I just read Krugman’s lament. The Obama Administration, and specifically Treasury Secretary Tim Geithner have, at long last, put forward a plan. But it’s a terrible plan that doesn’t address the fundamental rot at the heart of the global economic crisis. Or as Krugman put it, “The zombie ideas have won.”
From the Times article Krugman references, it is clear that his frustration is justified, in that the US Treasury Dept. just handed over a trillion dollar blank cheque to the zombie banks. Furthermore, even with another trillion dollars thrown into this bottomless pit, the people saddled with the responsibility of fixing the banking sector (and, more importantly, the credit markets) are still underestimating the scope of the crisis and are longing for the good old days of inflating bubbles.
The proposal’s fundamental assertion is that the nuclear waste from the securitized sub-prime morgage market is being undervalued and that the best way to fix this problem is for the US government hand private investors “generous subsidies, in the form of low-interest loans, to coax investors to form partnerships with the government to buy toxic assets from banks.” The moral hazard inherent in this proposal is lost on Tim Geithner. As Krugman put it: “this is an open invitation to play heads I win, tails the taxpayers lose.”
The biggest problem is that these zombie banks are dead. They are under-water in a sea of red ink, but some of them have reached the magical level of systemic risk that’s made them “too big to fail.” And in reaching this disgusting size, the zombies managed to completely envelop the entire American political system in their grip.
As political unpopular as it may to seem, the only sensible proposal is temporarily nationalizing the banks (and de facto banks, like A.I.G.), while freezing all foreclosures. This is the only way to amputate the zombie appendages currently strangling the global economy.
