In a comment to my post channeling John Hempton’s idea that the Treasury’s new asset purchase plan could be a step along the path to a better-informed selective nationalization of banks, tc125231 writes:
Please explain why saying nationalization without this expensive subsidy of a few entities consitutes a “dagger at the heart of capitalism” constitutes a logically transparent refutation of Krugman’s call to nationalize banks now.
As far as I can tell, Hempton’s post is an apparently logical rationalization of an emotionally held position. This is certainly his right, but rationalizations are a dime a dozenfor almost anything.
As an aside, did Hempton predict this mess? Krugman did a pretty good job of predicting it. This should buy his thinkin g at least a a fair hearing, which, frankly, you have not provided.
Is it because you share an emotianal bias suimilar to Hempton’s?
I don’t think it’s really my job to provide Paul Krugman a fair hearing in my blog. He’s already got a more than adequate platform for doing that. It does seems like part of my job here ought to be exposing readers to ideas that aren’t already being expounded by the most prominent economic commenter of our day. Hence my post.
As for Krugman “predicting this,” I think that’s going a bit far. He’s been gloomy about the economy for a few years, but so have I and a lot of other people. I’m not aware that he forecast the particulars of this banking crisis in any sort of detail. A year ago, in fact, I was tentatively pushing the idea of a Swedish-style bank bailout in the U.S. and Krugman was worried that it would cost too much. As for Hempton, he only started blogging last May, so I don’t think he can make any claim to having been super-prescient—at least in public—about the crisis. Although I was just looking through his May 2008 posts and this one about impending doom at Royal Bank of Scotland sure turned out to be right. Hempton is a part-time money manager, part-time lifeguard (a lifestyle enabled by a previous career as a full-time money manager), and former Treasury official in New Zealand and Australia whose musings over the past year I have found to be entertaining and enlightening. I’m sure he’s wrong about lots of things, as most of us are. But he’s worth reading.
The line about the “dagger at the heart of capitalism” is purpler than what I would have used, but what Hempton is getting at is that if you expropriate investors’ holdings without following a clear, transparent process, you risk scaring away future investors for years and years. The clearest case of this in the past year was at Washington Mutual, where the FDIC seized the bank and largely wiped out its unsecured creditors even though WaMu was not obviously insolvent. Hempton wrote a long screed about what a disaster this was, because the “capricious” nature of the seizure made it impossible for creditors at other banks to know whether they’d be protected or not. His point is not so much an emotional one as a practical one: If we’re going to nationalize some big banks, it’s important that we at least try to follow a clear process for determining who gets nationalized and how different stakeholders are treated. Right now, all the big banks are healthy according to the standard capital adequacy measures that regulators use. We know that’s not right, but it would be useful to have a straightforward means of showing that it’s wrong. The Treasury’s planned “stress tests” could be part of that, and so could a process to set market prices for currently untradable toxic assets.
Whether it’s worth an “expensive subsidy of a few entities” to do this is of course debatable, and it’s entirely possible that Hempton and I are guilty of wishful thinking about Treasury’s intentions. But it’s also possible that Krugman is guilty of whatever the opposite of wishful thinking is. And I guess that what set me off about tc125231′s comment, and caused me to ramble on and on here, is the omniscience it seems to attribute to Krugman. It’s not just tc125231: Krugman’s critique of the Geithner plan got huge amounts of uncritical play in the media today. He’s getting to be one of those people whose every statement is treated as oracular. Which I tend to take as a dangerous sign.
Krugman is a great economist and a great writer (the latter is in evidence more in his blog and his pre-NYT writings than in his column). He’s also a guy with tons of opinions, some of which are backed up by economic theory and many of which aren’t. He has some “emotional biases,” as do we all. And every so often, he’s going to be dead wrong.
Update: A commenter to the Eric Rauchway blog post I linked to (yes, this Internet thing can get very circular) observes re Krugman and this post: “Where his critics used to call him a lefty extremist, now the rap on him is he’s not omniscient.” Next up: Paul Krugman cannot bend spoons with his mind!
I think only righty extremists ever called Krugman a lefty extremist. But he did pegged a lot as shrill. He was shrill. Still is, some of the time. And one has to say: Shrill has worked out pretty well for him.
Update 2: Omigod, he is omniscient!