Monday, October 13, 2008

All Hail Paul Krugman (Treasury Secretary Elect?)!

(H/T and I'm witless in appreciation and boundless homage (for this picture and your presence) to the effulgent Dr. Driftglass: Nobel Prize Winner for Photoshop.)

Princeton University scholar and New York Times columnist, Professor Paul Krugman won the Nobel prize in economics Monday for his analysis of how economies of scale can affect trade patterns and the location of economic activity.
If Paul Krugman had been selected by the President of the United States as Secretary of the Treasury at any time from 2000 - 2008, I would bet a lot of the money, which I don't have anymore, that the U.S. (and thusly, the rest of the world) would not have experienced the current market blowout, and instead would be on a path to economic riches and beneficence in the world of the 21st century instead of "bound for inglory" as we are currently. His courage and "prescient insights into the systematic destruction of the U.S. economy by the men who have been in charge for the last eight years" are to be applauded and (cross my fingers) acted upon in the upcoming election by the multitudes who would have benefitted economically from them. My listserv members will vouch that I have emailed Professor Krugman's articles to them almost religiously for years as I believed he was among the wisest and most eloquent writer/educators being published today on the economic consequences of what has been inflicted on the unaware American taxpayers by (mainly) mindless touters of the phrases "free markets," "libertarian economics" and "deregulation." Now, where's the Pulitzer for the best weekly economics reporting ever written? He writes the most lucid and intelligent/intelligible prose you will find anywhere in the media today - honest, no-holds-barred opinions in a largely self-serving world. And won't this recognition be a constant irritant to his critics? I'll bet Bill O'Lielly is readying an attack right now on someone so superior to himself (in every positive aspect) that he will have to gag every time he mentions his name! As one writer in The Times' Comments section said, "Now, if only we could get (him) named Treasury Secretary, we’d have a sort of Krugman perfect storm!" Another commenter stated:
"I have read your column for years and have always admired the courage you showed in being one of the lone clarion voices pointing up the moral and economic bankruptcy of the Bush Administration. You were sounding the housing alarm long before the almost incredible corruption of the mortgage mess brought down our entire banking system; you exposed the shadow banking system to the American people. I recall a radio interview you did with NPR. You said that there were times that this mission sometimes became a heavy burden, but that you felt the column to be a moral obligation to the country and to your duty as an educator. I am so happy to see a man of extraordinary intelligence, honor and courage receive this prestigious award. You bring honor to Princeton, The Times and to us, the American people. Thank you, Mr. Krugman. — Patricia O’Hagen"
Also in the Comments section we find this pithy ditty:
Ain’t it time as all must surmise, For the Deus ex, out of the Skies, To do a good deed And our pleasures feed, By giving Paul the Nobel Prize? Larry Eisenberg
I've said it before and I'll say it again: Krugman for President! After "perfect storm" Obama. From the article:

He has come out forcefully against John McCain during the economic meltdown, saying the Republican candidate is "more frightening now than he was a few weeks ago" and earlier that the GOP has become "the party of stupid." "Krugman is not only a scientist but also an opinion maker," economics prize committee member Tore Ellingsen said. He added that Krugman's analyses tend to back free trade and his research gives no "support for protectionism." The 55-year-old American economist was the lone winner of the 10 million kronor ($1.4 million) award and the latest in a string of American researchers to be honored. It was only the second time since 2000 that a single laureate won the prize, which is typically shared by two or three researchers. The Royal Swedish Academy of Sciences praised Krugman for formulating a new theory to answer questions about free trade and said his theory has inspired an enormous field of research. "What are the effects of free trade and globalization? What are the driving forces behind worldwide urbanization? Paul Krugman has formulated a new theory to answer these questions," the academy said in its citation. "He has thereby integrated the previously disparate research fields of international trade and economic geography," it said. . . . Besides his work as an economist at Princeton University in New Jersey, where he has been since 2000, Krugman has written for publications including Foreign Affairs, the Harvard Business Review and Scientific American. Commenting on the global economic meltdown, Krugman told a news conference in Stockholm by telephone from the United States that some of his research was linked to currency crises and related issues. "This is terrifying," he said, comparing it to the financial crisis that gripped Asia in the 1990s. "I had never thought that in my lifetime I would see anything that resembles the Great Depression, but this in fact does." . . . In contrast to his treatment of U.S. financial officials, Krugman has praised leaders in Britain for their response to the global financial crisis.

In an Oct. 13 column in the New York Times, Krugman wrote that British Prime Minister Gordon Brown and Chancellor Alistair Darling "defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up." Whereas U.S. Treasury Secretary Henry Paulson rejected a "sort of temporary part-nationalization" involving governments giving financial institutions more money in return for a share of ownership, the British government "went straight to the heart of the problem ... with stunning speed." Krugman said the major European economies have "in effect declared themselves ready to follow Britain's lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts." "And whaddya know," Krugman continued, "Mr. Paulson - after arguably wasting several precious weeks - has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities."

Today's essay on the latest actions from Gordon Brown's British government typify the graceful economic explication for which Professor Krugman is known:
This is an unexpected turn of events. The British government is, after all, very much a junior partner when it comes to world economic affairs. It’s true that London is one of the world’s great financial centers, but the British economy is far smaller than the U.S. economy, and the Bank of England doesn’t have anything like the influence either of the Federal Reserve or of the European Central Bank. So you don’t expect to see Britain playing a leadership role. But the Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn’t been matched by any other Western government, least of all our own. What is the nature of the crisis? The details can be insanely complex, but 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; troubled financial institutions have tried to meet their debts and increase their capital by selling assets, but this has driven asset prices down, reducing their capital even further. 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, which is often referred to as an “equity injection,” is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman. But when Henry Paulson, the U.S. Treasury secretary, 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 — and moved to address it 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 on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts. 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 have to 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.
Oh yes, Mitsubishi today bought a 21-percent ($9 billion) stake in preferred shares of Morgan Stanley . . . after Morgan Stanley lost nearly 60 percent of its value last week amid speculation the deal would not close. I wish I thought things would be improving soon. Anyone optimistic? Suzan

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