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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

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