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Krugman: Solution To The Financial Crisis Is Getting The Banks Sound Again

[media id=7659] From the Newshour with Jim Lehrer March 23, 2009. Paul Krugman is not impressed with the idea of buying these toxic assets. JEFFREY

From the Newshour with Jim Lehrer March 23, 2009. Paul Krugman is not impressed with the idea of buying these toxic assets.

JEFFREY BROWN: Well, Paul Krugman, you wrote critically of the plan this morning. Now you've heard Lawrence Summers. Are you persuaded?

PAUL KRUGMAN: No. You know, I wish Larry the best; I hope he's right. But this is a plan that treats a fairly minor symptom of the problem.

You know, that maybe some of these toxic assets -- I guess they're now toxic legacy assets, whatever -- are being under-priced in the market. And maybe there's a problem there.

But the fact of the matter is that the banks made a huge bet. They made a bet that the housing bubble was nonexistent, that, you know, historically unprecedented levels of consumer debt were not a problem. They lost that bet.

And this plan does almost nothing to rescue them from the consequences of that bad debt. So I'm kind of saddened. It's kind of a punt. They've decided to sort of not really take on the critical issue of fixing the banks and instead hope that a little bit of rearranging of the financial furniture will solve the problem.

JEFFREY BROWN: Well, you heard Larry Summers in our interview. He used the phrase "vicious cycles turn into virtuous circles," that this would get the banks lending again. So you just don't see that enough is done here?

PAUL KRUGMAN: It's a very poorly targeted instrument. What you have is banks that have taken huge losses. And those are real losses. They're not just because the markets aren't working so well in toxic paper.

And to get the markets, to get capital flowing, to get credit flowing to the real economy, you actually need to make the banks sound again. It would take a huge increase in these prices. It would take a tremendous -- basically, you'd have to convince people that all these bum mortgages are actually pretty good in order to make the banks secure enough to start, you know, a lot of new lending.

This is not going to do that. It's going to help a little bit, maybe. Certainly it's -- you know, basically the plan hands out gold-plated toasters to anybody who participates. It's a very sweet deal for the investors. And it's going to push up the prices, but a lot of the benefits will go to financial institutions that are actually not in any trouble. A fair bit of the benefits will go to people who are not in the financial industry at all.

Only a little bit of it is going to trickle to the really critically injured banks. So it's just not -- it's a plan that kind of mistakes the nature of the problem that we face.

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