Paul Krugman: Rearrange the deck chairs and hope the iceberg melts just keeps getting stronger.

[kpete]

Paul Krugman | New York Times Blog
February 24, 2009, 3:50 pm
Mysterious plans

I’m trying to be sympathetic to the various plans, or rumors of plans, for bank aid; but I keep not being able to understand either what the plans are, or why they’re supposed to work. And I don’t think it’s me.

So the latest is that we’re going to convert preferred stock held by the government to common stock, maybe. James Kwak has a good explanation of what that’s all about. And it’s not at all clear what is accomplished thereby.

At the top are a bank’s assets. Below are its obligations to various parties, with decreasing seniority from left to right. I’ve drawn it to embody a pessimistic assumption about the bank’s finances, because those are the cases we’re interested in: the bank’s assets aren’t enough to cover its debts. Nonetheless, the stock, both preferred and common, has a positive market value. Why? Because of the Geithner put: the bank is protected from collapse, keeping the creditors appeased, but stockholders will get the gains if somehow things turn up.

.......................

I just don’t get it. And my sinking feeling that the administration plan is to rearrange the deck chairs and hope the iceberg melts just keeps getting stronger.

more at:
http://krugman.blogs.nytimes.com/2009/02/24/mysterious-plans/

[ClarkUSA]

1. So where's Krugman's plan?

Oh right, he has none.

[pokercat999]

5. Try reading the second paragraph.......below

"What we want to do is clean up the bank’s balance sheet, so that it no longer has to be a ward of the state. When the FDIC confronts a bank like this, it seizes the thing, cleans out the stockholders, pays off some of the debt, and reprivatizes."


This actually reads like plain English, but then English could be my second language, if I had a first.

[ClarkUSA]

23. That's not a plan. It's two sentences of very general economic rhetoric. Where are the specifics?

President Obama asked Krugman to offer up a better plan to Team O instead of complaining weeks ago and so far, Krugman
hasn't done a damned thing.

[girl gone mad]

70. It's way more of a plan that what Geithner has.

Better, too.

[Baikonour]

87. He's offered plenty of alternate plans, both in print and on television.

And Krugman is doing a lot by not only being one of the most brilliant economic minds in the world, but by contributing his ideas through said media. You don't think the Obama economic team is listening to him? I guarantee Larry Summers reads everything Krugman says.

But I forgot, it's easier to just hate Krugman because he questions democratic authority sometimes.

[karynnj]

13. Not fair - he has been one of the clearest people speaking

on the bank problem. It seems like wall street, the banks, and the financial institutions all want a plan that retains some, but not all value to the stock holders. The problem with that is that if the banks really are bankrupt that is a transfer from the taxpayers to the stock holders - spreading the pain.

It seems the Obama administration moved from where they started - to a plan in the middle - less advantageous to Wall street - still helping stock holders at the expense of tax payers. The fact is - when you buy stock, there is a risk it could go down - but the expectation (on your part) that it will go up.

[ClarkUSA]

24. What's not fair is his making a living pointing fingers and not offer up an alternative to Team O.

President Obama asked Krugman to offer up a better plan to Team O instead of complaining weeks ago and so far, Krugman
hasn't done a damned thing except to continue his endless whining in 3000 words or less.

[karynnj]

25. Any request was more rhetorical than serious

Summers and Geitner are the people creating Obama's plan. Neither they nor Obama would be likely to switch to the types of things that Krugman is speaking about.

The idea that people, not chosen to be in the government, should not speak about their disagreements in fields where they are expert enough to have gotten the Nobel prize is stunning. Did you say that when Shinsecki spoke of Bush not having enough soldiers in Iraq to win the peace?

[ClarkUSA]

26. lol! And you know this because President Obama told you this? You lost me right there.

Your statement is not based on anything but your opinion so it fits your hyporthesis. I take Barack at his word:
if Krugman knows how to do things better, contact Team O. I am sure they'd listen. But this constant whining
from the sidelines seems to be naive at best (since Krugman has no idea how legislation is crafted and has the
comfort of living in an ivory tower of Ivy League academia - as Rahm Emanuel said recently) and a calculated
grudge at worst (his anti-Obama campaign during the primaries seems to have become a bad knee-jerk habit).
Funny, I don't remember him griping about Bush II this much in 2001. Gee, I wonder why.

[karynnj]

27. No, I agree it is opinion -

but it is a very common knee jerk response given to criticism. The likelihood that Obama would run with a plan that is completely different than the policy created by Summers and Geitner, his two top people, is not even remotely likely. Those are the people he hired as his experts. As he observed, he himself is not an economist. Who do you think would evaluate any Krugman plan. (Look back at where Summers and Krugman were in the 1990s - what you will see is that Krugman was right far more often than Summers, who with Greenspan led Clinton to favor deregulation in the Financial, banking and energy markets.

Emanuel's comment (which I didn't hear - I'm accepting your citing of it) sounds like the standard RW attack on any liberal academic. Krugman has stated upfront that he doesn't know the details - no one does - and that was one of the major criticisms of Geitner's speech. People wanted to know at least on a high level what the process was going to be - and Wall Street, the business press and economists all were unhappy with the level of detail. What Krugman has done, after that caveat, is to try to figure out what could fit the vague description. The real problem appears to be that Treasury was not really ready with a plan when the speech occurred. They need a coherent plan and they need it as soon as possible.

Krugman was the MOST adament anti-Bush columnist in the NYT and, in fact, anywhere. You may not remember what you didn't read. He criticized him on economic issues and on the Iraq war. The fact is that Krugman is to the LEFT, not right of Obama. He is also more concerned with the taxpayer and the economy having a functioning banking system than with minimizing the loss to stockholders.

[ClarkUSA]

28. Krugman never criticized Bush II as much as he has Barack in the first month of W's presidency.

And I am still waiting for his plan. I'm tired of his griping, but it sure provides a nice anti-Obama talking point for the MSM,
doesn't it? He's a political columnist who has no experience in politics... he's got no credibility in the realpolitik world,
which is why Team O wants to know what his plan is -- because his shrill complaints are useless impediments when
hunting for Republican "aye" votes in the Senate.

As for not reading his columns, you are wrong to make such baseless assumptions; I studied under Prof. Krugman at
Princeton and have had conversations with him inside and out of the classroom. The man's a twitchy obsessive-compulsive
who didn't welcome dissenting views in the classroom (his favoring outsourcing was a sore point, for example - so much
for being a "liberal"), unlike Prof. Obama, who welcomed opposing views and encouraged them among his students (as long
as the ideas were supported in an intellectually honest fashion). The differences between them still are apparent in the ways
they approach political compromise in order to reach consensus. Oh, and I also bumped into him at off-campus political
parties held by prominent local Democratic organizers, so I probably know him better than you or anyone else at DU.
For example, I know what he was saying off-the-record to people about Barack during the primaries. Your defense of
a man you do not know and have never met seems much more knee-jerk than anything I've said.

If Krugman really wanted to make a difference, he should do more than complain and whine in his predictably anti-Obama
weekly columns. But he's not interested in doing anything more than that, it seems. It's not hard to wonder why. The man's
a PUMA at heart. His "my way or the highway" approach would get nowhere in Congress, which makes it laughable that
more people don't see it at DU. It's easy to criticize from afar and get a paycheck - and publicity - for it. It's hard to get
bills passed in a partisan atmosphere but Krugman is not intellectually honest enough to acknowledge this fact and give
credit where credit is due. Fuck him. Next time I see Prof. Krugman, I will be sure to tell him so.

[karynnj]

31. Absolutely not true - he was VERY tough on Bush

I have read Krugman since he first wrote for the NYT and I've read his books.

Krugman is writing as a distinguished economist. He is a professor of Economics at Princeton. His job at the NYT is to give his point of view on a very serious economic issue. He does not agree with the approach that the Obama team is taking - and in fact, part of why the Obama team was not ready when the speech was given - is because they moved away from what they initially were signally to something that moved in the direction of Krugman and Joseph_Stiglitz.

There is an intellectual discussion of what the best policy is. This is why you hear of the "Japan" and the "Sweden" approach. It is clear that Krugman, when he speaks of Zombie banks is closer to "Sweden". This is NOT "griping" but being a professional economist and columnist.

This is NOT the time of an election campaign. It is important for people, like Krugman, to speak out when he disagrees. Obama and his team are not perfect. I would bet that over the next 4 years, there will be issues where people who were his closest allies will disagree - hopefully politely. It is completely wrong to suggest that they all need to be silent. That is irresponsible - and in this case - they have already had what they consider a positive affect.

[ClarkUSA]

32. Not in Bush II's first month, he wasn't. No way even close. All Krugman does is whine about Obama.

The man has an agenda that is quite PUMAish. And the Sweden model is inadequate, as President Obama mentioned once
in response to a question from a reporter about this issue. Sweden had three or four banks in the whole relatively tiny GDP
country while the U.S. has thousands with a huge GDP, not to mention the difference in monies at stake. Sweden is also an
extremely socialist economy so the transition to nationalization was effortless and made with little legislative fuss.

Krugman's area of expertise is not domestic macroeconomic policy and it really shows. But no doubt he will keep up his
moaning... for as long as Obama is in office or until his readership drops off.

[karynnj]

36. Krugman's field is MACROECONOMICS

Maybe you should tell Princeton that it is not field of expertise. In addition, the banking problem has an international dimension. The comment that he is out of his area "and it shows" is ridiculous. As is using Obama, who has said he is not an economist, and using an answer he gave to the media to "prove" that - is not convincing. I would bet that Obama would himself say Krugman is an accomplished economist.

As to PUMAish, that is just ridiculous. He preferred HRC's and Edwards' healthcare plans and said so, but he far preferred Obama to McCain and he said so in many very good columns.

I did not say that he supports the Sweden model - I listed it and the Japan model as the 2 ends of a continuum. The size of the country really does not make it inadequate. There would be political difficulty in doing it, but the opposite extreme led to over a decade of economic bad times in Japan.

[ClarkUSA]

41. His Nobel was in comparative international macroeconomic policy.

President Obama may not be an economist but he's got the best there is advising him everyday and I'm sure he's quite capable
of absorbing their lessons quite well. And Krugman's incessant whiny attacks on 44's stimulus plan have been not only politically
naive but legislatively suicidal. You seem to keep ignoring that, which makes your perspective irrelevant. I want policy legislation
passed, while Krugman continues to conveniently ignore the real-life need (as opposed to ivory tower pontification) for political
consensus. He's a political idiot who needs to get a fucking clue.

Have you ever taken a course with Krugman? His field of expertise is not domestic economic policy. Where does your faith
in Krugman come from? He's never had an impact on anything that affects Americans positively. All he does is complain for a
paycheck and teach classes at Princeton while his students try not to fall asleep. In contrast, Lawrence Sommers has a great
track record based in the real world of policymaking. I and President Obama have faith in people who have experience in the
real world, not ivory tower professional PUMAish whiners like Krugman. You go defending him, though, even though he hasn't
got a track record of public service success at all, unlike Barack's economic team. Oh, he only stopped attacking Obama during
the GE because he had to given his readership would have deserted him otherwise. His PUMA attitude resumed soon thereafter.
His primary attacks on Obama's healthcare plan during the primaries were both shrill and misleading (read the archives for
why, as I don't care to refight the primaries) so his present obsessive anti-Obama bent is merely a continuation of his past
year's axe-grinding, barring a few month's off for his livelihood's sake.

[karynnj]

48. I know what Krugman's Nobel Prize was for

That does not change that his field is macroeconomics. International economics is a branch of macroeconomics that requires you understand everything in "domestic" macroeconomics - a designation not used. If you read even his columns, you would know that he was speaking even in the late 1990s of the consequences of deregulation and what he saw as a bubble.

Summers excellent advice included a few clunkers - he was Clinton's adviser on getting rid of Glass-Segall, deregulating the energy market (which allowed ENRON), and the commodities modernization act. He did give very good advice on others things - but the bad things had enormous consequences. He and his protege, Geitner, say they have learned from this. I hope so.

I really don't know how to say it more clearly - but this is not a political issue - where he is against Obama - this is an issue of economic policy. The views he has stated are consistent with his economic worldview. This is his profession. He is not going to throw away his credibility just to oppose Obama. (It might well be that the Obama economic advisers were why Krugman was against him in the primaries.)

I think it is fine to say that you disagree with points Krugman has made or that you completely disagree with his economic worldview. Where I have a real problem is when you seem to say that anyone disagreeing with anyone in the Obama cabinet is PUMA or RW or complaining. The fact is that there is nothing wrong with being a Professor or writing for the NYT.

[ClarkUSA]

51. Krugman is a legislative know-nothing who makes a living being a professional PUMAish malcontent.

I stand by what I've said about him. Because I know him better than you do.

[karynnj]

57. How do you know him?

I know him just from his columns, books, and tv appearances.

[ClarkUSA]

64. You didn't read through what I've said, have you?

I don't want to repeat myself, so read through this sub thread.

[karynnj]

71. Looking back at the thread, the only thing I can think

is that you took one of his classes - even though you did not actually say that. I had far drier professors in economics as an undergrad, when I majored in math and economics, and the people stayed awake.

[ClarkUSA]

78. Your reading comprehension is not what it could be. Try again.

Unless you have something new to add, I have nothing more to say than what I've said.

[karynnj]

94. Sorry - I didn't go back far enough and I didn't read the whole comment the first time for which I

apologize. I still think that he and everyone, has a right to express his opinion and you, and everyone, have a right to reject his opinion. As to defending him - I am more defending the right and the need for people on our side to question policy - if they have questions. It is part of being a citizen, rather than just someone who lives here.

[depakid]

73. From your posts it's pretty clear that you don't have much of a clue

but do seem to harbor a bit of a gridge and an even bigger chip on your shoulder.

[ClarkUSA]

79. lol! Ah, still trying to refight the primary wars? Time to move on, depakid.

My guy won over all others and I'm very happy, thanks. He's as great a president and Democratic Party leader
as I always thought he'd be!

:woohoo: Obama Is 44 :party:

[Zodiak]

75. I'm sorry, but you are just smearing

...and smears are devoid of content.

If you have nothing to say but the continual repetition that Krugman "whines" from the sidelines, then you are just engaging in a smear campaign in the service of preventing any open discussion about Obama's bank plan. This is something even Obama doesn't want.

Lots of posts, but not really a point to be made in any of them other than you don't like Krugman and trust everything Obama does without question. We get it, now stop wasting bandwidth or say something substantive.

[ClarkUSA]

80. I provided plenty of reasons to back up what I said, so stop whining.

[Zodiak]

82. Just because you say it doesn't make it true...your "reasons" have no issue-based substance

There is a difference between quality and quantity. Your 30+ posts on this thread are strong in the latter and devoid of the former.

And for your information, a "whine" is a tone of voice. Since the communicative medium we use is text, any perception of "whining" is on your part, and saying that doesn't make it true, either.

[ClarkUSA]

83. Just because you say so doesn't make it true... your complaints are whine-based, not substantive.

See? Two can play. :rofl:

[Zodiak]

84. LOL. hokay Mr. Broken Record

There are other ways to save bandwidth than pointing out that someone is over-doing it.

[ClarkUSA]

85. Nah, Krugman is the only Mr. Broken Record.

[girl gone mad]

72. Krugman has written textbooks on macroeconomics.

[ClarkUSA]

81. Any econ prof can write a 101 level book with a ghost writer -- it's a source of easy $$.

His Nobel is not in domestic macroeconomic policy, though. And never will be.

[girl gone mad]

93. You have absolutely no evidence he used a ghost writer.

You have no way of knowing what future Nobel Prize Dr. Krugman may or may not win.

Elite universities and professors would not use a book with his name on it unless it carried the prestige that goes with expertise. Krugman is most assuredly an expert in macroeconomics.

You seem to need therapy.

[ClarkUSA]

96. It's what high-profile profs do for $$. Do you really think his co-writer did anything else?

:eyes:

[Baikonour]

89. Was there an economic crisis within the first month of Bush II's presidency?

No. So what advice did Krugman have to lend? He's an economic mastermind, not a counter-terrorism mastermind.

And Krugman is not anti-Obama. To claim otherwise is typical alarmist anti-Krugman rhetoric.

[PVnRT]

30. Sounds like someone is still mad Krugman didn't worship Obama in the primaries

[ClarkUSA]

34. Rather, Krugman is a PUMA who would rather complain weekly than offer an alternative plan to Team O.

[Forkboy]

99. Big time. Dayum.

:scared:

[Greyhound]

29. He has been warning about this and offering strategies for years.

Of course, you would actually have to read and seek them out to know that, and that precludes the possibility of mindless cheerleaders possessing that knowledge.

[ClarkUSA]

35. He's been criticizing Everything Obama for years? Maybe for one year... and counting.

[Greyhound]

43. He has been warning about this crisis forming for years. The critisisms of Obama's

policies have been very consistent, they are far too little to generate the desired effect. In fact, he warned about just this sort of "measured" stimulus back in November.

No politician wants to tell the people the truth of just how big this disaster is for fear of being called an alarmist, Krugman has no such constraints, he is trying to raise the alarm.

Read some of his papers and books, his warnings and criticisms go back to the early days of the _shrub coup.

[ClarkUSA]

46. Anyone can criticize... where's his plan? Why doesn't he offer up detailed alternative ideas?

He wasn't the only one "raising the alarm" for the past few years, either. He just had a soapbox bigger than most.
It didn't take a genius to figure things out years ago: the subprime danger was evident since 2005, as many
grew concerned over what would happen when rates re-adjusted; the Bush tax cuts made up 2/3 of the deficit;
the housing bubble had to burst when ARMs came due.

Krugman is either terminally politically tone-deaf or a determined professional malcontent. The stimulus plan
isn't going to get passed via a magic wand and that means compromises. But it's still pretty damned good for
95% of taxpayers/unemployed poor/employed poor/kids who need insurance and early education/college kids/
mass transit/green energy/medical research, etc. given the alternative under Krugman's ideologically rigid
dogmatism (convenient when writing from an ivory-tower existence at Princeton for a man with zero legislative
know-how and absolutely no record of public service) which would be partisan gridlock and complete non-action.
Krugman would rather fiddle while Rome burns while President Obama wants to start to put out the fire. This
plan, as Obama made clear last night, is not a be-all, end-all solution. More is to come from Team O. No doubt
Krugman will keep complaining from the cosseted bubble he lives in at Princeton.

[Greyhound]

47. So how much research have you done since this started?

Rhetorical question since the answer is obvious, none.

He has created a whole laundry list of things that can be done, things that should be done, and things that must be done, but you wouldn't know that since you're stuck on "he's criticizing Obama!"

The whole point is that this disaster is bigger than politics and Obama has to bypass party leadership and DC politics by going directly to the people. He has the opportunity and the means to educate them so that they demand consent from their representatives. This is far bigger than 9/11, bigger than the Great Depression, bigger than WWII. It is epic, the scale is global, and there is no recovery with half measures and propping up the failed system. Politics as usual guarantees failure.

[ClarkUSA]

50. Give me his detailed plans, then. Only you seem to possess that knowledge, it seems.

General whiny rhetoric doesn't count in the real world of legislative process. Team O has to deal with the real world,
not airy-fairy ideological red-meat rhetoric that only results in partisan gridlock. WTF do you and he want anyway?
The stimulus plan is good news for the American public. I know I'm benefitting greatly from it and so are others. It's
not perfect but there's more to come. I'm tired of Krugman's know-it-all attitude when he has no clue about what it
takes to pass legislation in a partisan climate. You can love it all you want, but both of you have blinders on if you
think Democrats can just pass whatever they want without any compromise. That's not the way it is nor should it be.

[Greyhound]

52. So how much of my time are you willing to pay me for in order to do your homework?

I'll give you the DU rate of $40 p/hr, that's a $25 p/hr discount.

[ClarkUSA]

53. So you have nothing, eh? Thought so.

[Greyhound]

54. It's all there you have only to look. If you choose not to, that is your problem.

Of course I could use the money so if you want to know and don't want to put in the effort you can pay, this is America, after all. Get me your email, I'll get the agreement over to you today and the results as soon as the check clears.

Added bonus, you would be helping the economy and by extension, making Obama look better.

[ClarkUSA]

55. lol! Why should I look for something I know doesn't exist? You disagree, so put up or...

:shrug:

[Greyhound]

56. No performance, no pay. Afraid to back up your asparagus? n/t

[ClarkUSA]

58. You're full of it. Next time, be prepared to back up your statements or be called on your BS.

[Greyhound]

59. The offer stands and your lack of facts is apparent.

You've been offered answers that you are too lazy of too limited to find yourself. I will provide them as soon as you put your money where your keyboard is.

Why do you hate the American way? General Clark would certainly expect to pay for someone's services and effort, but you feel entitled to a freebie.

You have so much to say, prove your righteousness to everybody. What's it going to cost, a few bucks?

Krugman is a know nothing blowhard that won a Nobel Prize for his looks(?), Obama is the second coming and will make everything all better, and achieving great things cannot be done because it is too hard.

[ClarkUSA]

61. lol! Your "offer" reminds me of some email from Nigeria I have in my SPAM box.

:rofl:

[Greyhound]

65. Gee, what a surprise. Another loudmouth with nothing to offer but asparagus.

I was sure that one as learned and successful as you would have no problem with paying people for their efforts, so I can only surmise that you don't really want to learn anything and are comfortable in your ignorance. A "real American".

Now, go away and bother your mother.

[ClarkUSA]

66. rofl! Projection... thy name is Greyhound.

:rofl:

[Greyhound]

86. Another cutting comeback from the razor wit of ClarkUSA.

Will there be yet another snappy retort from the man with no argument? Stay tuned...

[ixion]

2. the iceberg is not only not melting, but it's getting bigger

as we steam towards it at full-speed.

[HiFructosePronSyrup]

3. Who, exactly, is Krugman in this Titanic analogy?

the guy sitting in the lifeboat telling the people with the oars to row harder?

[theoldman]

7. Dr. Krugman just happens to one smart economist.

[HiFructosePronSyrup]

12. He's also one colossal dick.

:shrug:

[ShortnFiery]

38. After his Nobel Prize award, Krugman has also morphed into a "Megalomaniac Extraordinaire"

[karynnj]

15. Well - if you had read his books and columns

especially the Great Unraveling - he was the guy saying "There could be icebergs ahead, be prudent and slow down".
Now, he is offering his best opinion on what to do. He is not in the government so he can't implement it. Just remember that he not Summers or Geitner got a Nobel Prize in economics.

[madrchsod]

19. his wife did`t take his advice....

[ClarkUSA]

37. His Nobel was not in domestic macroeconomic policy and it shows.

Lawrence Sommers has no better in the field of domestic macroeconomic policy and Geitner knows more than Krugman
in the field of domestic microeconomic policy. Together, they are a bigger brain trust than Krugman... plus, Sommers
has experience getting legislation passed. Krugman has nothing in that regard, and again, it shows.

[TornadoTN]

60. People should take your comments to heart

Let me clarify: I like Krugman, I think he's a brilliant economic mind and offers a lot in the way of knowledge to help correct our situation.

However, his area of expertise is not particularly suited to be the front man for this entire effort. I'd like him on the team, but not as the captain. It's analogous to a patient having heart surgery - do you want a brain surgeon or a heart surgeon to perform the work? Both are really sharp guys and very good doctors, but one has more experience with the heart and that should be the guy you go to to make it happen.


Honestly, I really would like Krugman to get on board and help come up with some policy initiatives to get the economy working again. He brings a lot to the table and could teach the others a thing or two - but he's not the know-all, be-all of all things economics.

[girl gone mad]

76. Again, Krugman has written textbooks on macroeconomics.

They are very popular, and used in top colleges.

You have no idea what you're talking about.

[Hello_Kitty]

100. So? Milton Friedman got a Nobel Prize in Economics. eom

[4lbs]

4. Let me see if I can provide an example.

Wells Fargo took $25 billion of TARP funds. For that, the federal government got stock in the company that pays dividends until Wells Fargo can buy back the stock.

They just paid back $371 million in dividends on this stock the past quarter. Multiply by 4 and that's $1.484 billion the federal government will be paid in dividends this year on a $25 billion investment in Wells Fargo.

After 15 years, the federal government will be paid back nearly the entire amount just in dividends. Or maybe after 5 years, Wells Fargo will begin buying back the stock at the same price it issued them. That happens and the federal government will get back the $25 billion investment plus 5 years or so worth of dividends, or about another $7.5 billion.

[theoldman]

6. Thank you for showing some intelligence.

[pokercat999]

9. I must be just plain stupid...I can't understand how the gov't

isn't being "paid" with it's own money and this isn't just another Ponzi scheme. Oh I think I understand now, you actually think Wells Fargo is going to pay the money back....hahahahahah it was a joke, I feel so dumb. You should have used the :sarcasm: or the :rofl: or at least the :evilgrin:

[4lbs]

10. How is it being paid back with it's own money?

The money being paid is the money that Wells Fargo makes from people that take out mortgages and loans, at say 6% and pay back monthly.

After a quarter, Wells Fargo takes the money accumulated from outstanding loan repayments and divvys it up. Some go to depositors as interest payments (you know, the 2% or so you get on your savings or money market account). Some goes to give stockholders (which the federal government now is one) dividend payments.

[pokercat999]

17. My Wachovia MM account is paying 0.15%, yes I'm moving the

$$. If Wells Fargo is in such a rosy position with all these loans being paid back and so little going out.....why do they need $25 BILLION?

My guess is they will never pay it back and we will nationalize them sometime within the next two years.

I hope I'm wrong.

[4lbs]

20. They'll pay it back. It's a matter of how and how long.

Even if they never buy back that stock in exchange for $25 billion in TARP money, the federal government will still get back $25 billion over 15 or 16 years in dividend payments.

As long as Wells Fargo continues to do well and pay dividends, it would be good for the federal government to get billions of dollars annually from them ad infinitum. It's actually in Wells Fargo's best interest to try to buy back that stock because then they'd have to share their profits less.

Wells Fargo took the $25 billion because it used it's already sizeable liquid assets to make sure it had enough to cover it's outstanding loans and deposits, as well as any bad mortgages it would have to "eat" in losses. However, that left it with almost nothing to use to make money with in terms of NEW loans. Hence the $25 billion in TARP money.

[pokercat999]

22. Gotta say you got faith...could I borrow a few thousand?....nt

[HamdenRice]

33. Good explanation -- but the conversion changes things a lot

I'm glad that a few people understand what's going on and that the TARP was an investment in assets that had to pay dividends.

But the conversion changes things a lot, both for the better and for the worse.

The problem with preferred stock was also its benefit to the government -- namely that the government got paid a regular dividend, and the preferred stock had a face value that the banks would have to pay back at some point, meaning that overall, the government would make money, assuming the banks stayed alive and returned to profitability.

The drawback of preferred is that although it is equity -- it is stock, not a bond -- it's obligations make it a lot like debt. If the bank failed to pay the dividend, it would be in default, and that would cause a ripple effect default on the bank's other bonds. Preferred in that sense wasn't very good for the bank's financial health.

Converting the preferred to common stock means that the bank no longer has to pay dividends. If a bank does not pay dividends on its common stock, there is no default, because no corporation has to pay dividends on common -- only when they choose to, and usually only out of "profits." This took a lot of financial pressure off the bank to be profitable any time soon. But it also meant that the government no longer will earn dividends.

In exchange for giving up guaranteed dividends, the government gets much more control over the bank by converting to common. Also, if the bank is ever profitable again and sold, the government makes more money selling common stock than selling preferred. (That's because even though the preferred is convertible, the bank could redeem it before going public with new common.)

So the conversion seems to signal that the government thinks the banks are in much deeper trouble than the initially thought, that they won't be profitable for much longer than they thought, and that they want to take much more control over the banks than they previously desired.

[bbgrunt]

77. thanks for that explanation.

[livefreest]

8. Washington should get necessary maximum control of banks in order to guaranty flow of credit

I know Americans hate Government in business, but look at what inaction has cost you all this far.
First they didn't bail out Bear Stearns and let it be bought for almost nothing
then they refused to bail out Lehman Bros. A credit freeze ensued and the treasury had to give other banks $700+ billions. Now we know that taxpayers were overcharged.

The Government should take maximum necessary control of banks in a way that credit unfreeze would be guarantied beyond any doubt. It's time the government stops trying to do just the bare minimum they think would give incentive to private sector. They shouldn't take a conservative view now otherwise credit will remain frozen and more people will be laid off: then they will have to purchase more banks later and have to inject more capital in banks later.

[leftstreet]

11. Actually, Americans don't hate government in business

Americans love Social Security and Medicare, and they like calling 911 or the Fire Department when necessary, and they enjoy having their streets plowed and their potholes filled - all without being charged a fee for service.

In fact, Americans would like MORE services for their tax dollars.

It's the Ruling Class Capitalists who hate Government (us) in business.

[spanone]

14. doesn't President Obama consult with krugman..he.did win that award and all?

he should present alternate plans and offer them to the administration, they'd probably listen to him, eh?

[ShortnFiery]

39. No, Krugman has been INVITED by Obama's team to consult with them. However, he'd rather

remain in his Ivory Tower pissing down at our present Administration.

Instead of bitching and moaning, why doesn't Krugman CONSULT with Obama's people and become part of *the solution?"

[Lilith Velkor]

63. Or Obama's people could read the New York Times

Don't they have an internet connection?

[Median Democrat]

16. What's Not Clear About Krugman's Analysis...

What he is excluding in his description of bank assets? He is apparently excluding some portion of the bank's loan portfolio, but is just excluding loans that are in default, or loans that are just illiquid, but still potentially valuable?

[madrchsod]

18. what division of the wells fargo bank is getting the tarp funds?

banking,loans,or investments? has there been an accounting or business plan on where the money is going and how it will be spent?

[Political Heretic]

21. I'm with Krugman. With all respect I don't think anyone, including team Obama has a damn clue

what to do about the size and scope of this disaster.

EDIT - I'm sorry I posted this before, and someone correctly modified it by adding that may also not have the political will to take the kind of radical steps that are now the only viable options left to us.

[ShortnFiery]

40. Krugman doesn't want you. His massive ego only allows the adoration of ONE.

:eyes:

[No.23]

42. Irony.

When PK pens the below comments...

"But the vitriol also reflects the fact that many of the people at the Republican National Convention, for all their flag-waving, hate America. They want a controlled, monolithic society; they fear and loathe our nation's freedom, diversity and complexity."

"The fundamental fact of American politics - and I've sharpened my view on this since last year and the hardcover edition of the book - is that we've got an alliance between the religious right and the accumulators of great wealth. Those are the people who are running things."

"Can we break the machine that is imposing right-wing radicalism on the United States? The scariest part is that the media is part of that machine."

we raise him up on our shoulders proudly.

But when he chooses not to join the adulation parade of the current President, we question his wisdom.

Ironic.

[blindpig]

44. Wowsa, hero to zero in no time flat.

Couple months ago he was a Wise One, suddenly not so much. Apparently criticism of the Anointed changes everything.

Such behavior used to get heavily criticized around here. Now, not so much.

[Greyhound]

45. The replies on this thread demonstrate one of the biggest problems we face,

zeal⋅ot⋅ry
–noun

undue or excessive zeal; fanaticism.

[mmonk]

49. I agree with Krugman I hate to say. But he is right and

things are looking more like we have chosen the Japanese model rather than the Swedish model on recovery. This bothers me.

[anaxarchos]

62. Krugman's point is straight-forward...

...and obvious on the face of it. The banks in question have no balance sheets and would be bankrupt tomorrow... except, that they are guaranteed, explicitly and implicitly, by the Federal Government. THAT is the asset on their books which keeps them afloat, ambiguous as that may be. It is a "nationalization" without any of the benefits of nationalization. Neither the ambiguity which the government has created, nor the lack of explicit government control which might force an unfreeze of credit at this point, are possible. Instead of sucking it up and nationalizing directly, the Geithners of the world continue to try to create "private" incentives to do the desired thing. The latest is simply trading out more senior for less senior equity... i.e. "rearranging the deck chairs". Not only is it amazingly "unfair" but it won't work. Krugman is simply saying, "Have the guts to run the banks which you already own, whether you want to or not..." He is not the only one saying that (including more than a few right-wingers - "Quick, gentlemen, save our phony-baloney fortunes."

Talking about Krugman, personally, in this context - or about Krugman's wife - is just ignorant silliness.

"But, but, but Krugman doesn't support Obama and I do, and, and, and..."

Does that ring the bell of denial and political reinterpretations of the facts that we became used to for the last 8 years? Economics is mostly arithmetic and doesn't lend itself so well to this kind of "spin" (although it is legion for other kinds of "spin").

[Greyhound]

67. One difference in trading out preferred shares for common is that, in the event

of failure, the preferred shareholders get priority over common shareholders. Is that wrong?

[anaxarchos]

68. Not sure...

...what you mean by "wrong". Yes, it is typical that preferred shares get their money out first but what does that mean in this case? What problem is being "solved" (i.e. "deck chairs")? It is not clear that the equity structure of the banks is in any way related to "frozen credit". Perhaps this is all about attracting new private investment. That is also unrelated to the "credit freeze"... more like an ideological predisposition which ignores the iceberg.

Thus, Krugman...

[Greyhound]

101. I meant incorrect. It is apparent that these private businesses are

completely insolvent. Their assets can't, in many cases, cover even half of their liabilities, thus Krugman's dubbing them "zombies".

My question/point is that after we've blown through $10T - $20T taxpayer dollars and they fail anyway, the parasites will then get first shot at what is left.

[anaxarchos]

91. Here is some more...

...from Krugman on the same subject:

http://krugman.blogs.nytimes.com/2009/02/25/all-the-presidents-zombies/#more-1461

[Greyhound]

92. In the interest of promoting an informed citizenry, We should just put his column

on the front page every day it is published. The chasm between belief and reality is truly amazing and seems to be growing.

Witness much of this thread.

Thank you.

[B o d i]

69. K&R

&U&G&M&A&N

[Kurt_and_Hunter]

88. quality post!

[girl gone mad]

74. Krugman is right.

To quote Barry Ritholtz:

...We now have a new N word today, and its Nationalization. Why the word is so fearful and loaded is beyond my comprehension. As Bloomberg’s David Reilly writes, “The nationalization debate is a smoke screen. We’ve already nationalized the big banks. Let’s just accept it and move on” — and I could not agree more.

OK, so how do we move beyond the N word?

Instead, why don’t we call it by a more accurate, precise, and less scary name: FDIC mandated, pre-packaged Chapter 11, government funded reorganization.

That is an accurate description of what occurred with Washington Mutual (WAMU) now part of JPM Chase, and Wachovia, now part of Wells Fargo. The Feds step in, seamlessly transfer control of the assets to a new owner, while simultaneously wiping out the debt, the shareholders, and giving a huge haircut to the bondholders.

Let’s look at each of these in turn:

• FDIC mandated: What does that mean? Well, by law, the FDIC is required to handle the liquidation or reorgs of insolvent banking institutions. We have prevented that normal process thru the application of trillions of dollars in bailout monies;

• pre-packaged The entire process is mapped out in advance so as to make it fast and seamless. WAMU depositors did not notice a single change over the weekend their FDIC mandated, pre-packaged Chapter 11 workout, government funded reorganizatio occured. The only observable difference was that WAMU customers were no longer charged an ATM fee when they went to Chase ATMs, as it was now the same company;

• Chapter 11 The full bankruptcy protection applies — meaning employees still get paid, secured creditors do not suffer, and debtor in possession financing (DiP) is available to the bank;

• government funded The source of the DiP funding;

• reorganization Just what it sounds like — new board of directors, management transitions out to a new team, recaptalized, bad debt taken off of the books, toxic assets spun out.

What emerges is a clean bank, no debt, well capitalized, and free of deadly toxic assets. You can see why so many people would find this state of affairs utterly objectionable.

In all seriousness, I understand the objection by shareholders — already down 90% — who would be wiped out by this. I fail to see the merit in the save-the-banks-at-any-cost arguments so many are proferring and preferring.

If the choice is between going Swedish or turning Japanese, you can call me Inga . . .

[bertman]

90. Krugman was on Countdown tonight. Anyone who didn't like him before will hate him now.

But I think the guy is right.

But I am not an economist and I didn't even stay in a Holiday Inn Express last night. Plus I've lost 35% of my 401k in the last six months.

[mdmc]

95. I lost 6 bucks

in the market...
Thank God I went conservative in my investments. It looks pretty smart now..

[bertman]

97. mdmc, that's great. I have been on the "high return" plan for several years due to my

advanced age (61) ha ha. I have not been a fan of investing in the "market" and only went into it a few years ago because of some other influencing factors that I won't go into here.

It is sad how many people have lost so much of their retirement savings or retirement income. But I'm glad you did not.

[mdmc]

98. my folks are down a good 65k

I put away 111 bucks per month in my 401k... Right now I am down 6 bucks. 90% is in t bills, the rest is in progressive stocks. The stocks lost 6 bucks, but the t bills picked up the slack..

peace and low stress and good luck..