On Krugman on the crisis

For those who don't understand the credit crisis, here's Krugman. I'd say this is essentially correct, and that if the US government gained $700 billion of equity in the firms that have been left holding shit paper, that would a/ ease the credit crisis and b/ be a reasonable thing for the government to do. It could of course sell its share back when the time is right, at a profit because let's face it, if Goldman Sachs can just write off the rubbish it's holding, its share price will climb.

This might sound a bit like nationalising the banks, but it's more like acquiring a "golden share" because I don't think Krugman suggests, nor would I, that the government should actually run any of these institutions.

It would actually be interesting to see how business ran themselves if the state was a significant shareholder. Is it a way of achieving oversight without regulation? Maybe it could be sold that way.

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See also Brad DeLong. This is really important. The draft bailout bill gives the new president's finance minister a free hand.

Do you want the man McCain chooses to have $700 billion to hand out as he chooses?

I know that some of the people who read this blog don't understand economics at all, and that's okay. Economics is mostly bullshit in a box, tied up with a pink bow. You just need to ask yourself, if someone I knew had a business and made a terrible mistake (or did something very wrong hoping not to get caught out), what would I rather do to "help": buy his mistake off him for ten thousand bucks so he can just carry on in business, or buy half his business off him for ten thousand bucks and just say "bin the mistake now you have the money to continue"?

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Another question that might occur is this: why is the government doing all this for the banks when it did nothing for the poor guys who were conned into taking out mortgages they couldn't pay and had their homes repossessed when the bubble burst? It's a good question.

And think about this. The reason no one can sell their "toxic" MBS assets is that mortgages are not being repaid. Ask yourself how much the value of the defaulted loans underlying the MBS is.

If it is less than $700 billion, maybe it would occur to you that the government could buy the mortgages, rather than the MBS. It could then put the mortgages on ultralow fixed interest rates, allowing the people who have them a/ not to default and b/ not to lose their homes.

It wouldn't fix the crisis but wtf. Who would you rather get $700 billion of public money? The banker who caused the fucking mess in the first place or the guy who is getting shafted by it?

Here, the excellent Ian Welsh explains how it could work. This helps the lenders by giving them capital for their shitty mortgages; helps the banks by allowing the MBS to be fairly valued, making them tradeable; and most importantly, helps the people. Of course, the right will hate it. When business gets money for nothing, or get bailed out when they fuck up, that's fine. When people get money for nothing, or get bailed out when they fuck up, that's socialism, and we can't have that, can we?

posted by Dr Zen @ 11:34 am