Paul Krugman: Gordon Does Good

The Gordian solution to knotted financial markets cuts through "to the heart of the problem," while the Paulsian solution appears to be "distorted by ideology" that prevents bold Alexandrian action:

Gordon Does Good, by Paul Krugman, Commentary, NY Times: Has Gordon Brown, the British prime minister, saved the world financial system?

O.K., the question is premature — we still don’t know the exact shape of the rescues in Europe or ... the United States, let alone whether they’ll really work. What we do know, however, is that Mr. Brown and Alistair Darling, the chancellor of the Exchequer (equivalent to our Treasury secretary), have defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up. ...

What is the nature of the crisis? The ... basics are fairly simple. The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments; these losses have left many financial institutions with too much debt and too little capital to provide the credit the economy needs...

What can be done to stem the crisis? Aid to homeowners, though desirable, can’t prevent large losses on bad loans, and in any case will take effect too slowly to help in the current panic. The natural thing to do, then — and the solution adopted in many previous financial crises — is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.

This sort of temporary part-nationalization,... often referred to as an “equity injection,” is the crisis solution advocated by many economists — and sources told The Times that it was ... privately favored by Ben Bernanke...

But when Henry Paulson ... announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying, “That’s what you do when you have failure.” Instead, he called for government purchases of toxic mortgage-backed securities, based on the theory that ... actually, it never was clear what his theory was.

Meanwhile, the British government went straight to the heart of the problem ... with stunning speed. On Wednesday, Mr. Brown’s officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday — five days after the plan’s announcement.

At a special European summit meeting yesterday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead... And whaddya know, Mr. Paulson — after arguably wasting several precious weeks — has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).

As I said, we still don’t know whether these moves will work. But policy is, finally, being driven by a clear view of what needs to be done. Which raises the question, why did that clear view ... come from London rather than Washington?

It’s hard to avoid the sense that Mr. Paulson’s initial response was distorted by ideology. Remember, he works for an administration whose philosophy of government can be summed up as “private good, public bad,” which must have made it hard to face up to the need for partial government ownership of the financial sector.

I also wonder how much the Femafication of government under President Bush contributed to Mr. Paulson’s fumble. All across the executive branch, knowledgeable professionals have been driven out; there may not have been anyone left at Treasury with the stature and background to tell Mr. Paulson that he wasn’t making sense.

Luckily for the world economy, however, Gordon Brown and his officials are making sense. And they may have shown us the way through this crisis.

Update: In case you missed the news:

Krugman Wins Economics Nobel

More: Justin Wolfers, Tyler Cowen, Alex Tabarrok, Yet Another Sheep, Ed  Glaeser, Nobel Announcement, Menzie Chinn.

Comments

[jonfernquest]

Classical allusions are cool
but Alexander basically knew where he was going,
east to India, dieing just before he got there.
Leaving an opening for Chandragupta Maurya
grandfather of King Asoka, first champion of Buddhism.
http://en.wikipedia.org/wiki/Chandragupta_Maurya
http://en.wikipedia.org/wiki/Asoka_the_Great

Star Trek might be a better analogy,
since we don't know where we are going,
or what will happen when we get there.
Many an adventure lies ahead.

http://www.readbangkokpost.com/easybusinessnews/financial_markets/to_boldly_go_where_one_has_got.php

[BJ Feng]

Huh? I thought that Paulson was going to do a combination of asset purchases with equity injections as needed. I read that the final bill mandated a government stake in companies who sold their assets directly to the government. Paulson had the power to decide how much of a stake and the terms, which is wise in a complex, changing situation like this one.

TARP was worded to give Paulson flexibility. There's a good reason why he hasn't announced specific government injections, that would make it impossible for those firms to raise any private capital in the meantime. Why would anyone invest money if they knew their shares would be diluted sometime soon? It would be very stupid of Paulson to announce ahead of time, any equity injection, until it actually happens.

Krugman is suffering from selective memory.

[hari]

Look EU Commissioner for Industry, Verhogen, said yesterday during EU-15 Summit, in Paris, he tried for couple of years ago to get UK, US and Ireland to come on board with regulatory control of derivatives and was rejected as absurd.
Now the same countries are demanding Gov intervention and nationalization of banks.

SO, I suspect, Paul is trying to argue that finally UK has found its moral compass and will nationalize banks to avoid meltdown of the financial sector - after years of neglect on demands to control derivatives market from Brussels.

After all, Brown is also a Ph.D. And Merkel listens to him on money matters. So it was not difficult for EU-15 to agree
on the Gordon principles for stablaization of the banking sector in EU.

Now, today, comes the national announcements on action to be taken by their Treasuries. Germany has decided to pump Euro 400 Billion into stabalizing the financial markets.

Markets in Aus/NZ and Asian financial centres have all registered postive reaction and, for the moment, it seems like the malady is being corrected - based on market reaction.

[hari]

What Paul doesn't admit or acknowledge is that UK and Ireland are going to come out of this fiancial crisis - based on their marketing links to CDS and other derivatives -with a weaker banking sector compared to continental Europe.

The mantra of deregulation was followed with a vengence in Ireland and City (Lon) including their own investment banks.
The inter-connectedness of hi street with Irish and City financial centres is the source of the malaise on the continent. EU banks with branches in Ireland and City milked the derivatives market for what it was worth and marketed it across the continental banking sector - including UBS and Deutsche Bank. No one q' the rating of the AAA derivatives because S&P Rating Agencies certified them as AAA. Basta!

[mmckinl]

Brown has it half right ... the bit he forgets is that he needs to audit the banks before he takes shares. Why buy shares or even debt with tax payer money if the bank is doomed ?

FDR had it right, the Swedish did it right ... first the reckoning then the help.

As it stands both Brown and Paulson are doing a modified Japanese Plan that will leave the economy on its back for years. The debts must be paid, the losses recognized or we live with zombie banks for years if not a decade causing economic stagnation and deflation.

[a]

And Krugman wins the Nobel Prize!

Congrats!

[hari]

Congratulations Paul Krugman!

Noble Economic Laureate 2008 - What a coincidence that a Trade Econmist get the proce this year!

Globalization and more....

[save_the_rustbelt]

I do not always agree with Krugman, but the depth and breath of his work is indisputable (economics, not politics).

Congratulations!

[prostratedragon]

Congratulations Prof. Krugman!

[baileyman]

Maybe the Nobel will persuade Obama to offload Rubin?

[Anna Lee]

Congradulations Dr. Krugman!!!

[Lafayette]

Personal profit raptors

Paulson: “That’s what you do when you have failure.”

He should know. He's part and parcel a great deal of the failure. Under his direction, Goldman Sachs was as engaged in this sub-prime mess as any other. One of the more gilded Golden Boys, he could not separate himself from the whopping handfuls of money to be made selling sub-prime derivatives.

G/S's implication in the Great Mess of Global Finance is depicted here. It's up to each reader to believe or not the Bloomberg explanation, but it seems full of interesting and intriguing information.

In a word, G/S shorted the subprime toxic junk in the latter half of 2006 -- and made a killing. Who made this killing? As the article reports, certainly those who proposed to short the toxic waste and the CEO of the moment (who was not Paulson, since he had already started at US Treasurer in May of that same year).

Anyway, lead-head has most certainly nominated a pyromaniac to head the fire-brigade when the Toxic Waste Brushfire turned into a Credit Seizure Holocaust.

Change in Washington. Change on Wall Street. Change at the Fed. Change in regulatory oversight.

Go for it, Barack. You cannot do a great deal of good by delivering Wall Street from these personal-profit birds of prey.

En passant

My point: There is strong evidence that G/S knew full well that the toxic waste wasn't worth the paper it was written on. And, they dumped their part of the mess on the rest of the world, pocketed the bonuses ... and laughed delightedly all the way to the bank. Then, to protect their jobs, abracadabra, G/S changed its stripes from Investment Bank to Commercial Bank.

A bunch of magicians are these Golden Boys ... and wreaking a putrid smell as well.

[anne]

Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman, Paul Krugman....

[anne]

http://www.princeton.edu/main/news/archive/S22/38/97G71/index.xml?section=topstories

October 13, 2008

Princeton's Krugman wins Nobel
By Ruth Stevens

Paul Krugman, professor of economics and international affairs at Princeton since 2000, has won the 2008 Nobel Prize in economics. *

Krugman, the only winner this year, was recognized "for his analysis of trade patterns and location of economic activity."

In addition to teaching and conducting research at Princeton, Krugman writes a column for The New York Times.

More information, including the time and location of a press conference and reception, will be posted as it becomes available.

* http://nobelprize.org/nobel_prizes/economics/laureates/2008/

[anne]

http://krugman.blogs.nytimes.com/2008/10/13/an-interesting-morning/

October 13, 2008

An interesting morning
By Paul Krugman

A funny thing * happened to me this morning …

* http://nobelprize.org/nobel_prizes/economics/laureates/2008/

[Farrar]

Paul Krugman does good. Bravo!

[Farrar]

See what even Tyler Cowen wrote.
http://www.marginalrevolution.com/marginalrevolution/2008/10/paul-krugman-wi.html
I never expected such enthusiasm from him!

[Robinia]

Well, I wanted good news, opened my laptop, and there sitting in my inbox was the news Paul Krugman won the Nobel Prize! Timing could not be better for drawing public focus to Krugman's work.

[melvin polatnick]

The big secret is out. Politicians and the media were hiding the fact that American households have a net worth of over 56 trillion dollars. That is more than half the household wealth of the world. Those statistics come from the Federal reserve Flow of Funds Summary Statistics Second Quarter 2008. If there was a way to get the hoarders of those bucks to go on a long shopping spree the recession in the U.S. would quickly end. But our politicians fear talking to those idle saving account owners and their potential to stimulate our economy, they would rather increase the national debt than anger millions of cheap voters. Consumer spending determines the health of the economy not inflationary government handouts. Until some miserly Americans start digging into their over loaded bank accounts and start spending money our recession will continue indefinitely.

[anne]

http://www.nytimes.com/2008/10/13/business/13morgan.html?hp=&pagewanted=print

October 13, 2008

Morgan Agrees to Revise Terms of Mitsubishi Deal
By LOUISE STORY and ANDREW ROSS SORKIN

The embattled investment bank Morgan Stanley agreed to give the Japanese bank preferred stock that pays a 10 percent dividend instead of common stock.

[Lots of learning about investment going on.]

[Organic George]

BJ,

Paulson,s first plan did not include direct purchases. When the Senate rewrote the Bill after the House rejected it, the language for direct injection of funds into banks was added over the objection of Mr. Paulson.

It is your memory that is faulty or do you just prefer to distort the facts.

[Elvis]

The Nob to Krug.
great.
How about a seat at the table in January?
We're gonna need some brains to fill the 8 year vacuum.

[anne]

http://economix.blogs.nytimes.com/2008/10/13/paul-krugman-wins-economics-nobel/

October 13, 2008

Krugman Wins Economic/s Nobel
By CATHERINE RAMPELL

Paul Krugman, a professor at Princeton and a columnist for The Times, won for his work on global trade patterns.

[Front page picture and all, and far better continue writing and criticizing than direct policy making.]

[evagrius]

www.federalreserve.gov/releases/z1/Current/z1r-1.pdf

"Debt of the domestic nonfinancial sectors is
estimated to have expanded at a seasonally adjusted
annual rate of 3½ percent in the second quarter of 2008,
2 percentage points slower than in the previous quarter.
The deceleration was widespread across sectors.
Household debt expanded at an annual rate of
1½ percent in the second quarter, 2 percentage points
below the pace in the previous quarter. In the second
quarter, growth of home mortgage debt decreased to an
annual rate of ¾ percent, and consumer credit rose at an
annual rate of 4½ percent.
Nonfinancial business debt rose at an annual
rate of 5¾ percent in the second quarter, 1¾ percentage
points less than in the previous quarter. The slowdown
was evident in all categories except net bond issuance.
State and local government debt increased at
an annual rate of ½ percent last quarter, 3 percentage
points less than in the previous quarter. Federal
government debt expanded at an annual rate of
6 percent in the second quarter.
At the end of the second quarter of 2008, the
level of domestic nonfinancial debt outstanding was
$32.4 trillion; household debt was $14.0 trillion,
nonfinancial business debt was $10.9 trillion, and total
government debt was $7.5 trillion.
Household net worth—the difference between
the value of assets and liabilities—was an estimated
$56.0 trillion at the end of the second quarter of 2008,
$0.4 trillion dollars less than in the preceding quarter."

melvin polatnick;

I think the "net worth" includes such things as land, houses, stocks and bonds, stuff that's hard to sell quickly. I don't think it's cash stuffed in mattresses.

[Elvis]

far better continue writing and criticizing than direct policy making.
agreed- as long as there are ears in the chairs around the table!

[anne]

I am rather less frightened about the financial crisis, thinking that there have been and are technical resolutions to allowing for credit flows, even if central bankers increasingly have to directly secure and force the clearing of credit. More worrisome is the general economic impact, since if we were slow in recognizing and responding to the crisis and mistaken in allowing Lehman Brothers to fail, we are slower in responding to the need for a direct spending stimulus to support employment.

The more important fear for me now is the direct employment support we will need in coming months, when such support is not now in place.

[anne]

Also, we were in effect fortunate that the original financial rescue plan was voted against since that plan simply did not allow for direct financial company capital base building as Gordon Brown has begun. Essentially, partial nationalization of banking has begun and will continue for quite a while as understanding is gained about just how complex and lengthy a process derivative unwinding will be.

There will be no quick returning to normal, since the market will not allow for normal for quite a while. Similarly, the costs of financial products and the nature of investment will be re-examined from here.

[donna]

Good to see Paul Krugman get the Nobel. Made my morning, along with the market staging a recovery, however temporary. ;^)

[Patricia Shannon]

Congratulations to Paul Krugman. It brightened my spirits when I heard it on the news this morning, because it should mean more people will read his work and get truer, more realistic information. I found this great blog when I did a search for Paul Krugman.

[John Sweda]

Prime Minister Gordon Brown has the advantage of having served as Chancellor of the Exchequer from 1997 to 2007, whereas President Bush has no experience in Treasury matters. Leadership in government should come from the top down. Also, the US is historically averse to government ownership (socialization) of banks, dating back to the dismantling of the Second Bank of the United States under President Jackson. The British have a more recent history of government ownership of banking, so it is natural that they propose this solution.

[chriss1519]

I have a dumb question.

What is the conceptual difference between govt purchase of equity stakes vs govt purchases of the bad securities? As I understand, in the first case, the government provides funds in return for equity. In the second, the government provides funds in return for the bad assets. In both cases, the bank gets the funds it needs. Also, while there are risks in purchasing the bad security, especially if the govt has to overpay, aren't there also the same risks to the govt if the bank goes belly-up?

The banks are getting funds in either case. Why is one considered superior in unfreezing credit/capital markets?

[OhNoNotAgain]

Boy, when I saw the word "Femafication", I thought that Anne was going to have a fit. Then, I realized that it was *Fema* as in the agency. :-)

Congratulations to Mr. Krugman, well-deserved. And kudos to the UK for swift action.

[anne]

"FEMA-fication" correctly.

[Dickeylee]

Obama could do us all a great service to go "all in" with Krugmans economic plans for our recovery. Hope the Nobel will get many, many more to read Pauls history of work and writings.
Congrats Paul, wel well deserved!

[anne]

"What is the conceptual difference between govt purchase of equity stakes vs govt purchases of the bad securities?"

The need is to build the capital bases of banks, rather than to replace a less liquid asset of likely declining near-term market value with a more liquid asset.

[The Old PK]

Where did this guy go?

http://www.slate.com/id/1918

[Talex]

700 billion whether by purchase of bad assets or by equity position is still a 700 billion equity injection either way you cut it. The only difference being is what you get in return for the 700 billion.

I'm not defending Paulson here but all Brown has done is shift what Britain gets in return for the money injected. While an equity position is desirable to bad assets the net result of the money injected remains the same - working capital. So Brown is not doing anything earth shaking here, just being a bit more of a better business man for the public.

Now as for the companies on the receiving end the positive result is that they get the same amount of money. The negative is that they still have to carry an asset turned liability on their balance sheets which could negatively affect their stock prices.

[hari]

There is no gurantee that Gordon Browns nationalization will diffuse the credit crisis in the financial sector. He's swung more than 180 degress - from total deregulation to basic nationalization of banking assests which demonstrates the disaster in City banks resulting from fraud and lack of oversight by Treasury.

Gemany has today pumped Euro 500 Billion into rescuing of banks and their assests. But the discussion is will it work? If so, for how long?

[Lafayette]

chris: What is the conceptual difference between govt purchase of equity stakes vs govt purchases of the bad securities?

The former gives the government seats on the Board, the latter does not. And, when equity values recover, the government can resell them at a profit, the funds going to the Treasury.

The difference is thus non-negligible.

Far more important is the UK solution that guaranties interbank transfers -- thus taking the risk out of overnight lending, which was the major part of the Credit Seizure. Europe as a whole this weekend arrived at a similar measure.

One can only presume that the G20 will do the same, since the British Prime Minister presented his solution at the Washington meeting Saturday.

[hari]

Today Gordon Brown has demanded a revision of Bretton Woods Institutions (IMF/IBRD). This, as we know, is long overdue.
US has been holding it up because of its leverage with IMF and IBRD in terms of share holdings.

What post-Bretton Woods Institutions will look like, I haven't the faintest idea. However, globalization is invariably political force to recognize in the changed world of global finance and trade.

[save_the_rustbelt]

So we are going to "invest in" (bailout) healthy banks? Huh?

"Treasury to Invest in `Healthy' Banks, Kashkari Says (Update3)

By Rebecca Christie and Robert Schmidt

Oct. 13 (Bloomberg) -- Neel Kashkari, the U.S. Treasury official overseeing the $700 billion rescue of the financial system, said government equity injections will be aimed at ``healthy'' firms.

``We are designing a standardized program to purchase equity in a broad array of financial institutions,'' Kashkari, who heads the department's Troubled Asset Relief Program, said in a speech in Washington. ``The equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions.''

[anne]

http://www.nytimes.com/2008/10/14/us/politics/14campaign.html?hp&pagewanted=print

October 14, 2008

Obama Expands Economic Plans
By JACKIE CALMES and JEFF ZELENY

TOLEDO — Senator Barack Obama on Monday expanded his economic platform, including proposals to spur new jobs, to give Americans penalty-free access to retirement savings to help them through the downturn, to urge a 90-day moratorium on home foreclosures and to lend money to strapped local and state governments.

Mr. Obama also is calling on Congress to double $25 billion the government loan guarantees for automakers and to temporarily eliminate taxes on unemployment benefits.

Campaign advisers said those steps and several others could be taken before January through current laws or by the Democratic-controlled Congress acting in a lame-duck session.

Mr. Obama is outlining his revised plan in Toledo, Ohio, a struggling city that is representative of the economic crisis and the battle for industrial-belt swing states that could determine the winner of the Nov. 4 election.

Senator John McCain, his Republican rival, also gave an economic speech in Virginia Beach, Va., but he had no new policy prescriptions, having rejected his advisers’ options over the weekend as too gimmicky, according to one Republican close to the campaign.

Mr. Obama was not originally scheduled to present new policy proposals in his speech at the Sea Gate Convention Centre in downtown Toledo. But when word spread on Sunday evening that Mr. McCain would not offer new economic proposals, as had been suggested by some aides, the Obama campaign saw an opportunity to expand upon Mr. Obama’s plans to offer relief for the middle-class with ideas on the table.

“We have the advantage of sharing ideas that are consistent with theideas we have shared before,” David Axelrod, the campaign’s chiefstrategist, said in an interview. New polls suggest mounting economic anxieties among voters are fueling Mr. Obama’s growing lead in many polls against Mr. McCain.

The main new proposals would:

— for the next two years, give businesses a $3,000 income-tax credit for each new full-time employee they hire above the number in their current workforce;

— allow savers with tax-favored Individual Retirement Accounts and 401(k)’s to withdraw 15 percent of those retirement savings, up to a maximum of $10,000, without paying a tax penalty as the law currently requires for withdrawals before age 59 and a half;

— bar financial institutions that take advantage of the Treasury’s rescue plan from foreclosing on the mortgages of any homeowners who are making “good-faith efforts” to make payments;

— direct the Treasury and the Federal Reserve to create a temporary facility for loans to state and local governments, similar to the Fed’s new arrangement to loan corporations money by buying their commercial paper, which are the I.O.U.s that help businesses with daily operating expenses like payrolls.

[Am I ever not impressed, but what the heck.]

[anne]

What was done in the New Deal was to support the most stable banks and allow for an absorbing of relatively unstable banks. The healthiest of banks need to be invested in, publicly and privately, to build capital bases to both absorb other banks and insure for continued and expanding general financial transactions and lending.

The precise need is not to insure liquidity in the financial system but to build capital bases which is just what the British have shown, what the Swedish did in the 1990s and what was done as the New Deal began.

Paul Krugman sought to explain this early on, but the philosophical problem of public ownership of healthy banks was obviously too much to expect the Treasury Secretary would be able to avoid being trapped by. Now, there is other leadership to follow.

[anne]

http://delong.typepad.com/sdj/2008/10/two-big-intelle.html

October 13, 2008

Two Big Intellectual Victories for Ben Bernanke
By Brad DeLong

Passing unnoticed in all the chaos is that the current financial crisis is giving Ben Bernanke two great intellectual victories.

There have long been several live issues in the study of the Great Depression. One is the question of whether it would have been enough to stop the Depression for the Federal Reserve to simply have injected so much liquidity into the economy to keep the money stock from falling. Milton Friedman said yes. Others muttered about "pushing on a string" and said no. Ben Bernanke pointed out that the credit channel depended not on the economy's liquidity but on the banking sector's capital--and that if the credit channel were important than all the liquidity policies in the world wouldn't help unless they could somehow by accident recapitalize the banking sector.

The course of events this year is a major win for Ben Bernanke.

A second live issue is whether--as Larry Summers and I have argued--it was expectations of further deflation that were key to discouraging private investment spending, or whether it was the legacy of past deflation in freezing up the banking system that was the key to the collapse of private investment, as Bernanke argued. Here again I think the experience of this year is convincing evidence that Bernanke was right.

Of course, at this stage he would rather that he had been wrong in his focus on the strength of the credit channel...

[save_the_rustbelt]

Will a $3000 tax credit be enough to make a business hire a new employee? No.

Will it subsidize employers who were going to hire anyway? Yes.

These sorts of incentives are incredibly difficult to design, and the tax system is cluttered enough already. Good intentions, yes. Workable, no.

[save_the_rustbelt]

I cut myself off...

If what I hear about Pelosi/Reid post election plans are correct, that plan would seem to be superior to Obama's.

[anne]

That there is yet no significant economic plan from Barack Obama is more shocking than discouraging; possibibly we are dealing with overwhelming caution before the election, since Obama has a commanding lead, but I have long thought we are dealing with a team of economic advisers that are terminally cautious and who have been as unwilling to focus on the financial crisis as unwilling to focus on employment as necessary by using direct spending programs.

That a year after mocking Hillary Clinton for asking a freeze on foreclosures, when a freeze would have helped importantly, Obama is so asking is again discouraging.

I could not be much less impressed.

[DeniseB]

Is Obama's idea of penalty-free withdrawals from retirement funds a good idea? Now that we've maxed out our credit cards & home equity withdrawals, is the next thing going to be raiding our retirement nest eggs? I can't see how this can be good.

[anne]

Denise:

"Is Obama's idea of penalty-free withdrawals from retirement funds a good idea?"

When building saving for retirement is so critical, absent truly sufficient Social Security payments alone, I cannot imagine moving to penalty-free withdrawals from retirement plans. I have no idea why such a proposal would be made.

[ddt]

Congratulations to Krugman! A really excellent and timely selection for the Nobel.

Throughout this whole crisis Krugman has really shone. I found it reassuring that he was out there commenting on the whole thing and steering discussion in the right direction (Swedish approach, etc.). With any luck he will find a place in the Obama administration.

[anne]

Mark Thoma:

"Krugman gets one or two comments on his blog: Comments (1873)"

With any luck, Krugman will continue just as now and have a voice that matters as much rather than the sort of muted-conservative voice that has characterized Obama economic advisers.

[Julio]

"Kashkari, who heads the department's Troubled Asset Relief Program,"

Please, oh please tell me that's not his real name.

[BJ Feng]

Paulson's current plan is still the best in my opinion. It is not enough to just recapitalize the banks. Trust is a big issue right now, and people do not trust banks with large holdings of mortgages, no matter if the mortgages are toxic or not. If all the questionable mortgages can be separated from the banks, then that should resolve the trust issue. Those banks without adequate capital would also need a capital infusion and Paulson also plans to inject capital as needed. This approach is both flexible and comprehensive. With European banks still holding mortgages, will people trust them enough to lend to them? There can still be worry that future writedowns and future losses will impair these banks. How much more can the Europeans afford to invest politically as well as fiscally? Everyday, I hear that more and more is needed to recapitalize. Already Royal Bank of Scotland needs more government money, the initial capital infusion was too stingy, how much more will they need after more losses?

[BJ Feng]

I can only hope that Krugman's Nobel Prize victory was not politically motivated. It would be a shame if the Nobel committee started issuing all awards based on political factors. They already have an award that is political and can be used in that manner, the Peace Prize.

Just earlier this year they issued the Literature Prize based on politics. The committee announced that no America would receive the prize as no American write was sufficiently "global" enough in their viewpoint to deserve consideration. The committee must make sure that non-political prizes go to the most deserving, not the most liked. Otherwise the prize itself will become tarnished as certainly the Peace Prize has become thanks to former awards to terrorists like Arafat. Not to mention Gore for expressing a viewpoint completely unrelated to peace.

[Patricia Shannon]

anne says...

Denise:

"Is Obama's idea of penalty-free withdrawals from retirement funds a good idea?"

When building saving for retirement is so critical, absent truly sufficient Social Security payments alone, I cannot imagine moving to penalty-free withdrawals from retirement plans. I have no idea why such a proposal would be made.

When I was out of work during the 1990-1992 recession, I had to cash in most of my IRAs to be able to live. I had to pay an early-withdrawal penalty, which of course made things worse. Most of us don't have tenured jobs.

[Lafayette]

Hari: What post-Bretton Woods Institutions will look like, I haven't the faintest idea.

Consider far stricter regulatory financial controls.

Which will dampen MBA-graduate enthusiasm for earning megabucks at Wall Street investment banks.

Dear me, dear me, what is the world coming to ... MBA-graduates in the dole line. Somebody take a picture.

[Lafayette]

Nitwit plutocrats

BJF: I can only hope that Krugman's Nobel Prize victory was not politically motivated.

Ah ha! A scintilla of intelligence! I knew it was there somewhere.

You can bet your bottom bippy that it was, in part at least, politically motivated. The Nobel Prize IS Swedish after all.

Can't you understand that world is fed up, but really FED UP, with American Go-go Capitalism that has behaved like a bull in a china shop?

There's too much broken crockery on the floor to have let this chance pass by to poke Uncle Sam in the eye. He deserves it.

And, this is only the beginning. After the dot.com bust, lead-head's dance-with-death in Iraq and the subprime debacle, American goodwill is in the pits and will take at least a decade to recover.

Hey, we're supposedly the Greatest Democracy on Earth, aren't we? Instead, we placed its government administration into the hands of a bunch of nitwit plutocrats.

We have met the enemy and he is us. (Pogo by Walt Kelly) Think before you vote on November 4th.

[anne]

"Just earlier this year they issued the Literature Prize based on politics."

Vile, vile, vile, vile, vile lying.

[anne]

Patricia:

"When I was out of work during the 1990-1992 recession, I had to cash in most of my IRAs to be able to live. I had to pay an early-withdrawal penalty, which of course made things worse."

Having a need for unemployment support, and putting people in a positions where they must run down retirement saving during periods of unemployment or possibly a health emergency, do not necessarily go together and surely would not through the Europe Union. What is needed are adequate workers protections, rather than a forcing of further worker sacrifices. The Obama economic proposals have nothing to do with supporting the needs of workers.

[anne]

"Just earlier this year they issued the Literature Prize based on politics.... Not to mention Gore for expressing a viewpoint completely unrelated to peace."

The Nobel Prize for literature was of course given to one of the world's most distinguished writers, with no prejudice whatsoever to distinguished writers not so honored, but there is a need for some to show disdain for intellect and accomplishment that we willfully will not understand.

The Nobel Prize for peace to those who are given to studying the environment was carefully shown by the Nobel committee, in line with earlier awards, to relate completely to fostering peace. The problem here for some is a disdain for life and health as such as long as they are to benighted to understand the threat to themselves.

Criticizing Paul Krugman by besmirching other Nobel Prize winners is beyond shameful.

[Cynthia]

I agree wholeheartedly with you, Lafayette!

Because America under the leadership of lead-head has been violently vacillating between dropping the world into a pressure cooker and throw it into a deep-freeze (creating bubble-mania on many levels, if you will), the Swedes have all the reasons in the world to politize this year's Nobel prize in economics.

And just as I jumped for joy last year when they awarded a Nobel to someone with the guts to tell the truth about the dangers of anthropogenic global warming, I'm jumping for joy this year when they awarded a Nobel to someone who's got the balls to speak out against unfettered Capitalism!

[Lafayette]

anne: What is needed are adequate workers protections, rather than a forcing of further worker sacrifices. The Obama economic proposals have nothing to do with supporting the needs of workers.

They have such legal protections in France. They don't work. A company will still find a way to dislocate labor-intensive jobs to lower cost climates, keeping only the more skilled workers necessary to sustain the domestic business.

I maintain that those whose jobs have dislocated have to be trained for either higher skill qualifications or a trade/profession. We can wail all we want, but those jobs are gone and they aren't coming back.

The flip side of the coin is that the same people to whom the jobs have been dislocated are now forming the middle-class backbone in countries like India and China. The middle-class spends money on imports. We need to find those niches which correspond to these new needs and develop them.

But, these product niches will need also new talents and skills.

Life is getting more difficult for the young compared to that which their parents enjoyed. (All the more reason to convince children that learning is key to their future well-being.) This phenomenon is being felt in all major developed countries around the world. The US is not the only one. It will take some good thinking of how to respond to the challenge.

And, no, I don't think the Dems have done their homework in the matter.

[hari]

Marquis - People's China Online Blog (14 Oct 2008)

Is "Made in China" still advantageous?

It's a commentary on a UNIDO Report dealing with China's comparative advantage by sector and product. Conclusion is clear: Yes!

[Patricia Shannon]

anne says...

Having a need for unemployment support, and putting people in a positions where they must run down retirement saving during periods of unemployment or possibly a health emergency, do not necessarily go together and surely would not through the Europe Union. What is needed are adequate workers protections, rather than a forcing of further worker sacrifices. The Obama economic proposals have nothing to do with supporting the needs of workers.

Good points.

[Patricia Shannon]

Anne,

But there are long-term and short-term needs and goals. It's probably realistic for Obama to think he can get quickly get a temporary lifting of penalties for early withdrawal of retirement funds. I don't think he can assume he can quickly fix the underlying problems. For one thing, we don't know what the composition of the U.S. Congress will be after the election.

[anne]

Particia:

Of course you're right, politically, but I am quite worried about a severe recession from here and looking for more political recognition of such a distinct possibility and a commitment to employment and terms of unemployment. An extension of unemployment benefits was not a part of the rescue package legislation.

[Patricia Shannon]

I don't know the details, but I know that unemployment benefits have been extended, at least in some states, including Georgia. In fact, they have been extended for people who had already run out. I myself got a letter telling me I might be eligible, because I was unemployed for part of last year, and ran out of unemployment benefits just before I got a job. Thank goodness I'm employed now! But I'm glad they are available for those who have not been as fortunate.

[Patricia Shannon]

http://news.yahoo.com/s/ap/20081014/ap_on_re_us/financial_crisis_violence;_ylt=AmkMGvsSgoSPMnykiPKpLTis0NUE

Suicides from financial crisis cause concern

By KELLI KENNEDY, Associated Press Writer Tue Oct 14, 9:00 AM ET

An out-of-work money manager in California loses a fortune and wipes out his family in a murder-suicide. A 90-year-old Ohio widow shoots herself in the chest as authorities arrive to evict her from the modest house she called home for 38 years.

In Massachusetts, a housewife who had hidden her family's mounting financial crisis from her husband sends a note to the mortgage company warning: "By the time you foreclose on my house, I'll be dead."

Then Carlene Balderrama shot herself to death, leaving an insurance policy and a suicide note on a table.

Across the country, authorities are becoming concerned that the nation's financial woes could turn increasingly violent, and they are urging people to get help. In some places, mental-health hot lines are jammed, counseling services are in high demand and domestic-violence shelters are full.

"I've had a number of people say that this is the thing most reminiscent of 9/11 that's happened here since then," said the Rev. Canon Ann Malonee, vicar at Trinity Church in the heart of New York's financial district. "It's that sense of having the rug pulled out from under them."

With nowhere else to turn, many people are calling suicide-prevention hot lines. The Samaritans of New York have seen calls rise more than 16 percent in the past year, many of them money-related. The Switchboard of Miami has recorded more than 500 foreclosure-related calls this year.

"A lot of people are telling us they are losing everything. They're losing their homes, they're going into foreclosure, they've lost their jobs," said Virginia Cervasio, executive director of a suicide resource enter in southwest Florida's Lee County.
...
In Tennessee, a woman fatally shot herself last week as sheriff's deputies went to evict her from her foreclosed home.

Pamela Ross, 57, and her husband were fighting foreclosure on their home when sheriff's deputies in Sevierville came to serve an eviction notice. They were across the street when they heard a gunshot and found Ross dead from a wound to the chest. The case was even more tragic because the couple had recently been granted an extra 10 days to appeal.

• In Akron, Ohio, the 90-year-old widow who shot herself on Oct. 1 is recovering. A congressman told Addie Polk's story on the House floor before lawmakers voted to approve a $700 billion financial rescue package. Mortgage finance company Fannie Mae dropped the foreclosure, forgave her mortgage and said she could remain in the home.

• In Ocala, Fla., Roland Gore shot his wife and dog in March and then set fire to the couple's home, which had been in foreclosure, before killing himself. His case was one of several in which people killed spouses or pets, destroyed property or attacked police before taking their own lives.

"The financial stress builds up to the point the person feels they can't go on, and the person believes their family is better off dead than left without a financial support," said Kristen Rand, legislative director of the Washington D.C.-based Violence Policy Center.

Dr. Edward Charlesworth, a clinical psychologist in Houston, said the current crisis is breeding a sense of chronic anxiety among people who feel helpless and panic-stricken, as well as angry that their government has let them down.

"They feel like in this great society that we live in we should have more protection for the individuals rather than just the corporation," he said.

It's not yet clear there is a statistical link between suicides and the financial downturn since there is generally a two-year lag in national suicide figures. But historically, suicides increase in times of economic hardship. And the current financial crisis is already being called the worst since the Great Depression.

Rising mortgage defaults and falling home values are at the heart of it. More than 4 million Americans were at least one month behind on their mortgages at the end of June, according to the Mortgage Bankers Association.

A record 500,000 had entered the foreclosure process. And that trend is expected to continue through next year, despite the current programs from the government and the lending industry to refinance delinquent homeowners into more affordable loans.

Counselors at Catholic Charities USA report seeing a "significant increase" in the need for housing counseling.

One counselor said half of her clients were on some form of antidepressant or anti-anxiety medication. The agency has seen a decrease in overall funding, but it has expanded foreclosure counseling and received nearly $2 million for such services in late 2007.

[Lafayette]

Hierarchy of Needs

PS: Counselors at Catholic Charities USA report seeing a "significant increase" in the need for housing counseling

We depend upon charitable organizations to distribute available low cost housing in the private sector. That's out of a Dickens novel.

The subprime mess, after all, was built on a crying need -- people want a house of their own. And, some are, unfortunately, silly enough to take enormous risks to do so. Some? Maybe that should read most?

Whatever, low-cost housing needs are not going away just because the Abominable SubPrime Mess does a disappearing act. Low cost housing has always been a need and, likely, always will remain one.

It is election time, and European news channels abound with stories about the American poor. The news rarely celebrates the poor does it? After all, who cares? Britney Spears' showbiz comeback is sooooo much more meaty a subject.

Still, as an American, it is shameful to be reminded of how many people are indeed incarcerated in poverty by an attitude of social unfairness. We can spend trillions in Iraq, but the poor -- just road-kill on the highway of life.

Between welfare "handouts" of housing and predatory pricing to sell a residential mortgage, there must be a middle ground. We've learned that giving away housing will not work. People do not respect the housing, it inevitably dilapidates and cities find themselves with enormous repair bills. Which means what? New, acceptable, low-cost housing becomes scarce.

I saw an article recently in the on-line Economist (Oct. 13th) about employing Maslow's Hierarchy of Needs in management. (Which I found somewhat misplaced, but what the hey, at least it being employed somewhere.) For a simple but profound piece of work written during WW2, it still has great relevance today. It explains a lot about how we make decisions that affect our lives.

If you look at that hierarchy, you will find low on the ladder are Safety Needs. Within that group is "security of the body", which is where I would put shelter. In fact, were I Maslow, I would have put shelter on its own.

A society does not elect to offer a solution for those needs which are not strictly physiological. But, it certainly does develop expectations amongst the population to do so. Because what the triangle is useful in telling us is that individuals climb up that ladder one step at a time. Life does not provide short-cuts up the hierarchical needs ladder ... even the physiologically challenged inheritor of billions will not enjoy self-actualization if their health gives way.

It would seem that governments that pretend to assure a "level playing field" (but not winners), mean to guaranty a chance for all to succeed. Therefore, it should attend to the needs in the first and second hierarchies -- meaning both personal Health Care and Safety (or shelter from the elements within decent housing).

Where there's a will, there's a way. First, we gotta find the will. (Anybody see it lying around? ;^)

[Lafayette]

jfq: east to India, dieing just before he got there.

Not really.

This warrior-tourist died on his way back, in Babylon. In fact, he was seriously wounded in battle in India, which made him weak and unable to recover from, it is thought, his cause of death, which some consider was typhoid fever.

India was, for Alexander, what Russia was to Napoleon. Both their armies were seriously diminished.