Here's the money quote in Paul Krugman's NY Times column today:
...after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.
And right before an election too. Sound familiar?...
We need to tell our Democratic Representatives and Senators NOT to be fooled or let themselves be pushed around this time. They need to fight for the principles Barack Obama and other Democrats have enunciated. Economists like Krugman saw this credit crunch coming for years. Let's force Bush to sign, or veto at his and the Republicans' peril, a bill that helps ordinary Americans and that will actually WORK instead of one that lets all the hotshots on Wall Street keep their millions at taxpayer expense.
Krugman goes on to explain why Paulson's plan probably won't work:
I have a four-step view of the financial crisis:
- The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities...
- These financial losses have left many financial institutions with too little capital...
- Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.
- Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse This vicious circle is what some call the “paradox of deleveraging.”
The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?
Well, it might — might — break the vicious circle of deleveraging... [but] even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.
...unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense....
The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.
That’s what happened in the savings and loan crisis.... It’s also what happened with Fannie and Freddie. (And... that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)
But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out.... Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” ...an unacceptable proposal.
Over at Talking Points Memo, Josh Marshall notes that he cannot find a single economist or other policy person he respects who thinks Paulson's plan is a good idea and calls it "Moral hazard on steroids."
So we can let the folks who got us into this mess have their own "no strings attached" blank check plan that will reward all the wrong people and probably just kick the can down the road rather than really deal with the problem, or we can stand firm and insist this be done on our terms -- terms that will actually get to the root of the problem and help people who need and deserve the help.
I think that's a no brainer, but I thought not attacking a country that was no threat to us while we were already fighting in the one that harbored those behind 9/11 was a no brainer too, so what do I know?