politics

Krugman Says Obama's Plan Gets it Wrong

Paul Krugman
Paul Krugman
Fred R. Conrad, The New York Times

Economist Paul Krugman says the Obama administration's latest plan to deal with the banking crisis is almost sure to fail.

The Nobel Prize winner says the strategy rests on the assumption that the banks (even Bank of America and Citi) are essentially strong, and their higher-ups know what they're doing. The meat of the plan involves enticing private investors to buy-up so-called "toxic assets" from the banks, wiping them off the banks' balance sheets. The government will subsidize the private investors by loaning them money to purchase the assets.

For this plan to work, the market value of those assets will have to rise at some point. The Obama administration says it agrees with B of A and Citi that the toxic assets really aren't as worthless as the market currently thinks they are. Krugman is not so sure, and he says, if the plan falters, Obama may have spent all his political capital. That means if, down the road, he needs more cash to keep attacking the banking problem, Congress may not give it to him.

Krugman says the only way to solve the crisis is to nationalize the banks, cleanup the balance sheets, and sell the banks back to private investors once the ship is righted.