Paul Krugman: Moment of Truth

It's time for aggressive, coordinated action to recapitalize the banking system here and in Europe:

Moment of Truth, by Paul Krugman, Commentary, NY Times: Last month, when the U.S. Treasury Department allowed Lehman Brothers to fail, I wrote that Henry Paulson ... was playing financial Russian roulette. Sure enough, there was a bullet in that chamber: Lehman’s failure caused the world financial crisis, already severe, to get much, much worse.

The consequences of Lehman’s fall were apparent within days, yet key policy players have largely wasted the past four weeks. Now they’ve reached a moment of truth: They’d better do something soon — in fact, they’d better announce a coordinated rescue plan this weekend — or the world economy may well experience its worst slump since the Great Depression.

Let’s talk about where we are right now. ...

The downward spiral accelerated post-Lehman. Money markets, already troubled, effectively shut down...

The response to this downward spiral on the part of the world’s two great monetary powers — the United States,... and the 15 nations that use the euro,... has been woefully inadequate.

Europe, lacking a common government, has literally been unable to get its act together; each country has been making up its own policy, with little coordination, and proposals for a unified response have gone nowhere.

The United States should have been in a much stronger position. And when Mr. Paulson announced his plan..., there was a temporary surge of optimism. But it soon became clear that the plan suffered from a fatal lack of intellectual clarity. Mr. Paulson proposed buying $700 billion worth of “troubled assets”..., but he was never able to explain why this would resolve the crisis.

What he should have proposed instead, many economists agree, was direct injection of capital into financial firms ... in return for partial ownership. When Congress modified the Paulson plan, it introduced provisions that made such a capital injection possible, but not mandatory. And until two days ago, Mr. Paulson remained resolutely opposed to doing the right thing.

But on Wednesday the British government, showing ... clear thinking that has been all too scarce..., announced a plan to provide banks with £50 billion in new capital — the equivalent, relative to the size of the economy, of a $500 billion program here — together with extensive guarantees for financial transactions between banks. And U.S. Treasury officials now say that they plan to do something similar, using the authority they didn’t want but Congress gave them anyway.

The question now is whether these moves are too little, too late. I don’t think so, but it will be very alarming if this weekend rolls by without a ... new financial rescue plan, involving not just the United States but all the major players.

Why do we need international cooperation? Because we have a globalized financial system... We’re all in this together, and need a shared solution.

Why this weekend? Because there happen to be two big meetings taking place in Washington: a meeting of top financial officials from the major advanced nations on Friday, then the annual International Monetary Fund/World Bank meeting Saturday and Sunday. If these meetings end without at least an agreement in principle on a global rescue plan ... a golden opportunity will have been missed, and the downward spiral could easily get even worse.

What should be done? The United States and Europe should just say “Yes, prime minister.” The British plan isn’t perfect, but there’s widespread agreement among economists that it offers by far the best available template for a broader rescue effort.

And the time to act is now. You may think that things can’t get any worse — but they can, and if nothing is done in the next few days, they will.

Comments

[Winslow R.]

pk wrote:"And the time to act is now. You may think that things can’t get any worse — but they can, and if nothing is done in the next few days, they will. "

Given PK's plan does nothing for the real economy, the spiral down of the real economy should continue while the financial sector is nationalized.

Pauslon's bazooka hangs at his side unused as mortgage rates hit 6% today. Crazy.

[hari]

I fear no rescue plan can stop the downward market spiral at this stage of the aggregated global credit crunch mess; the financial markets may require to sell off before they can finally recover; the cure Paul is suggesting is not adequate to the symptoms or malaise affecting the health of global finance.

[Easy Money]

We can do this the easy way or the hard way.

The solution is to nationalize the banks. We can do it now, and wipeout all shareholders and boldholders, and avoid too much of downward spiral for the real economy.

Or we can do it the hard way, with banks failing one by one, one harebrained scheme a day from clueless Ben and Hank, and the real economy put out to dry while this happens. Same end result.

No prizes for guessing what we'll get.

[anne]

http://krugman.blogs.nytimes.com/2008/10/09/two-kinds-of-problem/

October 9, 2008

Two Kinds of Problems
Paul Krugman

One thing I've been asked is why I'm not writing more about relief for homeowners and other kinds of bottom-up aid to the economy. Probably I should be saying more. But in defense, let me say that there are two kinds of economic problems right now.

The most acute problems involve the run on the financial system. This has to be brought under control if we want to avoid a 1931-style collapse. And things like homeowner workouts quite simply won't deliver enough relief to bank capital, and certainly not fast enough, to help significantly on that front. So there's a financial relief imperative, which mainly involves injection of capital and guarantees of liquidity.

Now, on top of that we've got the economy's slide into recession, which will continue even if the high-speed financial crisis is brought under control. What we need there is action on many things: fiscal stimulus, aid to state and local governments, homeowner relief, and more.

It's important to work on both kinds of problems, but it's also important not to imagine that solving either one automatically solves the other. And the slower-motion issues, realistically, won't be effectively addressed for a while, probably until whatshisname moves out of the White House. The high-speed stuff, on the other hand, had better be addressed in the next few days.

[esb]

Those of you who pay attention to such things know that we have just experienced another mini crash in Asian markets.

Europe is not having fun either.

Let me ask you this; would it not be better to just get to the bottom (in the equity markets) on Tuesday @ perhaps DJIA 6000+ and be done with all of this (and start getting some sleep once more) or do we want to continue to be subjected to this perception manipulation by Bernanke and Paulson over a period of several more weeks (or perhaps until Jan/Feb 2009) with the same result?

The markets will now clear, just get out of the way and be done with it all on Tuesday and perform (or promise) the nationalization at noon.

[Anonymous]

Reading Yahoo Finance top story was terrifying.

I suspect a quick drop is preferable to a slow decline. Unemployment risks are multiplied by the duration of uncertainty.

Bank nationalization - here we come!

Although - the mismatch in wages and housing prices still exists. The stickiness of housing suggests that the pain will be prolonged.

A period of general inflation could alleviate the mismatch in short order.

[Joe]

Inflate, Inflate, Inflate !!!!

Recession = Deflation

Depression = severe deflation = decade long calamity

Inflate. Inflate, Inflate !!!!

Everybody is doing it in Europe. It's all the rage.

If everyone is doing it then everyone's denomination will move in lock step.

The Chinese aren't going to be happy. I think the Middle East oil families (Divinely appointed government, as the story is related to the masses in those countries) have diversified out of bonds (anyone's bonds at this point). So they will just be bemused.

Social Security has a cost of living adjustment.

Wage earners will, by some means, have to procure increases. A new administration and sympathetic Congress would help.

After the crisis is over we can go back to the most sane policy of managing a few points of steady inflation a year.

Oh and throw out the crazy anarchist and get a government to manage the children in the financial sector.

[Joe]

Oh and after we conglomerate the financial sector in response to the crisis, we need to deconglomerate it.

Anti-trust anyone?

It's not an economic thing. Given the current situation any troubled bank divided by 10 is really only 10 smaller problems as opposed to one big one.

It's a political thing. Absolute power corrupts absolutely.

[bakho]

At the root of the problem is so much bad debt that many financial institutions will fail. This is due to bad bets and misallocation of resources. "Every bank for itself" is trying to salvage its own position, but this comes at an expense to the system. The situation calls for a quick rapid settlement and write off of losses, followed by a wise allocation of capital to productive sectors of the economy.

Capital is very difficult when decisions must be made about consumer debt. Consumer debt levels are unsustainable, but returning to sane levels would decrease consumption in a recession. Consumer spending is going to have to be replaced by government investment.

[Joe]

Or we could keep a few big banks and set up something like a public utility commission for the financial sector.

Top executives would be paid $150,000/year and wall street could be less dramatic.

No drama Obama!

[Robinia]

Moment of truth, indeed. Will the US IB CEO Treas Secty and the "CEO President" grow the depth of character to say, effectively, we were wrong.... and "Yes, Prime Minister"? Will "the Decider" yield to multilateral leadership? Will an ability to face empirical facts develop among those who have been blinded to all facts by their perception of the primacy of their ideology (or, as Stiglitz puts it, their religion) and face up? Will Paulson consult with those with opposing opinions, or continue to hire his previous Goldman Sachs underlings?

If ever we needed a push from a collective consciousness (which I am not at all sure is a real thing...) now would be the time. Think, talk and write real hard that it is possible for Bush, Paulson and Bernanke to consider the possibility that they may have been mistaken. C'mon, be a big enough man to confront your human frailty, be an example for the rest.

And, if not... well, this post-- http://calculatedrisk.blogspot.com/2008/10/dr-evil-and-mini-me.html elicited a comment that suggests, through music, the right approach if, indeed, Paulson and his "mini-me" are not educable:
http://www.youtube.com/watch?v=YoIylEjM-bg

[Joe]

Ben is not clueless. He knows exactly what's happening and what to do. The disconnect is that he is not master of the universe.

Hank I'm not so sure but to give him the benefit of the doubt, perhaps he proscribed by what's politically feasible.

Witness the totally stupid insane congressional republicans actions on the first try at the bailout bill.

But then they were elected by selling thier political wares to people who believe the world is six thousand years old.

Hence some insight into our present predicament.

[tinbox]

Just a few months ago Dr. Krugman was patiently explaining to us slow learners that his theory of oil inventory demonstrated without doubt that $120+ oil was here to stay. Apparently we won't have time to revisit that theory because we have to commit the nation's resources for a generation to whatever Mr Paulson wants this weekend. Dr. K. should slow down. Can the Government inject equity without a guarantee on bank debt? Can we afford to guarantee all bank debt, in addition to all deposits? Should we?

Mr Paulson can be expected to offer an insanely bank-friendly bailout. We know because we saw his last bailout plan. Can anybody explain why we should trust Paulson's judgment now?

[anne]

"Just a few months ago Dr. Krugman was patiently explaining to us slow learners that his theory of oil inventory demonstrated without doubt that $120+ oil was here to stay."

This is of course rubbish; what Paul Krugman was discussing and what was precisely the case was that increasingly prices for oil as for food were not being caused by speculative hoarding. Understanding that was and is of critical importance in poor economies, while being much ignored here.

[Coordination]

Since bad policies in a single country can destroy the entire world's economic system, a coordinated lending standard should be implemented to prevent future recurrence of this situation. No more super lax lending to people who won't pay back in any single country. International lending and accounting standards that are transparent to everyone around the developed world.

[evagrius]

Is this a prelude to the "One-World Government" so feared by right-wingers?

Ironoc if it is.

[Denis Drew]

Street gangs (we'll get to Republicans in a moment) substitute their love and money for the love a kid does not get at home and the money the member cannot earn in the straight economy. The gangs (we are almost to Republicans) also substitutes the tasks of gratuitous violence for the good feeling of accomplishing something important on a straight job: making the violence addictive. The latter connection goes mostly unnoticed because the connection is so weak (a substitute).

"Karl Markets" Republicans substitute their free market ideology for the good feeling of a (hard work acquired) understanding of the complex mechanics of an economy. That's why they find their ideology so addictive and hold on to it against all common sense.

[Joe]

change in world gdp = change in demand for oil = change in price for oil

think about "all things being equal" assumption then use it

predictions based on extrapolation of the past are moot points when a abrupt change in the status quo occurs.

any predicition about a partial equilibrium has it's flanks guarded by a host of assumptions about the general equilibium.

on another point abruptness in economic conditions should not be welcomed. a quick turnaround from the bottom doesn't necessarily follow.

Slower moving events give people time to adjust their expectations and plans.

[macquechoux]

"The solution is to nationalize the banks. We can do it now, and wipe out all shareholders and bondholders,.."

Boy oh boy, that would certainly help out the stock market, IRA investors, retirement funds, University investments and my 92 year old blind mother suffering from congestive heart failure who counts on her bank dividends and bonds to pay for her assisted living home and sitters! Jeez what a cure. Talk about a flight of US & foreign money out of the USA after such a brilliant move or just a hint that the government was thinking about doing such a thing. Your solution would accomplish what Marx and the Soviet Union could never accomplish.

[save_the_rustbelt]

What was unthinkable a month ago today becomes thinkable.

I am reminded of the homeowners who build McMansions in a forest fire zone, and then as the fire approaches try to fight it with garden hoses.

The garden hose will not work here either.

[Fred]

What we need right now is some clear thinking about the function of banks in a modern economy:

1. Depositories for cash. That function can be taken over by the Fed, with the bricks and mortar bank charging a monthly fee for its services (ATM machines, teller functions, check handling, etc). Money in a checking/savings/money-market account thus becomes an account with the Fed. The Fed can pay interest on this money but doesn't need to lend it, since the Fed created the money in the first place.

2. Mortgages. This function can be taken over by the government and very efficiently, assuming we reinstitute 10 or 20% down payments. Again, the bank does the retail work in exchange for a fee, and is also responsible for the first 5% of losses on loans. Together with down payments, this ensures everyone has some skin in the game.

3. Commercial loans. The banks borrow capital long and low in the bond/stock markets and lend long and high to businesses that are too small to tap the bond/stock markets directly. Since banks no longer have FDIC insured deposits as a source of low-cost capital, loan rates will probably rise. This will not mean the end of the world. Rather, it will mean that businesses will try to avoid borrowing or use scheme that enable dispensing with bank borrowing, both of which are positive developments.

I really fail to see why economists seem so anxious to save this creaking and massively inefficient system that we currently have. That those who currently benefit from the existing system want to save it, that I do understand of course.

[anon]

How much more clearer will PK have to spell it out that it is no longer saving the financial sector? It is now saving the entire global economy from sinking into the abyss. People there will be time to reconstruct a more sound financial sector.
Rust-belt, stop thinking about the single McMansion that is being burned down! The McMansion is gone period. Think about the whole forest and other collateral damages that are being consumed by the spreading fire. Wake up!

[Joe]

After the sane governments of Europe recite the facts of life to our politicians (Bernake excluded as he is already aware of the facts of life) sanity will prevail. It already started yesterday when Paulson announced he was going to recapitalize banks by taking some preferred shares.

The meltdown will be stopped and the monetary/financial system will be righted.

Depression will be averted but this disruption did/will cause disallocation in the real sector.

That's what Krugman and others are saying. Time for a little fiscal stimulus to avert the severe disfunctions of that occur in a deep recession.

The balance budget, fiscal conservatives don't understand that the only thing worse then Krugmans prescription is what will happen if the cure is not taken.

[Joe]

Inflate, Inflate, Inflate !!!!

[Panic in the Streets]

The world seems to be teetering on the brink, and no one is quite sure whether it will fall off or not. World stock markets are in a state of complete panic. People are desperately selling, fearing the worst.

[tinbox]

Anne,

Krugman asserted that it was real demand and not speculation driving oil and grain prices higher. So you're sticking with that? It seems at odds with subsequent events. (His arguments about oil prices were never supported by inventory data, but were back-of-the-napkin musings.)

The larger point is that experts like Dr. Krugman aren't great at forecasting economic outcomes, so we should take their advice with that in mind. Hillary was right about not trusting the economy to economists.

[Callahan]

Beautiful sunny day here in Michigan, great day for a meltdown.

[swells]

I've been doing some bottom feeding in the financials of late. I've accumulated what for me is a significant position admittedly bought for prices low enough to virtually ensure good profits if things ever recover.

But, my assessment, even if it drives my positions to zero and I lose every dime I have in them, is that the banks should be nationalized. I don't think people have any idea how violent and bloody things are going to get if this spins completely out of control. We've got McCain / Palin trying to win by getting Obama assasinated. Folks have very little idea how much violence will be unleashed if the "entitled" right wing ideologues find out they aren't.

[Joe]

hey tinbox got a tin ear. See my post above.

Krugman is a very smart man. Without digging down into the details of the controversy. If I had to chose between Krugman being wrong or you misunderstanding him, I will say that for all that has or will transpire, you misunderstood.

Assuming normal extrapolation from normal times $120/barrel oil is probably a reality.

These are not normal times.

The last time we went through a episode like this was in the 1930's.

Thankfully we learned some things from that cataclysm.

The creative destruction, liquidate them all folks need to go to the stupid farm.

[Joe]

Infalte, Inflate, Inflate!!!!

[Bruce Wilder]

swells is bottom-feeding in the financials, and I'm wondering if there will be any real bargains at the Circuit City liquidation sale.

I'm thinking that a wave of corporate bankruptcies is going to frighten the pants off of everyone, who couldn't figure out what all the fuss over Bear Stearns and Lehman was about.

General Motors may not be that far behind Circuit City. But, even if it isn't, Circuit City's bankruptcy is going to carry commercial real estate down, and with it, dozens and dozens of small and regional banks, the names of which Hank Paulson never heard before.

[Easy Money]

"...my 92 year old blind mother suffering from congestive heart failure who counts on her bank dividends and bonds to pay for her assisted living home..."

Oh boy, all her assets are in bank bonds? I strongly suggest you get her diversified asap. Very likely those bonds are toast, whether or not they nationalize now.

[esb]

The words "State of National Emergency" have an interesting "ring" to them, do they not.

What about "Executive Order Suspending the Force and Effect of the Constitution"

Some might think that a "Temporarily" should be inserted between the second and third words.

In any event, this weekend will bring all manner of fears and angers, and I suspect that the crawling things will come out and make their bid to take over the world.

Something other than a crash seems to be "in the air," something extralegal, from the gang that brought you the Iraq War.

says...

"..all through the period of the alleged bubble, inventories have remained at more or less normal levels. This tells us that the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors..." 12 May, Paul Krugman NYT

Oil was $125 on May 12 and since then "fundamental factors" pushed it almost 20% higher and then 40% lower--in 100 trading days? Inventories are still at "more or less normal levels." Paul Krugman may well be a fine person and an excellent economist, but he is wrong about the dynamics of the oil market. It does not inspire any confidence in his understanding of banking crises.

[esb]

Looking at the action in GLD/SLV makes me thing of

"Executive Order Requiring the Surrender of Gold"

[kthomas]

esb.....what?

Have you seen pictures of President Bush lately? He's in no position to start his beloved Neocon NWO. Darth Cheney is probably busy securing a safe place in Switzerland to avoid arrest and prosecution in the US.

Still, keep your powder dry.

[esb]

More seriously, this will be over when Paulson wants it to be.

Most likely, one hour in on Tuesday next.

Or perhaps, nine minutes in.

[a]

Excuse me if I'm beside myself.

Krugman was a supporter of The Plan (Paulson's 700 Billion Usd plan, that is). If we may recall, this Plan had absolutely to be passed in order to stop the American economy from collapsing. Yet, in spite of the passage, the American economy is collapsing anyway.

Now a rational man might then show some modesty. He has just supposed the spending of 700 Billion, and in spite of that, the economy is still spinning out of control. He might even say, "mea culpa." But no. Krugman has a New Plan.

Also, you would think that an Anglo-Saxon, a supporter of market liberalism, which has got us into the mess in which we are in, might also be a little hesitant before preaching to the rest of the world what *their* obligations are. But no. Krugman, in all his arrogance, and in spite of being wrong continually, seems to think that the worlds' leaders have an obligation to support his New Plan. Or else the economy will collapse, and they will be held responsible.

Look, Mr. Krugman. One of the persons responsible for the mess we are in, is you. We are now on the seventh or eighth plans to save the economy. These are plans you supported. And you know what? They *haven't* saved the economy. And each time, you come back again, with yet another Plan. Does being wrong have any impact on you? Are you ever going to excuse yourself? DO YOU HAVE ANY SHAME?

Delete this if you want, I've had a bad week.

[rufus]

Krugman: “And the time to act is now. You may think that things can’t get any worse — but they can, and if nothing is done in the next few days, they will.”

What Krugman, pundits and most importantly political leaders need to understand what is driving asset deflation at this point more than a ‘credit crunch’, a ‘burst housing bubble’, a derivatives market failure, is a crisis in confidence.

The primary accelerant in asset deflation at this very moment is psychological. As simplistic as that sounds, trust is gone. Krugman, pundits and political leaders are the ones populace and investors are looking towards for leadership, and most of the signals being sent are elevating panic. Whether it is uncoordinated nationalistic fiscal/monetary movements, or direct statements of doom and despair, all are contributing to the hysteria. Bernanke’s and Paulson’s actions for example have the appearance of ad hoc efforts without a single note of encouragement. When the Fed chief announces and enacts a FFR cut, but tempers it with caution, worry, and concern, the signal/message to investor and populace is mixed.

Just as when Krugman and pundits entitle pieces with apocalyptic and doomsday style descriptions and superlatives they only serve to heighten hysteria while the intention may be merely to inform. As Anne is fond of saying, language does matter. I point to the simplistic cartoon on Krugman’s NY Times Bog.

http://krugman.blogs.nytimes.com/2008/10/10/the-markets/

I am not trying to lay this at Krugman's feet alone by any means nor identify him as a primary culprit, that lineup is vast. However I am using this current article posting, just as I could refer to the 'Edge of the Abyss' article as an example.

While I’m not suggesting that Pollyanna could solve this crisis, or that coming together in a circle to sing Kumbaya is going to cure all ails, the leadership should be more aware and be making a more concerted effort to bolster confidence. The most subtle signals and choice of verbiage/syntax can have significant psychological effects. Conscious consideration of every phrasing and every statement or movement must be considered.

No the ‘crisis’ (another word connoting fear and panic) is not just all in our (investors or populace) heads, but the current runaway sell of assets is approaching valuations well below intrinsic values. While intrinsic values themselves may be more difficult to forecast then speculative cash flow or other PV models, assets still have value, goods and services are still demanded. Everything cannot be logically thrown on to the dollar value menu, whether it be a 2,000 square foot home or the PP&E of General Electric. Leadership, in all forms, should be striving to deflate the panic not inadvertently even giving rise to it. Panic, worry, and fear beget the same.

[rufus]

There are definitely underlying or quite evident fundamentals that need to be addressed such a liquidity. However, if the Fed infuses capital into the banks in exchange for preferred shares for example, many investors are and will be looking to remove capital from the system to satisfy their own need for immediate liquidity, ‘let me see my cash’. While this will appease the immediate need for satiation, many will then turn and pump this capital into more secure investments such as Treasuries or commodities like gold (a necessary flight to liquidity). The Fed will effectively deleverage some of the banks positioning and swap places with investors, but where will this particular game of musical chairs lead us, and more importantly what message will it send? All efforts, particularly coordinated global efforts, must be couple with clear and CALM messages/signals.

[rufus]

"(a necessary flight to liquidity)"

whoops...meant security not liquidity

[hari]

Rufus - I don't think the market can now be controlled by Paulson/Bernake policy actions - it's a bit too late!

The order of new business day is a full blown recession and no idea how long it will last. Reason why G-7 could not agree on US proposals to intervene in the financial market.

From a policy perspective, you're absolutely right about pundits and their headline nonsense - read by a lot of people! Aug 2007 is when this dismal crisis was recognized by Fed - but with not serious policy implications, if I recall. Bernake was confident it would be contained by monetary policy.

[Patricia Shannon]

Robinia
Thank you for the link to the Bob Marley song. I'm listening to it right now.

[Patricia Shannon]

http://www.msnbc.msn.com/id/27104617/

By Kerry Capell
updated 2 hours, 3 minutes ago

Home to just 304,000 people, tiny Iceland is emerging as the biggest casualty of the global financial crisis. On Oct. 9, the government took control of the country's largest bank, Kaupthing, and halted trading on the Reykjavik stock exchange until Oct. 13. Authorities also used sweeping new emergency powers to hive off most of the domestic assets of the country's second-largest bank, Landsbanki, into a separate entity to be called "New Landsbanki" that will be fully owned by the government.
...
In just five years, the banks went from being almost entirely domestic lenders to becoming major international financial intermediaries. In 2000, says Richard Portes, a professor of economics at London Business School, two-thirds of their financing came from domestic sources and one-third from abroad. More recently — until the crisis hit — that ratio was reversed. But as wholesale funding markets seized up, Iceland's banks started to collapse under a mountain of foreign debt.

[BJ Feng]

Those of you who want the economy to return to "the basics" of production have to understand this is what happens during deleveraging. We cannot get rid of the speculative credit without this. The speculators are losing their shirts, those who were prudent will be hurt, but not nearly as bad. If you aren't leveraged, and aren't in substantial debt, then you'll come out of this fine. If you are highly leveraged, and need to continuously borrow to finance that leverage, you are screwed. That includes those people who bought 5-6 homes with zero down, or starting flipping one home at a time, and built up enough money to start flipping two homes, then three, and now they're going to be wiped out.

The government is not omnipotent. I know this is sacrilege to the left, but government is NOT GOD! Has anyone considered the possibility that government cannot stop this process? That easy money government policies and the availability of low interest rate loans are two major factors that caused this in the first place?

I'm very impressed with the maligned Austrians, they've long predicted such a scenario should we finally get deleveraging. The government simply cannot force people to lend money to insolvent or dangerous firms. And the government does not have enough capacity to lend to everyone and guarantee everything. Doing that might put the government itself in trouble, like with Iceland.

The best that can be done is to set the stage so that the economy can recover quickly after the deleveraging is over. Try to make the banks healthy enough to operate after the carnage is over, attempt to limit the damage to good, productive companies caught in the current. But unhealthy companies that are dependent upon debt are not salvagable. REITS and companies with huge debt loads need to be taught the meaning of risk. You can't have risk without the possibility of losses, that's what makes something risky. We've forgotten that thanks to years of credit expansion and easy "free" money.

[rufus]

Hari,
"The order of new business day is a full blown recession and no idea how long it will last."

Agreed, and with that being said acceptance (albeit begrudgingly, must be the order of the day, or coming days).

"Bernanke was confident it would be contained by monetary policy."

Also agreed, many mistakes were made. Perhaps the 'bailout' (please substitute asset purchase, asset reallocation, or something admittedly less cynical for me) would have worked 6-12 mos. ago, doubtful a week or two was the difference.

Now infusions of capital into the banking system are necessary and important, but the scale and scope of which is being elevated by the atmosphere. Once the hysteria is contained investors and lenders alike will recognize the opportunity for profit (possibly already substantial).

Also as others have said a restructuring of the financial markets is also important, and as Volcker cited in an interview last night, isn't that already underway. Decades old institutions (i.e. investment banks) no longer exist in their previous form. Can anyone imagine the derivatives market being viewed; much less valued the same in the future. The market is capable of some painful self corrections. Future moves must also give consideration to future risks (i.e. consolidation in the banking industry). As Volcker also suggested should the TB part of TBTF be allowed to occur again.

My point about the hysteria is not to over simplify the matter, but some application of Occam's Razor would seem prudent.

[Joe]

I quess I can't expect many people to be regular readers of Mr. Krugman, cognizant of his precise assessments.

I quess I also can't expect that many people understand precisely what has transpired to bring us to the current circumstances.

I quess "tinbox says" became "says".

As to the fundamentals of the oil market 100 days from May 12 puts us us in the middle to end of August when all the fundamentals of all markets were starkly different from the prior existing fundamentals.

Mr. Krugman was calling a housing bubble a couple of years ago.

Mr. Krugman should not be numbered with some amorphous cabal you have concieved.

Mr. Krugman criticized Paulson's plan the day after it came out and the plan, as it is coalescing, is precisely tacking into the form he recommended. The appropriateness of his recommended approach is confirmed by the fact that other governments are also using the same strategy.

Mr. Krugman did say the previous formulation was better then nothing and supported it on that basis.

Mr. Krugman is very intelligent, right on time and an honest broker. He is recognized as such by people who study the subjects upon which he comments.

Those who attempt to denigrate him are ignorant.

I have to believe some of the denigration is the result of Krugman being first and right on every assessment he made regarding the Bush administration.

These assessments were called shrill when Krugman first presented them, only to later become conventional wisdom.

Those who criticize him should be careful because in all cases in the past Krugman has made his detractors look inept.

[macquechoux]

Easy money, her bonds are mostly municipals and mostly Louisiana based. We both live in South Louisiana. She has quite a bit of stock in JP Morgan Chase that she acquired prior to 83.(?) I believe she is about 75% bonds and the rest is stocks with maybe 5% preferred. She has way too much cash and she will be just fine. She is also quick to point out she has gotten along just fine, "Without listening to a damn thing you or your brother ever said about money." Not to worry. My point was to point out how absurd the idea is of "nationalizing every bank" could have more bad results than good.

Thanks for the consideration.

[BJ Feng]

Joe, let me make my own insightful predictions, ready? I predict that the stock market will boom sometime in the future, which will increase the wealth of stockholders. They will start to consume more and the nation will undergo a period of prosperity. But excesses will build up, the FED will have forgotten the mistakes of the 1990's and 2000's, choosing to ease monetary policy. Eventually, we'll enter into a recession and many, many jobs will be lost.

You see Joe, I'm a genius, and a seer. I have powers that Nostradamus wished he had. I KNOW the future, and what I said above will pass. Years later, I hope you will remember these predictions and how I WARNED you about the boom and recession. How I pleaded with you to avoid excesses and avoid overconsumption. But did you listen? Did America? So the next time we enter a recession, I hope you will concede that I am very very wise, and I saw what was going to happen.

Oh, on a side note, I foresee a deep period of turmoil, and then a gradual recovery before the events above will pass. Only if America listens to what I say can it avoid the deep period of turmoil and slow recovery. But America isn't listening, and so I predict this, and when it happens, you will know that I am all wise and all seeing.

[tinbox]

It's true Krugman has been very good writing about the Bush administration. But he has a blind spot when it comes to his pal Bernanke. Nobody's perfect. Krugman was wrong about the effect of speculation on oil prices and no, the fundamentals did not change both up and down significantly. That doesn't make Dr. K a bad guy; nobody can predict markets very well.

The thing is, Krugman needs to accept that he can't predict markets-oil, stocks, whatever. Proposals need to be evaluated on their fundamental merits-not on whether they will prop up the markets. Why write a column that exhorts everyone to support a fantasy US version of the untried UK plan entirely based on the threat that

"You may think that things can’t get any worse — but they can, and if nothing is done in the next few days, they will"?

Why not tell us how the plan will be effective, how much it will cost, and why it is as fair as possible?

[Joe]

BJ Feng, Tinbox

Non sequitur, besides the point, facile, irrelevant, wrong.

Most or several apply.