has come out in full force against the Geithner bank bailout plan, or as Nobel prize winner in economics, Joseph E. Stiglitz, calls it - "Ersatz Capitalism"; and I would add that it is also a pillaging of the national wealth for the benefit of the plutocrats.
The arguments of Paul Krugman and Stiglitz are augmented by the writings other economists like James K. Galbraith, Robert Reich, et al.
Below the fold, we will take a look at what these erudite economists have said.
Today, 2009 April 1, in the New York Times Joseph E. Stiglitz write:
The main problem is not a lack of liquidity. If it were, then a far simpler program would work: just provide the funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced.
Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time. Joseph E. Stiglitz, NY Times Op Ed, "Obama's Ersatz Capitalism"
Previously, Paul Krugman wrote in the New York Times:
But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.
The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that. Paul Krugman, New York Times article, "The Market Mystique"
And James K. Galbraith wrote in the Washington Monthly:
Geithner’s banking plan would prolong the state of denial. It involves government guarantees of the bad assets, keeping current management in place and attempting to attract new private capital. (Conversion of preferred shares to equity, which may happen with Citigroup, conveys no powers that the government, as regulator, does not already have.) The idea is that one can fix the banks from the top down, by reestablishing markets for their bad securities. If the idea seems familiar, it is: Henry Paulson also pressed for this, to the point of winning congressional approval. But then he abandoned the idea. Why? He learned it could not work.
Paulson faced two insuperable problems. One was quantity: there were too many bad assets. The project of buying them back could be likened to "filling the Pacific Ocean with basketballs," as one observer said to me at the time. (When I tried to find out where the original request for $700 billion in the Troubled Asset Relief Program came from, a senior Senate aide replied, "Well, it’s a number between five hundred billion and one trillion.")
The other problem was price. The only price at which the assets could be disposed of, protecting the taxpayer, was of course the market price. In the collapse of the market for mortgage-backed securities and their associated credit default swaps, this price was too low to save the banks. But any higher price would have amounted to a gift of public funds, justifiable only if there was a good chance that the assets might recover value when "normal" conditions return. James K. Galbraith, Washington Monthly article, "No Return to Normal: Why the economic crisis, and its solution, are bigger than you think"
Also, Robert Reich has written about "Lemon Socialism":
America has embraced Lemon Socialism.
The federal government -- that is, you and I and every other taxpayer -- has taken ownership of giant home mortgagors Fannie and Freddie, which are by now basket cases. We've also put hundreds of millions into Wall Street banks, which are still flowing red ink and seem everyday to be in worse shape. We've bailed out the giant insurer AIG, which is failing. We've given GM and Chrysler the first installments of what are likely to turn into big bailouts. It's hard to find anyone who will place a big bet on the future of these two. Robert Reich, Robert Reich's Blog, "How America Embraced Lemon Socialism"
It's called Lemon Socialism. Taxpayers support the lemons. Capitalism is reserved for the winners. Robert Reich, Robert Reich's Blog, "How America Embraced Lemon Socialism"
Again, we provide taxpayer money to support the same laissez faire, unregulated financial system that has failed us for the last 30 years.
And again, I paraphrase the quotation on insanity; it is repeating the same actions while expecting a different result.
I think it is time to change the financial system.