Tuesday, March 24, 2009

Krugman's Despair

Originally posted as a comment to Jon Taplin:

So Paul Krugman is a terrible market forecaster, big deal.

The questions at hand are: 1) whether the Geithner/Summers plan is likely to work, and 2) whether it’s also wise to consider the nationalization/turnaround alternative. If you believe that the market is still irrationally undervaluing the MBS’s, then the G/S plan should look good to you. If you believe that the MBS write downs reflect true decreases in future cash flow expectations, the plan is going to look bad to you.

Whether or not we believe in the G/S plan, it makes sense that we should have a turnaround plan in place that considers going in to the Big 4 banks which hold 70%+ of the market. This is good disaster recovery planning; even if you don’t have to go in to any or all of the banks and do this, you need to have the ability and willingness to do so, should it become necessary.

The thing that concerns me is that this scenario apparently hasn’t been considered. It may be a bad idea for the country, but the fact that Summers/Geithner et al aren’t able to articulate the flaws in such a plan in the face of Krugman/Steiglitz/De Long et al’s criticisms tells me that they haven’t thought things through.

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