Paul Krugman, This Morning

Why oh why can't we have people like Gordon Brown running our government?

Paul Krugman:

Gordon Does Good: Gordon Brown and Alistair Darling, the chancellor of the Exchequer (equivalent to our Treasury secretary), have defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up. This is an unexpected turn of events.... London is one of the world’s great financial centers, but the British economy is far smaller than the U.S. economy, and the Bank of England doesn’t have anything like the influence either of the Federal Reserve or of the European Central Bank. So you don’t expect to see Britain playing a leadership role. But the Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn’t been matched by any other Western government, least of all our own.

What is the nature of the crisis?... The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments; these losses have left many financial institutions with too much debt and too little capital... troubled financial institutions have tried to meet their debts and increase their capital by selling assets, but this has driven asset prices down, reducing their capital even further.

What can be done to stem the crisis? Aid to homeowners, though desirable, can’t prevent large losses... will take effect too slowly.... The natural thing to do, then — and the solution adopted in many previous financial crises — is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership. This sort of temporary part-nationalization, which is often referred to as an “equity injection,” is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.

But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying, “That’s what you do when you have failure.”... Meanwhile, the British government went straight to the heart of the problem — and moved to address it with stunning speed.... At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead...

Comments

[Neal]

OK, so the idea is to restore the availability of credit.

So who would you give loans to at this point?

Is GM, Ford or Crysler credit-worthy?

Should more residential real-estate loans be made?

Is commercial real-estate still going to go up?

Are loans to restaurant owners, marketing consultants, specialty shops, medium and high end retail a good idea now?

Are start-up businesses a good idea at this time?

Should we ease the requirements for car loans and allow more roll-over of old loans into the new?

Is there still home equity for which we can provide some cash?

Is it a good idea to provide more education loans for communications arts, video production, dog grooming, restaurant and hotel management, pet grooming, veterinary assistant?

And on and on...

The reality is is that the ventures and enterprises that may have seemed to be good ideas and that may have been funded prior to 2008 are not be a good idea now--especially with the consumer collapse that is in progress.

Where is the new, credit-worthy consumer going to come from? Where will the credit worthy businesses that cater to the consumer come from? Can those business even begin or expand now and hope to recover their costs and repay loans?

Without even looser credit standards than in the height of the boom, lenders cannot responsibly loan in the present consumer environment.

This is the next crisis--now. The financial institution collapse accelerated to the front of the crisis line through leverage. The solution of the financial institution problem does not address the fundamentally dire status of the consumer. This consumer and their willingness to take and use credit that was the basis of the prior boom. The consumer was also the small panel in the inflated ballon that ripped first and started the collapse.

So, don't celebrate any solution yet--all it has done is ensured that there might be a skeleton of credit institution remaning for a "consumer-lead" recovery that is still a long way off, if it ever comes.

[Maximilian]

This is weird;
can somebody explain

http://www.msnbc.msn.com/id/27159654/

and

http://www.foxnews.com/story/0,2933,436742,00.html

Fox news has word for word the same article as msnbc????????????????????????????

Is this upposed to be journalism????

[Marshall]

Note the unclosed href at the beginning of this article :

Gordon Does Good - NYTimes.com/a>

That's why the whole thing is a hyper link.

[Scott Martens]

Is there some way he can be appointed Obama's Treasury Secretary? I mean, he has experience as ex-Chancellor of the Exchequer and it sure seems likely he won't be PM for long. I admit to finding the notion of America getting Britain's hand-me-downs and rejects rather amusing.

[chris y]

Why oh why can't we have people like Gordon Brown running our government?

Because he's notably terrible at every aspect of policy except the economy?

[Not Really]

> The reality is is that the ventures and enterprises that may
> have seemed to be good ideas and that may have been funded
> prior to 2008 are not be a good idea now--especially with
> the consumer collapse that is in progress.
>
> Where is the new, credit-worthy consumer going to come from?
> Where will the credit worthy businesses that cater to the
> consumer come from? Can those business even begin or expand
> now and hope to recover their costs and repay loans?

We know without question that we need to start the transition away from oil. We as Americans know that if that transition appears too painful it will be rejected right up to the day the last drop is pumped. Start with some projects that will have immediate benefit and take us a few steps down the path to the post-oil world: (1) place a $100 billion order for Chevy Malibu Hybrids and similar +30mpg vehicles built in the US by any manfacturer; exchange them 1-for-1 for sub-20 mpg vehicles by lottery (that's 2.7 million vehicles if you are counting) (2) place a $100 billion order for wind turbines in the 5 MW range from any manufacturer willing to delivery 60% minimum US content; distribute to every rural electric cooperative in the US (rather than have huge windfarms, have one turbine at every rural co-op substatation)*

That is basically how WWII ended the Great Depression except in this case we would be buying useful stuff instead of disposable weapons.

Not Really

* Yes, I know electricity generation doesn't use much oil. We need to start preparing for an economy and society that use only electricty and a minimum of plant-based diesel.

[Neal]

Not Really

I agree, the only way forward is the switch to a new energy paradigm. The problem is that the amounts you are talking about are a pittance in comparison to the scale of dollars that were generated in the great housing inflation and the financial gyrations that accompanied that.

This will be a period of severe dislocation for much of the US economy.

[Neil Bartlett]

"[Gordon Brown is] notably terrible at every aspect of policy except the economy."

This statement is exactly three words too long.