I am flattered that Paul Krugman thought to reference this blog on his. I have been a fan since undergraduate days at the Australian National University where I read (as a second year) some of his then recently published trade papers and thought that he was a seriously smart guy. He later won the Nobel Prize for that work.
I have kept a copy of Currency and Crises on my shelf for years too – and – like Paul am surprised that currency has played such a small role in this crisis. The post on Swedbank (still the most visited post on this blog) was a direct application of Krugman’s book to the business of stock picking. (Paul please read the post. You will be amused. Given what has happened in Latvia since I wrote that post it looks pretty good.)
I purchased seven copies of Pop Internationalism – Krugman’s mid 1990s popular work – and gave them to people who spouted all sorts of (Lester Thurow) crap about trade. I even reviewed Krugman's book on Amazon – you can find that and my other reviews here.
To put it bluntly – I am a Krugman fan almost to the point of idolatry.
So I am getting puzzled at some illogic. Paul has not (yet) agreed that the Swedish bullet (effective guarantee of all banking liabilities before selective nationalization) is going to be the way the US goes – but he acknowledges that a large amount of banking is effectively non-recourse finance with the losses going to the taxpayer.
He agrees with the obvious – that when banks are guaranteed they need to be regulated so they have more than zero capital. Presumably they want to have quite a bit of capital (amount open to debate) or the incentives on the management to bet the money on red at the casino – or even loot the bank – is pretty high. They also need to be regulated.
But he appears vehemently opposed to the (still not well detailed) Geithner plan to price toxic assets by giving a bunch of hedge funds non-recourse finance to purchase them. He even refers to this a zombie financial idea - one that will not die.
This an illogical position. Banks are non recourse. Krugman acknowledges that and says that banks require adequate capital or they should be confiscated. (No disagreement there – but I am sure we would disagree about the quantum of capital and how to measure it and what the confiscation process should be.)
Anyway if there is new capital put in banking it will also be levered up non-recourse.
I hope (and maybe I read Paul wrong here) that he wants new capital in banking and he would prefer it be private.
Well isn’t that the Geithner plan? Lets finance the tough stuff (scratch and dint mortgages, some commercial property) with new capital – as per any other bank – leveraged non-recourse to the taxpayer.
The objection Paul makes is to it being “non recourse” – an objection which is illogical. He has made this objection repeatedly.
The debate should be – as this blog has made clear before – about the numbers (and possibly the confiscation rules). It is not whether the Geithner idea is good or bad – it is whether Geithner demands enough private capital to be a reasonable outcome for taxpayers.
If the government requires enough capital then hey it is real capital and it reduces risk to the taxpayer. If they require too much capital then the returns won’t be attractive enough. There is not much economic difference between just establishing new banks and the Geithner idea – spelt out in some detail in the "long post" – for providing non recourse finance to several toxic asset funds.
Just because it is non-recourse doesn’t mean it is evil. If there is adequate capital then – hey – its new capital to the banking system – something that many (but not all) of us strongly desire now. The issue is how much new capital for how much taxpayer risk.
PS. Paul - I know you are a busy guy - but I would love an email. I once sent you an email (on Iceland) via Joe Nocera of the NYT. I have no idea whether you got it - but it also looks pretty good...