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Have Geithner's Zombie Ideas Won? Paul Krugman on the "Cash for Trash" Program

Krugman on Geithner's toxic assets program: "It’s the zombie that you keep killing, and it just keeps coming back."

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Goodman: So you socialize the debt, you privatize the profit. Why—

Krugman: Yes, it’s, lemon socialism. The minuses are the taxpayers; the pluses are the private investors.

Goodman: Why doesn’t the government just buy all up all of the toxic assets then, like the FDIC does?

Krugman: Well, the FDIC guarantees a bank’s debts, basically, so the deposits are secure, and then if it says the bank is bankrupt, then it goes in and it seizes the bank and then sells the toxic stuff for whatever it can get. That’s what I advocate; that’s what we ought to be doing. I think they’re just daunted by the scale of this thing. The FDIC normally does, you know, two or three banks a week, even in bad times, and they’re small banks. Here we’re talking about quite possibly Citigroup, which is $2 trillion in assets. It’s a very big thing. And I think the reason they keep on coming back, the reason the zombie ideas won’t stay dead, is the lure of an easy solution, that you can just wave a magic wand and the problem goes away, and they’re still looking for magic.

Goodman: Do you think Timothy Geithner, the Treasury Secretary, Paul, should step down?

Krugman: You know, I don’t have a strong view on that. It’s certainly becoming a problem, and he’s really got to clean up his act if he wants to stay there. Basically, look, this is not Geithner. Ultimately, the buck stops in the Oval Office. The question is, why is President Obama going with the soft side, the hope over analysis, on this stuff? So I don’t have a big commitment on Geithner, one way or the other.

Goodman: Can I ask you something about the AIG bonuses that have caused such an uproar? I mean, why wasn’t there strict regulations about how the stimulus money could be used, how the TARP could be used? Why wasn’t there regulation here?

Krugman: Well, if I was going to take the side of the government people, I’d say it’s hard to write those regulations in a way that doesn’t have unintended consequences. You know, there was a time when they tried to put limits on CEO pay, and it ended up leading to the explosion of stock options, which was not a good thing.

But I think it basically comes down to the mindset, that the view still, apparently, dominant in—even in this administration is that there’s nothing really fundamentally wrong with the system. There were some mistakes, and there was some bad luck, but we don’t want to shake up the system too much. We don’t want to really rebuild it. We don’t want to tear up the relationships with those people who we thought were so smart and now look so dumb, really are smart, and we want to keep them on the job. It’s a problem. I think there’s too much conventionality. To some extent, the Obama administration is still partying like it’s 2006.

Goodman: Paul Krugman, what would a new system look like? What would you advocate?

Krugman: I think, in the end, we’re going to have to go back to something that is kind of like the system that emerged from the New Deal, which was tightly regulated banks and financial institutions, limits on risk taking, fairly high taxes for high earners, which—it turns out that, you know, low tax rates create incentives, but the incentives are actually to play dangerous games with other people’s money. A lot of things need to be updated for the twenty-first century and information technology and so on, but basically, our grandfathers got this thing right. Our grandfathers understood that finance is useful but dangerous and needs to be very tightly hedged about with regulations.

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