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  1. Just because nationalisation might be a good policy given Britain's constraints does not mean that it is a good policy for America whose immense political assets provide it with options that other countries just don't have -- namely the ability to redistribute wealth worldwide for its own benefit.

  2. 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.)

Krugman and Buiter, early proponents of the more aggressive form of TARP that led to injecting state funds directly into the capital stocks of banks (and is now sitting in vaults to maintain high capital ratios), are still operating as if fixing banks will somehow fix the recession, when only massive public works spending can now do that.  The reason? No market exists for capital -- markets are illiquid, and they will remain illiquid until aggregate demand for goods and services increases -- the classic Keynesian scenario.  So it is foolish to analyze banking balance sheets as if markets for their products were functioning, as both seem to do in their discussions of how to price illiquid assets. (No price is needed: government just needs to settle on negotiated payment that seems fairest to all parties just like it does all the time in property condemnation proceedings for illiquid real estate -- this isn't new stuff here.) In financial economics, Nobel laureate Krugman is somewhat out of his specialty, so he's as smart as any other economist on this topic (okay, maybe a little bit smarter), but Buiter is one of the world's leading financial gurus and has been saying the opposite until this last article, so his misunderstanding smacks of outright panic, especially when his reasons are so sparse. (Which again leads to the question of why, if the problem is American in origin, is Europe so affected by it?  Sounds like classic political dependency to me.)

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.  

by santiago on Thu Jan 22nd, 2009 at 10:45:48 AM EST
The maasive increase in aggregate demand is only happening because companies don't have the confidence or the credit to invest, and are instead cutting back on costs - which means trimming workforces, which in turn means that employees are paying down debts and saving rather than spending.

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.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jan 22nd, 2009 at 12:50:20 PM EST
[ Parent ]
increase decrease
by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jan 22nd, 2009 at 12:50:53 PM EST
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That's how it started -- lack of counterparty confidence to lend, which is why Tarp was a good idea at the time.  But we're way beyond that now. Personal savings has skyrocketed everywhere, which means that individuals all over the world are in fear of losing their jobs, and many of them will, so they rationally reduce spending.  Same for businesses of all kinds except repo men. Fixing banks won't help until people can be assured of income stability.  

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.

by santiago on Thu Jan 22nd, 2009 at 02:28:27 PM EST
[ Parent ]
The systemic problem is that markets are inherently manic depressive and incapable of rationally assessing future risk.

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.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jan 22nd, 2009 at 06:32:26 PM EST
[ Parent ]
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.)
True, and very artfully phrased.  But what caused the banking crisis?  It would appear that it was caused by a massive and unsustainable increase in real estate valuation that was enabled by a loose money policy combined with rigorous "see no evil" regulation at the Fed and at other regulatory agencies, especially since 2002. (Another way to think about this is that, were we only able to get the bubble to "un-pop" all would again be well.)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 22nd, 2009 at 01:37:17 PM EST
[ Parent ]
I agree with your diagnosis.  However, it's not actually necessary to address the cause to solve the current problem.  To illustrate with another example, the cause of the disastrous invasion of Iraq was that George Bush happened to be president.  But now that he is no longer president does not mean the problem is solved. Only eventual withdrawal of forces and a stable Iraqi political environment will solve the problems that resulted from the invasion.  Same goes for the worldwide recession today.  Banks may have caused the problem, but that's water under the bridge at this point because banks are not the ones precluding a solution to the problem -- individuals too fearful to spend are.
by santiago on Thu Jan 22nd, 2009 at 02:34:16 PM EST
[ Parent ]
actions have irreversible conseuences.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Jan 22nd, 2009 at 05:06:16 PM EST
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I agree with your diagnosis.  However, it's not actually necessary to address the cause to solve the current problem.
True again.  But addressing the cause is important if we are to at least delay by 50 years repeating the actions that brought us to the current problem.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 22nd, 2009 at 05:49:22 PM EST
[ Parent ]
Agreed.
by santiago on Thu Jan 22nd, 2009 at 05:59:07 PM EST
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Problem is, they counted the rentals for the smoke machine and all the mirrors as part of the GDP, then stiffed the company who rented it and counted the legal fees as part of GDP. And when the company went out of business, they counted bankruptcy court payrolls as part of GDP. And when the next company bought their assets, they found that the smoke machine was sent back to China, and the mirrors were all too broken...but they found ways to count the shipping costs and the insurance auditors invoice as GDP.

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

by siegestate (siegestate or beyondwarispeace.com) on Thu Jan 22nd, 2009 at 09:01:38 PM EST
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