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Friday, October 03, 2008

Paul Krugman: Edge of the Abyss

Can we buy enough time to implement a real solution to the financial crisis?:

Edge of the Abyss, by Paul Krugman, Commentary, NY Times: As recently as three weeks ago it was still possible to argue that the state of the U.S. economy, while clearly not good, wasn't disastrous... But that was then.

The financial and economic news since the middle of last month has been really, really bad. And what's truly scary is that we're entering a period of severe crisis with weak, confused leadership. ...

There's growing evidence that the financial crunch is spreading to Main Street, with small businesses having trouble raising money and seeing their credit lines cut. And leading indicators for both employment and industrial production have turned sharply worse, suggesting that ... the economy, which has been sagging since last year, was falling off a cliff.

How bad is it? Normally sober people ... say that the economy seems to be on “the edge of the abyss.” And the people who should be steering us away from that abyss are out to lunch.

The House will probably vote on Friday on the latest version of the $700 billion bailout plan..., ... now ... the Paulson-Dodd-Frank-Pork plan (it's been larded up since the House rejected it...). I hope that it passes, simply because ... another no vote would make the [financial] panic even worse. But that's just another way of saying that the economy is now hostage to the Treasury Department's blunders.

For the fact is that the plan ... is a stinker - and inexcusably so. The financial system has been under severe stress for more than a year, and there should have been carefully thought-out contingency plans ready ... Obviously, there weren't: the Paulson plan was clearly drawn up in haste and confusion. And Treasury officials have yet to offer any clear explanation of how the plan is supposed to work, probably because they themselves have no idea what they're doing.

Despite this, as I said, I hope the plan passes, because otherwise we'll probably see even worse panic... But at best, the plan will buy some time to seek a real solution...

And that raises the question: Do we have that time?

A solution ... will ... almost surely involve the U.S. government taking partial, temporary ownership of [the financial] system, the way Sweden's government did in the early 1990s. Yet it's hard to imagine the Bush administration taking that step.

We also desperately need an economic stimulus plan to push back against the slump in spending and employment. And this time it had better be a serious plan that doesn't rely on the magic of tax cuts, but instead spends money where it's needed. (Aid to cash-strapped state and local governments, which are slashing spending at precisely the worst moment, is also a priority.) Yet it's hard to imagine the Bush administration, in its final months, overseeing the creation of a new Works Progress Administration.

So we probably have to wait for the next administration, which should be much more inclined to do the right thing - although even that's by no means a sure thing, given the uncertainty of the election outcome. (I'm not a fan of Mr. Paulson's, but I'd rather have him at the Treasury than, say, Phil "nation of whiners" Gramm.)

And ... it will be almost four months until the next administration takes office. A lot can - and probably will - go wrong in those four months.

One thing's for sure: The next administration's economic team had better be ready to hit the ground running, because from day one it will find itself dealing with the worst financial and economic crisis since the Great Depression.

    Posted by on Friday, October 3, 2008 at 12:42 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (72)

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