Evan Thomas’s Newsweek cover story on Paul Krugman is timely, and—as with everything Thomas does—elegantly executed. I especially liked this passage:
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.
But when the article tries to describe how exactly Krugman’s prescription for saving the financial system differs from the Obama administration’s, it gets muddled fast:
Krugman’s suggestion that the government could take over the banking system is deeply impractical, Obama aides say. Krugman points to the example of Sweden, which nationalized its banks in the 1990s. But Sweden is tiny. The United States, with 8,000 banks, has a vastly more complex financial system. What’s more, the federal government does not have anywhere near the manpower or resources to take over the banking system.
Sweden’s government took over exactly two banks, one of which was already partly owned by the government. Sweden doesn’t have a lot of banks, so this amounted to about a quarter of the assets of the banking system. But taking over a couple of the top-five U.S. banking companies would account for a big chunk of total system assets here. And that’s really what the discussion here is about: It’s what the government should do with Citi, maybe B of A, maybe a few mid-major banks. A wholesale government takeover of all 8,000 banks is not on anybody’s agenda.
Krugman, Simon Johnson and a lot of other people think the government should be moving a lot more quickly and decisively to take over the most troubled banks and clean up their balance sheets. The Treasury approach appears to be to do some work on the balance sheets—through efforts to modify mortgages and buy up toxic assets—and then figure out what to do with the most troubled banking companies. As I’ve written before, this is really a debate about tactics, not basic questions of finance and economics. The debate involving basic questions of finance and economics is the one that’s just getting started about how we regulate the financial sector.
They’re not totally unconnected, of course: Johnson has an article in the May Atlantic arguing that a recalcitrant financial oligarchy is standing in the way of solutions on both fronts. But I don’t get why we keep having this misleading back and forth on whether to nationalize the banks or not. I don’t get why the Obamanites keep using that we’re-not-Sweden line, and I don’t get why the Krugmanites are so unwilling to see any of the administration’s moves as laying the groundwork for possible future nationalizations.