Krugman, Sorkin Feud In NYT Civil War [UPDATE: Sorkin Responds]

Remember how about 20 hours ago, the New York Times newsroom was a place of joy and celebration, over some Pulitzer Prize wins? Well, the happy days are over -- because now a burgeoning wonk fight between Dealbook's Andrew Ross Sorkin and regular columnist and blogger Paul Krugman threatens to tear the newsroom asunder provide outsiders with an amusing pissing match.

Courtesy of Sorkin, here's the shots fired:

You may recall that during the most perilous months of 2008 and early 2009, there was a vigorous debate about how the government should fix the financial system. Some economists, including Nouriel Roubini of New York University and The Times's own Paul Krugman, declared that we should follow the example of the Swedes by nationalizing the entire banking system.

They argued that Wall Street was occupied by the walking dead, and that no matter how much money we threw at the banks, they would eventually topple the system all over again and cause a domino effect worldwide.

Seems like a glancing shot, at best. Nevertheless, Krugman thinks Sorkin should apologize:

I certainly never said anything like that, and I don't think Nouriel did either. First of all, I never called for "nationalizing the entire banking system" -- I wanted the government to take temporary full ownership of a few weak banks, mainly Citigroup and possibly B of A. I defy Sorkin to find any examples of me calling for a total takeover.

And the argument was never that "no matter how much money we threw at the banks, they would eventually topple the system all over again". Again, where did I say that? The argument was always that if we were going to rescue the banks -- and we were -- taxpayers should get the potential upside as well as the potential downside.

Krugman adds that it's perfectly fine to say that supporters of nationalization were by and large "pessimistic" about "the prospects for a light-touch bank strategy." However, "caricaturing their position, making it sound far more extreme than it actually was, is definitely not OK." But how is the discourse supposed to survive without the permission to indulge in widespread caricature?

At any rate, I think this is the article that Sorkin had in mind when he penned his piece this morning, because it contains the words "nationalization," "zombie," and suggests that banking is on "the brink":

What Alan Greenspan, the former Federal Reserve chairman -- and a staunch defender of free markets -- actually said was, "It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring." I agree.

The case for nationalization rests on three observations.

First, some major banks are dangerously close to the edge -- in fact, they would have failed already if investors didn't expect the government to rescue them if necessary.

Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can't risk letting much bigger institutions like Citigroup or Bank of America implode.

Third, while banks must be rescued, the U.S. government can't afford, fiscally or politically, to bestow huge gifts on bank shareholders.


Why not just go ahead and nationalize? Remember, the longer we live with zombie banks, the harder it will be to end the economic crisis.

How would nationalization take place? All the administration has to do is take its own planned "stress test" for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary. Yes, the whole thing would have a Claude Rains feel to it, as a government that has been propping up banks for months declares itself shocked, shocked at the miserable state of their balance sheets. But that's O.K.

Seems like this Sorkin/Krugman tilt is going to get lost in some epic hair-splitting. Krugman "agrees" that "some banks," should be nationalized in the present crisis, not all. But Sorkin can pretty credibly claim that the mechanism Krugman advocates could potentially involve any bank.

Elsewhere, Krugman has said things like, "So as far as this discussion is concerned, we've got, like, four banks. The "thousands of banks" line is just a diversion." But even he's been willing to admit that he hasn't always been clear in his position, and he's been more charitable and forgiving than he is to Sorkin today.

So, that's the spat aspect of this. Frankly, there's a lot of dumber things going on in Sorkin's article!

The premise, insofar as it has one, is that maybe we should spend a minute imagining that the bailouts are working and that the American people are making out like bandits, and should just chillax and stop worrying about it! Would that it were an evidence-based claim, or at least a series of claims that weren't immediately offset by realities.

For example, "America's coffers would be only $89 billion lighter after all accounts were settled from the rescues, down from an earlier estimate of $250 billion." I mean, who wouldn't feel good about losing $89 billion? Also, our investment in Citigroup "is on track to make a profit of nearly $11 billion, plus $8 billion or so in interest and other fees."

Same article: "Of course, we're still expected to lose $48 billion on the government's rescue of the American International Group." And also: "The overall math also doesn't account for the more than $1 trillion the Federal Reserve pumped into the system through loans to Wall Street that were virtually interest-free."

Says Sorkin: "But if you can put that aside for a moment --." And I'm going to stop him right there because, you know what? I don't think I am going to put aside that $1 trillion, if it's all the same to you.

And, here's the AIG caveat (which I don't think Sorkin realizes is actually a caveat):

Of course, we're still expected to lose $48 billion on the government's rescue of the American International Group. But two people close to the board suggested to me that as the company recalculates the value of assets in its portfolio that were once considered "toxic," the government could actually claw its way back to even on that investment, if it holds on to its stake long enough.

Emphasis mine, because that sounds like the EXACT CRAP THINKING that pervaded companies like AIG in the first place. Toxic assets get "marked" to "some pretend value that may come about in some future scenario, if we keep our fingers crossed and maybe use magic" and everything will just work out okay, somehow.

I read about this stuff in some book called TOO BIG TO FAIL, I think?

Anyway, the rest of the article basically asks readers, do you really want to be some jaded pessimist like Paul Krugman and Nouriel Roubini and Joseph Stiglitz? And of course, who would? Would that Sorkin had presented a case for optimism, beyond: "Let's use the power of imagination to feel better."


As you know, I'm a big fan of yours. I just want to point to some of the source material I had consulted for the column.

That source material includes:

1. This Nouriel Roubini column, for which we shan't hold Krugman responsible.

2. This blog post, in which Krugman says: "Brad DeLong says that Swedish-style temporary nationalization is the right answer to a financial crisis; he's right." Of course, what did DeLong say?

Nationalization has the best chance of avoiding large losses and possibly even making money for the taxpayer. And it is the best way to deal with the moral hazard problem.

It might work like this. Congress:

* grants the Federal Reserve Board the power to take any financial firm whatsoever with liabilities and capital of more than $25 billion that is not well capitalized into conservatorship
* requires the Federal Reserve Board to liquidate any financial firm in its conservatorship when it judges that the firm is insolvent (paying off in full or not paying off in full the liabilities of the firm at its discretion), unless
* the Federal Reserve Board finds that preservation as a going concern is in the interest of the taxpayer, in which case Congress
* grants the Federal Reserve Board the power to transform equity stakes in the firm into junior preferred stock at par value and then transfer ownership and custody of the firm to the Treasury
* requires the Federal Reserve to terminate conservatorship if the firm becomes well-capitalized once again.

Emphasis mine, because I hope we can all agree that this is not tantamount to "nationalizing the entire banking system."

3. Ha-cha! The very column I predicted, "Banking on the Brink," above. In that article, Krugman says:

What Alan Greenspan, the former Federal Reserve chairman -- and a staunch defender of free markets -- actually said was, "It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring." I agree.

Again, I think we can all basically agree that "temporarily nationalize some banks" is not the same as "nationalizing the entire banking system."

So, I trust there is no further misunderstanding?

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