Department of "Huh?!"

Andrew Ross Sorkin:

Andrew Ross Sorkin: You may recall that during the most perilous months of 2008 and early 2009, there was a vigorous debate about how the government should fix the financial system. Some economists, including Nouriel Roubini of New York University and The Times’s own Paul Krugman, declared that we should follow the example of the Swedes by nationalizing the entire banking system...

Paul Krugman:

Andrew Ross Sorkin Owes Several People an Apology: I certainly never said anything like that, and I don’t think Nouriel did either. First of all, I never called for “nationalizing the entire banking system” — I wanted the government to take temporary full ownership of a few weak banks, mainly Citigroup and possibly B of A. I defy Sorkin to find any examples of me calling for a total takeover. And the argument was never that “no matter how much money we threw at the banks, they would eventually topple the system all over again”. Again, where did I say that? The argument was always that if we were going to rescue the banks — and we were — taxpayers should get the potential upside as well as the potential downside...

Andrew Ross Sorkin:

Dear Professor Krugman … - DealBook Blog - NYTimes.com: You quoted part of my column that said, “Some economists, including Nouriel Roubini of New York University and The Times’s own Paul Krugman, declared that we should follow the example of the Swedes by nationalizing the entire banking system.” On your blog, you wrote, “I certainly never said anything like that, and I don’t think Nouriel did either.” Just so there is no confusion, I based that passage on what you and Mr. Roubini had said and written during the crisis about a Swedish-style nationalization of the banking system.... On your blog on Sept. 28, 2008, after reading a piece by Brad DeLong, an economist, which you linked to, you wrote, “Brad DeLong says that Swedish-style temporary nationalization is the right answer to a financial crisis; he’s right”...

To be clear, what I wrote was not "follow the example of the Swedes by nationalizing the entire banking system." What I wrote was:

Time Not for a Bailout, But for Nationalization...\: There are three options: (i) Do nothing. (ii) Bailout (a la Paulson). (iii) Nationalization (a la Sweden 1992). Do nothing was last tried in 1929-1932. The result was called the Great Depression. Let's not do that again. Let's decide between bailout and nationalization.

Nationalization has the best chance of avoiding large losses and possibly even making money for the taxpayer. And it is the best way to deal with the moral hazard problem. It might work like this. Congress:

• grants the Federal Reserve Board the power to take any financial firm whatsoever with liabilities and capital of more than $25 billion that is not well capitalized into conservatorship
• requires the Federal Reserve Board to liquidate any financial firm in its conservatorship when it judges that the firm is insolvent (paying off in full or not paying off in full the liabilities of the firm at its discretion), unless
• the Federal Reserve Board finds that preservation as a going concern is in the interest of the taxpayer, in which case Congress
• grants the Federal Reserve Board the power to transform equity stakes in the firm into junior preferred stock at par value and then transfer ownership and custody of the firm to the Treasury
• requires the Federal Reserve to terminate conservatorship if the firm becomes well-capitalized once again...

I call this one for Paul.

And let me say that I still think that plan would have been preferable to what we wound up doing--as Paul Krugman said, the government would have had a good deal of the upside, and making it clear that the government did stand 100% behind the firms it chose to stand behind would have ended the crisis more quickly.