Tuesday, March 18, 2008

Revelation! -------- Paul Krugman Has a Good Point

Paul Krugman, the op-ed columnist at the New York Times wrote a piece yesterday that I find little fault within most of its context:

The B Word
Published: March 17, 2008

O.K., here it comes: The unthinkable is about to become the inevitable.

Last week, Robert Rubin, the former Treasury secretary, and John Lipsky, a top official at the International Monetary Fund, both suggested that public funds might be needed to rescue the U.S. financial system. Mr. Lipsky insisted that he wasn’t talking about a bailout. But he was.

It’s true that Henry Paulson, the current Treasury secretary, still says that any proposal to use taxpayers’ money to help resolve the crisis is a "non-starter." But that’s about as credible as all of his previous pronouncements on the financial situation.

So here’s the question we really should be asking: When the feds do bail out the financial system, what will they do to ensure that they aren’t also bailing out the people who got us into this mess?
Let’s talk about why a bailout is inevitable.

Between 2002 and 2007, false beliefs in the private sector — the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe — led to an epidemic of bad lending. Meanwhile, false beliefs in the political arena — the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing — led Washington to ignore the warning signs.
LINK (registration may be required)

Also from Mr. Krugman:

"As I said, the important thing is to bail out the system, not the people who got us into this mess. That means cleaning out the shareholders in failed institutions, making bondholders take a haircut, and canceling the stock options of executives who got rich playing heads I win, tails you lose."

This is by far one of the toughest things I have ever done in my short three year stint of blogging. I agree with 90% of what Mr. Krugman has written here. (cough, cough!) Ouch, that hurts. Mr. Krugman is the epitome of the socialist leftist experiment and has had a pulpit to preach from for over a decade. While Mr. Krugman generally puts his party's affiliation and ideology ahead of what is in the best interest of the whole nation, in this isolated instance, I believe Mr. Krugman is right about the procedures that allowed a portion of the financial institutions to grant unqualified loans to far too many borrowers that should never have been considered. It is this policy, ("system"), that is currently choking a free market system that should in its own right be made to shoulder the burden of correction. Once again, the over-extension of credit to the general population has come home to roost and the "piper" must be paid. But who's the piper?

With the Fed setting precedence here by stepping in and backing the debt of Bear Stearns, it appears that it will be the tax payer that will ultimately pay this debt. How many other financial institutions will line up for the "bail-out" is any one's guess. Meanwhile the housing market will remain in a flux mode because stiffer restrictions must be used in the lending practices of the banking industry. And. I'm not comfortable if the restrictions are "self-implemented" when the industry itself could not show restraints in the past. If the Federal Reserve is going into the business of financial lending, they should also be expected to provide restrictions and at the same time demand interest on their "investments". Any other course would be just a recycle of the same mess they participated in that got us to this point.

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