In the lead up to the G20 Summit in London, economists Paul Krugman, Joseph Stiglitz and Simon Johnson all put out impressive articles outlining the serious short falls of Tim Geithner and Larry Summers economic recovery plans for the US (and the rest of the world). In total, these commentaries paint a fairly depressing picture – in that they cast doubt on the possibility of success due to the tarnishing of America’s reputation (Krugman’s article), the socializing of losses and the privatizing of potential gains that make it a losing proposition for the American taxpayer (Stiglitz’s article) and the lack of really reigning in those responsible for making this mess (Johnson’s article), but they are important to read none the less.
I have to say that I have been extremely underwhelmed by Geithner’s plans so far, in that he really seems to be trying to rebrand the core elements of the Bush/Paulson approach to the financial crisis, rather than calling for sacrifice and genuine accountability. Furthermore, his plans for getting investors involved in buying toxic assets seems way to reminiscent of the steps taken to insure against major investor losses during the Mexican Peso crisis of 1994 and the Asian Financial Crisis of 1997/1998. While is may be unrealistic to think that wealthy investors want to take any level of risks buying the CDOs and subprime mortgages that are hidden away, to insure that they won’t lose money is just as insane.
Simon Johnson, who functioned as a chief economist for the IMF, and Stiglitz, who was a chief economist for the World Bank, have experience dealing with financial systems in a state of collapse. Ironically, it is now the US’s turn to hear the lecture on fiscal responsibility, greed, cronyism, etc. that they have tried to give so many others over the last 25 years. Here is what Johnson says:
“In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.”
Sound familiar. I highly recommend reading all three before trying to interpret what ‘breakthroughs’ might be coming out of London during the G20 summit.
Emma G's Stream of Consciousness 
I have to say, I am scared to death of nationalization. While theoretically it seems like the right solution, I think it seems only somewhat less likely to fail or result in lots and lots of public losses, and the proponents are really underestimating the messiness and difficulty of implementing it, both politically AND operationally. (And in this case, a political failure could be disastrous.) My biggest skepticism, though, is the force and certainty for which it’s being argued. Regardless of the Swedish example, we really are in unchartered territory and NO ONE knows what would work. And anyone who writes without acknowledging that, loses credibility in my eyes automatically. Stiglitz and Krugman are two of the economists out there whose analysis and values I have the most respect for – and they have been prescient in their criticisms – but ALL economic models have a lot of uncertainty and top economists of all stripes tend to err on the arrogant side.
I thought this quote from Harvard economist
Dani Rodrick about the Johnson piece was dead on:
My real fear about nationalization, though, isn’t that it won’t work and will be really costly (there’s probably no better alternative). My real fear is that we might end up betting the whole progressive agenda on it. Especially if it doesn’t work, it could take progressive politics down with it. But even if it works, it will likely cost trillions of dollars and there won’t be a counterfactual to be able to point to that it actually saved us from disaster.