Krugman: Obama is Wrong

Newsweek devotes its cover this week to the punditry of Paul Krugman, the most prominent leftist critic of President Obama’s financial plan.

In his twice-a-week column and his blog, Conscience of a Liberal, he criticizes the Obamaites for trying to prop up a financial system that he regards as essentially a dead man walking. In conversation, he portrays Treasury Secretary Tim Geithner and other top officials as, in effect, tools of Wall Street (a ridiculous charge, say Geithner defenders). These men and women have “no venality,” Krugman hastened to say in an interview with NEWSWEEK. But they are suffering from “osmosis,” from simply spending too much time around investment bankers and the like. In his Times column the day Geithner announced the details of the administration’s bank-rescue plan, Krugman described his “despair” that Obama “has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing. It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street.”

If you are of the establishment persuasion (and I am), reading Krugman makes you uneasy. You hope he’s wrong, and you sense he’s being a little harsh (especially about Geithner), but you have a creeping feeling that he knows something that others cannot, or will not, see. By definition, establishments believe in propping up the existing order. Members of the ruling class have a vested interest in keeping things pretty much the way they are. Safeguarding the status quo, protecting traditional institutions, can be healthy and useful, stabilizing and reassuring. But sometimes, beneath the pleasant murmur and tinkle of cocktails, the old guard cannot hear the sound of ice cracking. The in crowd of any age can be deceived by self-confidence, as Liaquat Ahamed has shown in “Lords of Finance,” his new book about the folly of central bankers before the Great Depression, and David Halberstam revealed in his Vietnam War classic, “The Best and the Brightest.” Krugman may be exaggerating the decay of the financial system or the devotion of Obama’s team to preserving it. But what if he’s right, or part right? What if President Obama is squandering his only chance to step in and nationalize—well, maybe not nationalize, that loaded word—but restructure the banks before they collapse altogether?

Tim F points to a rather prescient January 2002 Krugman column:

One of the great cliches of the last few months was that Sept. 11 changed everything. I never believed that. An event changes everything only if it changes the way you see yourself. And the terrorist attack couldn’t do that, because we were victims rather than perpetrators. Sept. 11 told us a lot about Wahhabism, but not much about Americanism.

The Enron scandal, on the other hand, clearly was about us. It told us things about ourselves that we probably should have known, but had managed not to see. I predict that in the years ahead Enron, not Sept. 11, will come to be seen as the greater turning point in U.S. society.

[…]

So now what? At the moment, demands for reform are scattershot and confused. Some people want new rules for 401(k) plans; some want new rules for accountants; some want campaign finance reform; some want a return to regulation. These seem like unrelated agendas, but I think they have a common theme: They’re all about ending an era of laxity, in which nobody asked hard questions as long as everything looked O.K. That era is now over.

While I’ve never been a huge fan of Krugman’s non-economic punditry, he knows a little something about economics.  I’m not so sure his prescription for the cure is right, but his diagnosis of the disease at least merits attention.

As an aside, the Newsweek piece, by Evan Thomas, is worth a read for what it says about the punditry game, too, especially the cozy relationship its most esteemed practitioners have had with policymakers.

FILED UNDER: Economics and Business, Media, , , , , ,
James Joyner
About James Joyner
James Joyner is a Security Studies professor at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Zelsdorf Ragshaft III says:

    Alinski states to impose socialism on a population.  One must find the levers of the economic engine.  Then break those levers.  Obama has zero experience as an executive (not counting time with the educational fund he chaired but accomplished little in the way of educational improvement) so what could one expect him to do.  His resume was so thin he could not have been hired by any private corporation for even a junior executive position.  He was a rabble rouser and a teacher, for God sake.  Why is anyone shocked at what he is doing?




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  2. Drew says:

    In an article from the Financial Times posted about a month ago by OTB contributor Dave Schuler (at his site) the observation was made that Geithner cut his teeth as a finance man while in Japan during their protracted “L” recession.

    Imagine what he observed. The primary policy elements the Japanese used were serial semi-complete bailouts of banks and operating companies…..and repeated spending stimulus packages for infrastructure and the like. Sound familiar??

    Also, in a recent University of Chicago economics seminar one of the panelists, in trying to interpret the policy prescriptions of the Obama administration, observed “they must think we are Japan.”

    Perhaps the only “motive” here isn’t perpetuation of the ruling class, but that Geithner was trained with a hammer, so he’s convinced he’s looking at a nail.

    In any event, can anyone tell me how the general view that the major banks were insolvent just a few weeks has magically been rebuked?




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  3. Bithead says:

    Odd thing; Kurgman’s comments are of the same tone as that of The Economist. The Chours is already getting warmed up, apparently… and the odd thing about it is that the ostensibly liberal writers are complaining as loudly as the conservatives have been, all along.




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  4. odograph says:

    So, we can call Obama a centrist again?

    (FWIW, I do find his policies pretty conventional. That they go too far for “tea partiers” is not surprising. That they do not go far enough for Krugman only slightly so. We can only hope that splitting the difference is an effective policy.)

    Note: Bit, if Obama fails for the reasons Krugman outlines, you aren’t going to be happy.




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  5. Drew says:

    Centrist would be the last adjective I would use.




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  6. Derrick says:

    Obama has zero experience as an executive (not counting time with the educational fund he chaired but accomplished little in the way of educational improvement) so what could one expect him to do.

    Yeah, because mucho executive experience helped out W so well.




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  7. Yeah, because mucho executive experience helped out W so well.

    We get it, you didn’t like W’s policies. But do you have any substantive criticsm of him as an executive or is this just another inane polemic? Or are you unable to distinguish between what you regard as bad decisions and an inability to implement any decisions, good or bad?




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  8. FWIW, I do find his policies pretty conventional.

    Centrist, conventional, we got a whole ‘nother vocaulary being developed here.




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  9. Vocabulary. Sorry.




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  10. Bithead says:

    So it would seem. Earlier this evening I happened across a link on the National Review site, with a very old document contained in it. The date was November 19 of 1955. I will commend it to your reading.

    In one of the points in that link, “bipartisanship” , “middle of the road”, and “progressivism ” were labeled as the most alarming single danger to the American political system.

    We are in trouble as the nation today to the exact agreed to which we’ve ignored that warning.




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  11. Bithead says:

    Recalb needed on the voice to text program. Sorry.




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  12. PD Shaw says:

    Here’s the problem:

    his “despair” that Obama “has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.

    Some of us believe bankers know more about what they’re doing than government officials. Perhaps Obama has reason to agree.




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  13. Dantheman says:

    charles austin,

    “But do you have any substantive criticsm of him as an executive or is this just another inane polemic?”

    Criticisms of W’s executive decision making skills (apart from policies):

    1. hiring of people who had no shred of qualification for the posts they were filling (Heckuva job Brownie and Harriet Miers are the most obvious examples, but many others).

    2. reliance on biased sources of information over getting the full picture (such as stovepiping of intelligence on Iraq).

    3. failure to change policies as events change (such as the tax cut originally designed for rapidly growing economy became one to bring country out of recession).




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  14. That’s better.

    1. At least Bush did actuially hire people to fill the jobs, even if they didn’t always do as well as anyone would have liked. Last I heard, 17 of 18 of the top Treasury positions are still unfilled. If Bush sucked, how would you rate Obama on hires? Remember Gregg? Richardson? I don’t know, another seven or eight others who have had their nominations withdrawn, mostly because they didn’t pay their taxes? It would seem that this should be a higher priority for a real executive, but maybe that’s just me. but what do I know, I just run a small company. FWIW, harriet Miers was apparently successful for the job she held as the President’s legal advisor. I believe you are referencing her nomination to be a Justice for the Supreme Court, which was withdrawn rather quickly and unceremoniously. Remember this for later.

    2. All sources of information are biased. It is important for everyone to realize that. Good executives are accustomed to taking all infromationas data points. Everyone has to develop their own sense of what and who can be trusted. My understanding is that Bush relied on the same intel sources that Bill Clinton, Al Gore, Hans Blix, etc. all relied on concerning Iraq. Again, this sounds more like you didn’t like his conclusions or policies than a substantive criticism.

    3. You mean, like the Surge? Or replacing Rumsfeld? Or withdrawing Miers nomination? Nobody bats 1.000, but to say he never changed if demonstrably false.

    Still, your repsonse was light years ahed of Derrick’s.




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  15. sam says:

    Isn’t this the nut in the Newsweek quote:

    But what if [Krugman’s] right, or part right? What if President Obama is squandering his only chance to step in and nationalize—well, maybe not nationalize, that loaded word—but restructure the banks before they collapse altogether?

    Is the thread bitch that Obama should nationalize restructure the banks, and he isn’t; that we should let them collapse and Obama’s trying to prevent that (and therefore, he’s incompetent, inexperienced, whatever for trying to preserve them)? Is that the complaint?




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  16. G.A.Phillips says:

    if Obama fails

    LOL, If?




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  17. odograph says:

    I think you all don’t like “centrist” more for how it feels to you, than the fact that Obama’s policies have been between the fringes. There were people who wanted zero stimulus, and there were people who put the “needed” figure at 3 trillion.

    On the bailout side the numbers have been large, and disconcerting to us all, but sadly …

    By the end of December, global banks had written off about $1,000bn (€752bn, £699bn) in bad assets, approximately half of that in the US. Since the onset of the crisis, the writedown of assets in the US has exceeded the provision of new capital. Even the Geithner public-private partnership plan is not going to reverse the expected deterioration of capital ratios at sufficient speed and on sufficient scale. In Europe, new capital exceeded writedowns by a small amount, but on the recent projections I have seen, this trend could reverse sharply this year, unless governments introduce new recapitalisation plans.

    That’s from a scary piece at the Financial Times. I think the important phrase is “the writedown of assets in the US has exceeded the provision of new capital.”

    I can’t help but feel that you are chewing the carpet a bit about “Obama” without really engaging what constitutes the middle course these days.




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  18. Dantheman says:

    Charles,

    1. I am also not sure if filling positions slowly but well is worse than quickly but poorly. Both Gregg and Richardson were qualified to be Commerce Sec. And yes, I was referring to Miers for the SC — I have my doubts on her performance within the White House, but that would certainly go to specific politics.

    2. I agree with what you said, but I strongly think Bush did not, preferring one source of info over all others. That reliance on a single source certainly was not shared by Hans Blix, who insisted on actual inspections of purported weapons sites (and whose failure to find anything in weeks of searching pushed me from being pro to anti Iraq War). And whether or not Clinton or Gore relied on that source, they did not find it persuasive enough to launch a war based on it.

    3. Firing Rumsfeld and having Miers withdraw were not Bush’s decisions so much as caving to overwhelming political pressure. We can argue whether the Surge was a significant change of policy or better directed tactics in support of the same policy, but that is for another day.

    And please note that Derrick has still not responded to your comment, so _any_ response by me is light years ahead of his. You are criticizing him for not giving a detailed set of criticisms in a one sentence snark.




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  19. odograph says:

    More reading, a very good summary of the new Animal Spirits book as it relates to the credit crisis.

    Recommended to anyone who wishes to consider “confidence” and its role in the business cycle.

    (I’m still working on the book itself, off and on. It’s a little dry and textbook-like.)




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  20. Steve Verdon says:

    In his Times column the day Geithner announced the details of the administration’s bank-rescue plan, Krugman described his “despair” that Obama “has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing. It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street.”

    I believe I noted something similar. That part of our problem is that people move between Wall Street and government with considerable ease. You go into an Administartion as a mid level appointee, come out and go to Wall Street. A decade or so later you go back into government as a higher level appointee, then back out to Wall Street. Rinse and repeat. This is part of the problem, IMO, and it appears that Krugman shares this view (although he and I probably arrive at different policy conclusions).




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