Krugman of the NYT Explains Voodoo and Doo Doo Economics: Government Nationalization and Printing Money!

The New York Times—aka the Walter Duranty Papers [1] has an all-encompassing and circuitous track record of apologizing for any form of big government as long as it involves huge spending and high taxes. Today, the Times’ famous noneconomics economist Paul Krugman grinds on with his generic contempt for capitalism and explains how a ‘bad’ bank would not function well in our quest to identify and do something about the mountain of toxic debt that is crushing the world economies.  Obama plans to spend another trillion or two and we might wonder if this adds to the debt?

I[2] have included an executive abstract of this blog that condenses the facts and themes.

Abstract of this blog: Paul Krugman resorts to his monotonous and tautological socialist stance by suggesting that the government seize certain banks, temporarily, and then wants to ‘clean out the stockholders.’ This is some plan to deal with massive toxic debt, now in the trillions.  In a parallel manner the Europeans are struggling with similar ways to sequester bad debt and deal with it. The net effect of this essay by Krugman is to encourage the US government to nationalize our banks and seize our assets to repay the debt that the government caused in the first place with subprime loans to people who had no credit.

My view is that they can only print more money and ‘solve’ this problem with massive inflation. The nostrum that our government would ‘temporarily’ take over anything and relinquish control some time later is a sick joke.  Our world economy is crashing and this is an opportunity for the leftists to take control and seize our money. They cannot succeed on their own and cannot get anything special unless they steal it from others. If they cannot nationalize the banks they will attack bond holders. The bond market may bubble up and burst like the real estate markets did. This is a confiscation of wealth and favored by leftists. Watch out for your government—they are in a frantic quest for your money.

In its twice-weekly turn of the leftist canonical crank, their igNoble Leechette[3][4][5][6], blessed with insights and the esoteric ability to divine the specifics of Depression government policies, will now sing  for us  a newly written chorus song featuring the only words that matter to a leftist politician: Tax and Spend.

Krugman begins with:

“Old-fashioned voodoo economics — the belief in tax-cut magic — has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans.”[7]-- By Paul Krugman Op-Ed Columnist Published: January 18, 2009 [Emphasis is mine in all quotes.][All quotes are from this link in this essay today unless otherwise indicated.]

The old theme above is popular with leftists who make pronouncements about capitalist economics while failing to explain eras like the Jimmy Carter Malaise.  This view frequently produces freak-show influenced written works like the Times article today that feature the criticism of ‘tax cut’ zombies,[8] and such, as odd capitalist caricatures. Much of our current financial problems derive, directly, from Jimmy the Peanut’s Community Reinvestment Act [CRA][9] and other follies.  The rest came mostly from excessive use of personal credit. The theme for the left is to tax and spend and to tax and spend and cutting taxes seems to perturb this fun process.  The demand for more real estate, world wide, caused a crash in wealth by forcing down home prices and wiping our equity. The government deficit spending also creates more massive debt, the kind that is trashing the world economies and is creating and worsening the impending depression. The world economies are crashing in a debt-deflation spiral and many think they can solve this with more debt. [10]What follows is a leftist propaganda piece[11] that shows us how to remedy the massive debt problem and winds up with the predictable socialist conclusions.

We now have to wander through an essay on ‘bad banks’ and where to put ‘toxic debt:’

“But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.”

Voodoo dead banks explained:

“On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.

So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope that shareholders will be rescued by a government bailout.”

[What Krugman is describing are Fannie Mae and Freddie Mac, creations of leftist governments to buy up bad debts from issuing mortgages to people who cannot handle credit. These quasi-government corporations were a latrine to dump bad mortgages. This is a typical mechanism of the left. It is a deferred tax and their constituents, largely, do not pay taxes so they can increase taxies to pay for this gift or, more accurately a bribe, to secure votes. ]

“Why would the government bail Gotham out? Because it plays a central role in the financial system”

Why did we bail our Fannie Mae? The stockholders took a massive hit and the stock fell to less than a dollar per share. Then they got rescue money from the Fed.  Somebody got cleaned out on that ruse.

Krugman’s Options:

[1] “Well, the government could simply give Gotham a couple of hundred billion dollars, enough to make it solvent again.”

[2] “A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.”

Here, the socialist dreams of seizing a bank, wiping out stockholders equity [the bank is nearly bankrupt so the stock is worthless and they cannot allow the shares to remain active] , taking printed money or tax money to restructure the bank and then selling off the bank to new owners. Notice that this is a confiscation of shareholder’s equity [theft] and propping up the wreckage with tax money and then reaping a profit. Sound nice?

[3] “Instead, they’re reportedly gravitating toward a compromise approach: moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.”

Krugman explains the fear of the non- Nationalization approach:

“What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.”

“Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization….

.. but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover …Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job.”

The screed ends, abruptly, here without an alternative except for a temporary, government takeover. 

Here is proof that the government ‘leaders’ are in collusion with their counterparts in other countries as we read from the Brits:

“The Treasury's £200bn plan to soak up toxic debt will be followed within days by a US variant from the Obama team. Germany cannot be far behind.”[12]-- Biblical Debt Jubilee May Be the Only Answer Once again, Britain Leads The World In The Macabre Speciality [sic] of Saving Banks. By Ambrose Evans-Pritchard Last Updated: 6:08AM GMT 19 Jan 2009 [Emphasis is mine in all quotes.][All quotes are from this link in this essay today unless otherwise indicated.]

Prichard Expounds on this theme:

“"It is easy to conclude that none of the Government's policies are working," said Professor Peter Spencer from York University. "We must not lose sight of the fact that they have prevented the collapse of the monetary system."-- Ambrose Evans-Pritchard

“The $3 trillion (£2 trillion) fiscal blitz by the US, China, Japan and Europe plugs an emergency gap. With luck, it will keep the world economy on life-support just long enough to stop recession and banking crises from feeding on each other with lethal effect, as they did in 1931”

“The US version is a "bad bank" for mortgage debt. It is more or less the old "TARP" passed by Congress, before the funds were diverted into bank recapitalisations. This method worked after the Savings & Loan crisis in the 1980s. The market found a floor. The Treasury even made a profit.”

Here is the Evans-Pritchard clincher:

“There is no guarantee that the measures will succeed. The vast scale of government borrowing may exhaust the stock of global capital. Markets are already beginning to question the credit-worthiness of sovereign states. The Fed may find it harder than it thinks to disengage from colossal intervention in the bond markets.-- Ambrose Evans-Pritchard

 In the end, the only way out of all this global debt may prove to be a Biblical debt Jubilee.[13]

 Creditors are not going to like that.”-- Ambrose Evans-Pritchard

Here we see a convergence between the leftists who favor nationalization and the Ambrose Evans-Pritchard analysis:

[1] There is NO solution to the massive debt, except inflation, in my view. Inflation can solve debt problems by wiping out the problem by simply printing money. If we have 12 trillion in debt we could, in theory, just print another 12 trillion and inflate the currency so that the debt is reduced 50%. What a neat idea! Thus the value of a bond or mortgage contract will plummet and become essentially worthless.  Gold and real estate prices will soar. There is no way the bond holder can struggle out of either type of financial instrument here as they cannot ‘call in ‘the debt.  Bondholders can only try to dump bonds on the bond market and that depresses the prices. We are printing money [a process called ‘quantitative easing’] along with the EU group, Japan and probably China. That will produce inflation and maybe hyperinflation.

[2] A Biblical debt Jubilee means that creditors must trade down their debt instruments for nothing but, perhaps, good will.  This suggests a wild and dangerous financial switch from being a creditor to becoming a debtor where your debt will be forgiven by the government. This is an investment opportunity that most will overlook, but could be a winner for mortgage buyers.  Hedge funds might be thinking about this investment jewel.

[3] In the absence of inflation, the confiscation of wealth to ‘spread it around’ is indicated by the Obama administration. He is a socialist and this makes sense in his mind.

What Krugman alludes to here is that the government needs to step in and nationalize the banks [temporary, government takeover]with the result that they can then tap or tax our accounts and swap some of that for debt. This is a process where the governments create debt and then seize the assets and capital of those who were successful participants in the economic game.  The Russians excelled in this respect except that they were a bit crude in the way they grabbed wealth. A few thousand firing squads satisfactorily solved the problem of complaint.

There is no such thing as a ‘temporary’ government takeover of anything. Once in power, the government wants more and more. The only prize left for the left is to seize the assets of those bank accounts as a first step toward socialism Of course; socialism has general records of failure on the globe as we must note that France, Germany, England and others who are in worse financial shape even though they have employed socialism for decades. Isn’t it strange that they didn’t avoid this mess, as in the case of China? It seems France had 51% of their GDP provided by the government, twice our level, and they are collapsing from the debt debacle as well.

The governments of the world have only two sources of money: taxes or the printing press.

All they have left now is your assets, bank accounts and 401(k) s. Next would appear a ‘wealth tax’ where they tax you according to your net worth [in addition to your income] that includes property. This favors the government also if they put in a confiscatory inheritance tax as the Communist Manifesto[14] recommends.

Are we really going to let this happen? Wake up people.

rycK

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