Lemon socialism

If anyone is wondering why Nobel Prize winning economist and New York Times columnist Paul Krugman is not a member of President Barack Obama's inner circle of economic advisers, they need only read his column in today's paper for the answer. In "Bailouts for bunglers," Krugman argues that the Obama administration and its economic leading lights are sticking taxpayers with all the risk while the people who got us into this mess stand to reap all the benefits:

Just to be clear, I’m not talking about the Obama administration’s plan to support jobs and output with a large, temporary rise in federal spending, which is very much the right thing to do. I’m talking, instead, about the administration’s plans for a banking system rescue — plans that are shaping up as a classic exercise in “lemon socialism”: taxpayers bear the cost if things go wrong, but stockholders and executives get the benefits if things go right.

When I read recent remarks on financial policy by top Obama administration officials, I feel as if I’ve entered a time warp — as if it’s still 2005, Alan Greenspan is still the Maestro, and bankers are still heroes of capitalism.

But here are the key grafs:

But bank stocks are worth so little these days — Citigroup and Bank of America have a combined market value of only $52 billion — that the ownership wouldn’t be partial: pumping in enough taxpayer money to make the banks sound would, in effect, turn them into publicly owned enterprises.

My response to this prospect is: so? If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found? But the Obama administration appears to be tying itself in knots to avoid this outcome.

Now, let's edit this last graf so that we cut out the phrase "at least until private buyers can be found?" To me, it now reads even better. When a homeowner defaults on a mortgage, he or she loses the house to the bank--they don't get it back at the end of the process after all the dust has settled. Likewise, the banking and financial industries have gone bankrupt. This is not just a matter of "fairness" to the taxpayers, it would be a major step towards solving the basic problem. Instead of private interests running the economy and pulling all the strings for the benefit of a few, the government would be running the show for the benefit of all--or, at least it would if we the taxpayers insist that it be so. And this would not necessarily mean the end of private businesses and private property, not at all. In fact, under government control, the banks would make loans to those who really deserve them instead of those who are slicing and dicing mortgage derivatives into ever more risky investments. The banks would become a force for real innovation and economic growth instead of whores and panderers to the giant Ponzi scheme that our economy has largely become.

I know what you're saying, the government would make a bad job of it. Krugman has an answer for that too, the all too obvious one:

Meanwhile, a Washington Post report based on administration sources says that Mr. Geithner and Lawrence Summers, President Obama’s top economic adviser, “think governments make poor bank managers” — as opposed, presumably, to the private-sector geniuses who managed to lose more than a trillion dollars in the space of a few years.

We've tried free market capitalism and seen where it got us. It's time for something at least a little different.

Cutting a deal with Rush Limbaugh. James Carville has a very amusing commentary on Rush's proposed stimulus package on CNN online. Among the gems, Carville refers to Limbaugh as "the moral and intellectual leader and most influential person in the Republican Party in the United States."

Is the entire bailout strategy wrong? Nobel laureate economist Joseph Stiglitz, another of the "left Keynesians" along with Krugman, comments on CNN.

Advice to Obama on Afghanistan. From my Boston University journalism colleague, Nick Mills, an interview with BU Today. Obama appears to think that a military solution is possible in Afghanistan and Pakistan; he is most surely wrong, as were all others down through history.