{"id":453,"date":"2008-09-21T19:34:43","date_gmt":"2008-09-22T00:34:43","guid":{"rendered":"http:\/\/onthe8spot.com\/2008\/09\/21\/thinking-the-bailout-through-paul-krugman-op-ed-columnist-new-york-times-blog\/"},"modified":"2008-09-21T19:34:43","modified_gmt":"2008-09-22T00:34:43","slug":"thinking-the-bailout-through-paul-krugman-op-ed-columnist-new-york-times-blog","status":"publish","type":"post","link":"http:\/\/onthe8spot.com\/index.php\/2008\/09\/21\/thinking-the-bailout-through-paul-krugman-op-ed-columnist-new-york-times-blog\/","title":{"rendered":"Thinking the bailout through – Paul Krugman – Op-Ed Columnist – New York Times Blog"},"content":{"rendered":"

September 21, 2008, 11:12 am
\nThinking the bailout through
\nWhat is this bailout supposed to do? Will it actually serve the purpose? What should we be doing instead? Let\u2019s talk.
\nFirst, a capsule analysis of the crisis.
\n1. It all starts with the bursting of the housing bubble. This has led to sharply increased rates of default and foreclosure, which has led to large losses on mortgage-backed securities.
\n2. The losses in MBS, in turn, have left the financial system undercapitalized \u2014 doubly so, because levels of leverage that were previously considered acceptable are no longer OK.
\n3. The financial system, in its efforts to deleverage, is contracting credit, placing everyone who depends on credit under strain.
\n4. There\u2019s also, to some extent, a vicious circle of deleveraging: as financial firms try to contract their balance sheets, they drive down the prices of assets, further reducing capital and forcing more deleveraging.
\nSo where in this process does the Temporary Asset Relief Plan offer any, well, relief? The answer is that it possibly offers some respite in stage 4: the Treasury steps in to buy assets that the financial system is trying to sell, thereby hopefully mitigating the downward spiral of asset prices.
\nBut the more I think about this, the more skeptical I get about the extent to which it\u2019s a solution. Problems:
\n(a) Although the problem starts with mortgage-backed securities, the range of assets whose prices are being driven down by deleveraging is much broader than MBS. So this only cuts off, at most, part of the vicious circle.
\n(b) Anyway, the vicious circle aspect is only part of the larger problem, and arguably not the most important part. Even without panic asset selling, the financial system would be seriously undercapitalized, causing a credit crunch \u2014 and this plan does nothing to address that.
\nOr I should say, the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that\u2019s the real plan, Congress has every right to balk.
\nSo what should be done? Well, let\u2019s think about how, until Paulson hit the panic button, the private sector was supposed to work this out: financial firms were supposed to recapitalize, bringing in outside investors to bulk up their capital base. That is, the private sector was supposed to cut off the problem at stage 2.
\nIt now appears that isn\u2019t happening, and public intervention is needed. But in that case, shouldn\u2019t the public intervention also be at stage 2 \u2014 that is, shouldn\u2019t it take the form of public injections of capital, in return for a stake in the upside?
\nLet\u2019s not be railroaded into accepting an enormously expensive plan that doesn\u2019t seem to address the real problem.
\nThinking the bailout through – Paul Krugman – Op-Ed Columnist – New York Times Blog<\/a>.<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"

September 21, 2008, 11:12 am Thinking the bailout through What is this bailout supposed to do? Will it actually serve the purpose? What should we be doing instead? Let\u2019s talk. First, a capsule analysis of the crisis. 1. It all starts with the bursting of the housing bubble. This has led to sharply increased rates … <\/p>\n

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