared out of his mind, which means I am too

I saw this Paul Krugman's blog the other day:

Two points:

1. The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month.

2. Infrastructure spending will take time to get going — a new Goldman Sachs report suggests that projects that are “shovel-ready” are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009 — and that’s even if Congress goes along, which may be a problem given all the bad analysis and disinformation out there.

So here’s what I’m wondering: will it, in fact, even be possible to pull the economy out of its nosedive before unemployment goes into double digits? I’m starting to wonder.

Ugh... Double-digit unemployment? The last time the unemployment rate was in double digits was 1940 at the end of the Great Depression. As the days pass move on, and the economic numbers look worse and worse, the likelihood of a depression becomes more likely.

Ideology could use some help from Buddhism

I was reading Paul Krugman's blog today, and he had a little post about how conservative economists still want to keep the same policies of George W. Bush despite, as Krugman notes, how much those policies have contributed to our current economic crisis:

Thus, John Taylor — a very good economist, when he wants to be — insists that we must respond to the economy’s temporary weakness with a permanent tax cut. Let us reason together. Does it make sense to let one recession dictate tax policy in perpetuity? What happens if there’s a boom; can we increase taxes (no, because then the cut wouldn’t have been permanent.) What if there’s another recession? Do we permanently cut taxes again? Is there a tax-cut ratchet (or maybe racket)? Think this through, and it makes no sense at all...

Recession, recovery, whatever: it’s always proof that the Bush years should continue forever.

Of course, this is hogwash. Not so much because Milton Friedman and his economic buddies don't have some validity to their theories because they certainly do, but because these conservative economists have turned theory into ideology, the well-thought out into divine reasoning.

What's the problem with turning any theory, whether on the left or right, into ideology? A rigidity and lack of flexibility to the problems at hand. Despite the failed policies of George W. Bush, these economists still insist that there way is the best way.

Don't get me wrong, the left has plenty of ideologs as well-- Paul Krugman is pretty much an ideolog himself-- and I personally can sometimes fall victim to this tendency as well.

But my core belief in the end has nothing to do with ideology: It is to believe in nothing (I'm pretty sure I stole this from Zen Buddhism somewhere). What do I mean? Well, only when we believe in nothing, are we open to anything. And only when we are open to anything can we see the world as it really is. Ideologs and intellectuals are rarely open to this. But it is failing we all have some of the time...

Paul Krugman's "The Lame-Duck Economy"

Paul Krugman wrote a truly frightening column this morning for the New York Times. His point: the 60 day or so transition from the George W. Bush White House to the Barack Obama White House could be a complete disaster as the economy continues to falter and nothing gets done because we have such an ineffectual, lame-duck president in office. How much worse can it get? Here's what Krugman says:

How much can go wrong in the two months before Mr. Obama takes the oath of office? The answer, unfortunately, is: a lot. Consider how much darker the economic picture has grown since the failure of Lehman Brothers, which took place just over two months ago. And the pace of deterioration seems to be accelerating.

Most obviously, we’re in the midst of the worst stock market crash since the Great Depression: the Standard & Poor’s 500-stock index has now fallen more than 50 percent from its peak. Other indicators are arguably even more disturbing: unemployment claims are surging, manufacturing production is plunging, interest rates on corporate bonds — which reflect investor fears of default — are soaring, which will almost surely lead to a sharp fall in business spending. The prospects for the economy look much grimmer now than they did as little as a week or two ago.

I'm obviously not an economist, but I've read a lot of expert opinions lately, and consensus seems to be the government needs to spend, spend and spend to help the economy get out of it's rut. That means going into a huge deficit to make sure money is going directly into the economy in the hopes of stimulating it. But unfortunately we don't have the leadership to make that happen right now. And if things get even worse before Obama takes office, it might be too late for him to really swing the balance of the economy in the right direction. Scary thought, I know. Let's just hope we don't see another great depression.

Paul Krugman's "Depression Economics Returns "

In the Times this morning, Paul Krugman makes some suggestions for the new Obama administration:

What does all this say about economic policy in the near future? The Obama administration will almost certainly take office in the face of an economy looking even worse than it does now. Indeed, Goldman Sachs predicts that the unemployment rate, currently at 6.5 percent, will reach 8.5 percent by the end of next year.

All indications are that the new administration will offer a major stimulus package. My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion.

So the question becomes, will the Obama people dare to propose something on that scale? Let’s hope that the answer to that question is yes, that the new administration will indeed be that daring. For we’re now in a situation where it would be very dangerous to give in to conventional notions of prudence.

Well, let me start by saying that I trust Krugman with the economy maybe more than anyone in the world. He is after all a Nobel Prize winner in economics and predicted the downfall of this economy several years ago, while many economists were still saying nothing was wrong with the economy. So when Krugman says we need to inject even more money into the economy, I believe him.

What I am worried about is the Obama administration. After injecting $700 billion into the economy already, it would definitely be politically unpopular to inject another $600 billion into it. Will Obama and his team do what's politically unpopular yet good for the nation? Will they stand by what they think is right? I hope so. Either way it's going to be Mr. Obama's first big test as president.