...but I am concerned that Paul Krugman is at least partly right here:...now we have a bank crisis. Is it the result of fundamentally bad investment, or is it because of a self-fulfilling panic?
If you think it’s just a panic, then the government can pull a magic trick: by stepping in to buy the assets banks are selling, it can make banks look solvent again, and end the run. Yippee! And sometimes that really does work.
But if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money. To keep the banks operating, you need to provide a real backstop — you need to guarantee their debts, and seize ownership of those banks that don’t have enough assets to cover their debts; that’s the Swedish solution, it’s what we eventually did with our own S&Ls.
Now, early on in this crisis, it was possible to argue that it was mainly a panic. But at this point, that’s an indefensible position. Banks and other highly leveraged institutions collectively made a huge bet that the normal rules for house prices and sustainable levels of consumer debt no longer applied; they were wrong. Time for a Swedish solution.
But Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets...
Actually, I would pose the question even more broadly than Paul Krugman does, and ask whether our entire economic model in this country is sustainable or not. If the model - extravagant levels of consumption, most of which goes not for true 'needs' but for marketing-fueled 'wants'; far too little private or public investment in human capital (education) or physical infrastructure (a national, "smart," power grid, for example); little or no savings (or even "dissavings") as a society; heavy borrowing from overseas, including our not-necessarily-friendly banker in China, to finance our deficit/debt spending spree; an assumption of cheap, never-ending resources that is no longer the case (if it ever was); subsidization of a sprawl model which depends heavily on cheap, subsidized (implicitly and explicitly) energy, land, and other resources; too few checks and balances on corporations due in part to weakened government and labor unions, in part to globalization; a for-profit health care system that ties coverage to the employer, that wastes huge amounts of money, that focuses far too little on PREVENTING diseases and far too much on TREATING them once they're already bad; etc. - is at root NOT sustainable, then we need a fundamental paradigm shift. In turn, that implies a period - probably a fairly long one - of painful adjustment as we transform our economy. It also implies a set of policy choices in which government tries to cushion the pain to an extent, mainly for the most vulnerable Americans (elderly, young, poor), but which overall focuses more on speeding the transition from the current, flawed model.
Thus, the debate with the "stimulus" plan between those (mainly Republicans) who wanted to give consumers a metaphorical adrenaline shot and those (like Barack Obama) who wanted to focus on addressing the underlying root causes (energy, health care, education, infrastructure) that are distorting and harming our economy. If you're in the former, mainly Republican, camp, you probably believe that the current economic model IS sustainable and that the current situation we find ourselves in is mainly a "panic attack" (as Paul Kruman puts it). You might also believe that we find ourselves in a fairly serious but fundamentally "normal" recession (e.g., part of the "business cycle"). If so, you probably think the government has a limited role to play, mainly focused on "ending the run on the banks" and helping to get money flowing again. That would be a classic conservative point of view, and I believe an incorrect one.
My own view is closer to Krugman's, that the system is fundamentally unsustainable and in need of a major overhaul. That's why I would have put 100% of the "stimulus" money into investment, and as much of THAT as possible into the TYPE of investments - smart people, smart power grids, etc. - that transforms our economy from the 20th (or even 19th) centuries towards a strong, sustainable 21st century paradigm. In the end, we got a mixture of both - adrenaline shots and attempts to fix the underlying root causes. Of course, even if we focus on fixing the underlying root causes, we still need to diagnose them correctly and take the proper corrective measures, just as a doctor needs to do with a sick patient. If not, even the best intentions can lead to the patient getting even sicker, suffering even worse, and dying even a more horrible death in the end.
On that cheery note, have a great Sunday! :)
P.S. Speaking of "unsustainable," see the Washington Post article on cul-de-sacs.
