A key point of their arguments that seem to be missed by many comments here is that Krugman, correctly, is not advocating nationalisation of banks that have not become insolvent, which is still the vast majority of banks, and the FDIC already nationalises and liquidates insolvent banks, and has already done so since the crisis began, so new policy in the US is not needed. He is just advocating not subsidizing banks any more. (I don't know enough about Britain's experience, but are most banks actually insolvent now in Britain? Buiter's piece makes one think they must be.) But neither of them have provided any explicit argument that nationalising banks will end the recession sooner, which is the only thing policymakers should be concerned with right now.
None of this is inevitable. Loosening lending will go a long way towards fixing it, and since private banks would rather waste cash on end-of-the-world bonus payments than lend it sensibly, government intervention is the only rational option.
Looseninig lending would go a long way toward helping that, but it is not a sufficient, or even necessary, condition any longer. Also, except for economists, political authorities of all stripes are calling for more conservative lending, as well as most people commenting here. That means high capital ratios like we have now, and high lending criteria even under government management. Only a re-establishment of markets for money and credit through increasing confidence in future income streams can solve the crisis at this late stage.
During boom times of irrational exuberance bad companies are funded because risk is underestimated.
During recessions of irrational pessimism and paranoia, good companies aren't funded because risk is overestimated.
Neither is optimal.
These boom/bust cycles are a kind of social illness - an economic plague which reappears cyclically.
Rather than trying to recreate traditional forms of banking, which at best are only barely stable and are likely to react to the present situation by being excessively conservative, what's needed is a distributed organic economy in which credit isn't monopolised and parasitic speculation is illegal.
Although started due to a banking crisis, the current recession is now continuing because of a massive decrease in aggregate demand, not because banks are having trouble lending, so no solution to banking, even if it is indeed still broken, which I doubt, will help us get out of the worldwide recession any sooner. (Another way to think about this is that if housing prices suddenly went up, the banking crisis would also be over.)
I agree with your diagnosis. However, it's not actually necessary to address the cause to solve the current problem.
There's more trillions gone than there is production in the world, it was part of our great GDP, but it still is a debt to someone.
There's no emollient left to make a bubble with. But note, the USians just took delivery of a new aircraft carrier on 10 Jan ($6.2 billion), they've another in production (only $5.1 billion) and dumped nearly $400 million onto Northrop to start designs on the next one. So things must not be really all that bad. Why do we need a banking system when we has gots the aircraft carriers. Your Industry New Never underestimate their intelligence, always underestimate their knowledge.
Frank Delaney ~ Ireland
