It’s New York Times columnist vs. New York Times columnist.
Paul Krugman hammers his colleague Andrew Ross Sorkin for getting Krugman’s stance on bank nationalization wrong, saying “Andrew Ross Sorkin Owes Several People An Apology.”
Here’s what Sorkin wrote:
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.
It’s indeed sloppy (leave aside the way-too-narrow scope of what Sorkin and the Journal include in their calculation of bailout costs, which is what the column is about). Krugman said the opposite of that, as Joe Weisenthal points out. That second paragraph doesn’t make any sense, either. Does anyone believe that “no matter how much money” we put into the banks it wouldn’t be enough? And if the point is about moral hazard, well, give the banks some time!
But Krugman is hardly innocent here. He says this:
If you want to say that the advocates of nationalization were excessively pessimistic about the prospects for a light-touch bank strategy, fine. But caricaturing their position, making it sound far more extreme than it actually was, is definitely not OK.
First thing that reminds me of is Krugman’s own caricaturing of a position to make it sound extreme, as I pointed out two weeks ago, when Krugman painted anti-Too Big to Failers as not caring about regulation.
Worse, Krugman was still at it in yesterday’s column:
As I see it, it’s a caution against silver-bullet views of reform, the idea that cracking down on just one thing — in particular, breaking up big banks — will solve our problems.
Does anybody think that? No. So don’t go “caricaturing their position, making it sound far more extreme than it actually was.” That’s “definitely not OK.”
Here's what the men and women who write or read www.ZeroHedge.com have to say about young Sorkin (aka, ARS).
I love this quote from the NYT, chronically late to any game involving Wall Street, and they send a nave like ARS out for the biggest story in a century (or even ever, according to Greenspan).
#1 Posted by Anon, CJR on Tue 13 Apr 2010 at 05:47 PM
False equivalence, Chittum.
Sorkin deliberately misrepresented Krugman's position, naming him explicitly, in some kind of wild hyperbole. First of all, Krugman didn't put words in anyone's mouth and secondly I'd dispute that "nobody" thinks that "breaking up TBTFers will solve their problems." But put that aside, even if you don't agree with Krugman, he didn't dishonestly assign that position to any specific person who doesn't hold it.
False equivalence is almost as bad, in many ways, as what Sorkin did. And as journalism, it is even more insidious.
#2 Posted by James, CJR on Tue 13 Apr 2010 at 08:54 PM
Nice try, James, but no.
Krugman explicitly called out Volcker, as I pointed out in the link above. He's continuing to misrepresent the anti-TBTFers' arguments. Even if he hadn't named Volcker, it would still hardly be false equivalence to point out that he is distorting others' positions like Sorkin does to him.
#3 Posted by Ryan Chittum, CJR on Tue 13 Apr 2010 at 09:23 PM
Ryan.
From your link, Krugman says (my emphasis): "One side — exemplified by Paul Volcker, the redoubtable former Federal Reserve chairman — sees limiting the size and scope of the biggest banks as the core issue in reform."
Characterizing someone's position with the phrase core issue is far different than your claim that he "painted anti-Too Big to Failers as not caring about regulation." He said nothing of the kind. Your hyperbolic misrepresentation is almost as bad as Sorkin's claim that Krugman said he "wanted to nationalize the entire banking system."
You engage in reductionist mischaracterization in order to draw a false equivalence. I normally respect your journalism, and that's why I'm surprised at your poor effort here.
#4 Posted by James, CJR on Tue 13 Apr 2010 at 10:59 PM
James, I'm not mischaracterizing anything.
Again, from that link, two graphs down from the "core issue" quote:
"The solution, say people like Mr. Volcker, is to break big financial institutions into units that aren’t too big to fail, making future bailouts unnecessary and restoring market discipline."
And Krugman characterizes anti-TBTF as a "silver-bullet view of reform" today.
#5 Posted by Ryan Chittum, CJR on Tue 13 Apr 2010 at 11:17 PM
Like I mentioned earlier, what I think Paul is contrasting is a system which prioritizes bank behavior versus a system that prioritizes size. A system which prioritizes size will allow destabilizing and harmful financial activity so long as its contained. A system which prioritizes behavior doesn't seek to contain harmful behavior, it seeks to eliminate it.
And the problem with the containment approach is that it relies on people, perhaps tainted people, to measure the container. Such was the case with Enron and the Consolidated Securitized Entities where they got regulations lifted off their activities in exchange for monitoring and transparency, which then got passed off to people like Christopher Cox and Arthur Andersen. That seems to be what he's saying here:
http://www.nytimes.com/2010/04/05/opinion/05krugman.html
"It’s a good-faith effort to do what needs to be done, but it would create a system highly dependent on the wisdom and good intentions of government officials. And as the history of the last decade demonstrates, trusting in the quality of officials can be dangerous to the economy’s health...
But what will actually be in those “strict rules” for capital, liquidity, and so on? The bill doesn’t say. Instead, everything is left at the discretion of the Financial Stability Oversight Council, a sort of interagency task force including the chairman of the Federal Reserve, the Treasury secretary, the comptroller of the currency and the heads of five other federal agencies.
Mike Konczal of the Roosevelt Institute, whose blog has become essential reading for anyone interested in financial reform, has pointed out what’s wrong with this: just consider who would have been on that council in 2005, which was probably the peak year for irresponsible lending.
Well, in 2005 the chairman of the Fed was Alan Greenspan, who dismissed warnings about the housing bubble — and who asserted in October 2005 that “increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system.”
Meanwhile, the secretary of the Treasury was John Snow, who ... actually, I don’t think anyone remembers anything about Mr. Snow, other than the fact that Karl Rove treated him like an errand boy.
The comptroller of the currency was John Dugan, who still holds the office. He was recently the subject of a profile in The Times, which noted his habit of blocking efforts by states to crack down on abusive consumer lending, on the grounds that he, not the states, has authority over national banks — except that he himself almost never acts to protect consumers.
Oh, and on the subject of consumer protection: the Dodd bill creates a more or less independent agency to protect consumers against abusive lending, albeit one housed at the Fed. That’s a good thing. But it gives the oversight council the ability to override the agency’s recommendations.
The point is that the Dodd bill would give an administration determined to rein in runaway finance the tools it needs to do the job. But it wouldn’t do much to stiffen the spine of a less determined administration. On the contrary, it would make it easy for future regulators to look the other way as another bubble inflated."
And yes, his treatment of Volcker is unfair in that Volcker has pushed for a semi-reestablishment of Glass-Stegall, but it's not an unfair characterization the democrat's haphazard approach.
They are proposing weak exchanges and weak consumer protection agencies as a way of monitoring activity. Small percentages of activity when you break it down. They are not really interested in restricting activity.
And what Paul seems to be saying we need here:
http://www.nytimes.com/2010/04/12/
#6 Posted by Thimbles, CJR on Wed 14 Apr 2010 at 12:29 AM
Ryan,
Your asserting that you are not mischaracterizing Krugman's views doesn't make it true. No need to dig yourself deeper into your hole, I just thought that your attempt to jump up and defend Sorkin was weak and in doing so, committed the same kind of sin that Sorkin does -- wildly mischaracterizing his positions in simplistic, over-the-top language -- and I thought it was beneath you to do that, since you are a much more mature journalist than Sorkin.
It's obviously a difference of priorities that everyone is talking about, not the cartoonish, one-sided Custer-like last stands that you (and Sorkin) portray them to be.
#7 Posted by James, CJR on Wed 14 Apr 2010 at 06:56 AM
Kruggie's paper trail is long. While he favors the straw-man, he also engages in differences without distinction. Take this example from last week:
"The hope was that other European countries would strike a deal, guaranteeing Greek debt in return for a commitment to harsh fiscal austerity. That might have worked."
Now this, from the previous paragraph:
"So the only way Greece could tame its debt problem would be with savage spending cuts and tax increases, measures that would themselves worsen the unemployment rate. No wonder, then, that bond markets are losing confidence, and pushing the situation to the brink."
"Harsh fiscal austerity": good; might work. "Savage spending cuts and tax increases": bad; situation to the brink.
Since fiscal austerity by definition means spending cuts and/or tax increases, I guess the key to Krugman's thinking comes down to the difference between "savage" and "harsh."
#8 Posted by Paul, CJR on Wed 14 Apr 2010 at 07:48 AM
James,
I'm not mischaracterizing Krugman's position--I'm pointing out what he said. See Thimbles' comment. And I didn't "jump up and defend Sorkin."
This is not difficult.
#9 Posted by Ryan Chittum, CJR on Wed 14 Apr 2010 at 08:37 AM
Mr. Chittum,
No, this is not difficult.
"The solution, say people like Mr. Volcker, is to break big financial institutions into units that aren’t too big to fail, making future bailouts unnecessary and restoring market discipline."
is not equivalent to
"KRUGMAN WANTS TO NATIONALIZE THE ENTIRE BANKING SYSTEM."
Ergo, you drew a false equivalence.
Krugman is more than capable of defending his policy prescriptions, I'm taking issue with your poor journalism, in the form of drawing a false equivalence.
#10 Posted by James, CJR on Wed 14 Apr 2010 at 08:53 AM
as they say, James: I think you and I are going to have to agree to disagree
#11 Posted by Ryan Chittum, CJR on Wed 14 Apr 2010 at 10:19 AM
Thanks for the piece and the lively debate. My own feeling is that Krugman is not an honest writer - not that he tells 'lies', but that he is a master at framing his discussions of issues such that they omit information that might weaken his rigidly ideological/partisan cases.
A writer sometimes should be judged by what he doesn't say (about a given issue or debate) as much as what he does. Krugman's intense intellectual vanity precludes him from granting anything to anyone who disagrees with him - a trait far more significant to evaluating him as a pundit than any particular issue.
#12 Posted by Mark Richard, CJR on Wed 14 Apr 2010 at 12:42 PM
James, we need to split up the complaints. There's two.
1) there's a complaint that Krugman mischaracterized Volcker by saying he had a single focus, split and contain banks approach.
2) there's complaint is that Sorkin mischaracterized Krugman by saying he wanted to nationalize all the banks because the zombie banks are money pits.
Krugman is likely going after Volcker because in the current American political spectrum Volcker is being defined as the strict extreme, which he is only in relation to Bobby Rubin, Larry Summers, and Timmy Geithner. His approach is being defined as the maximum when in reality it's the barest minimum and the approach until now has been below the minimum required to handle the problem.
Volcker's approach, in Volcker's words, is this:
http://www.businessweek.com/magazine/content/10_02/b4162011026995.htm
"The kind of reform I've been advocating is acceptance of the fact that the core of the system remains commercial banking. If that breaks down then you have an enormous crisis. And commercial banks have expanded into areas I don't think are so central. I would cut back their so-called capital market activities—hedge funds, equity funds, commodities trading, trading in derivatives. They're all legitimate functions, but they're not so central. And I don't want to protect all those functions. I don't want to protect everybody because when people act like they're protected, you get in trouble. So let's leave the capital markets to their own devices without any expectation of government protection and keep the existing safety net for the commercial banking system.
In my judgment we don't need to regulate the capital markets so heavily. You have some extreme cases where individual institutions are so big and so vulnerable, yes, you might want some regulation of capital and leverage, but that would be the exception. But if they fail, let 'em fail. We will have some kind of a new resolution process. Some agency will go in there and say, "You're going to fail, but we're going to provide a more orderly exit.
But if you're a commercial bank, no matter how big you are, you should not be allowed to fail?
I wouldn't go so far as to say you're not going to be allowed to fail, but you're going to have a lot more protection available so that it would take pretty extreme circumstances to fail to the point that the institution disappears. The quid pro quo for that is more regulation and a limitation on your activities. I don't want [commercial banks] out doing a lot of speculative trading.
So does this mean we should restore Glass-Steagall?
No. That's a false statement people make about my position. Glass-Steagall basically said banks cannot underwrite corporate securities or deal with corporate securities. But I would let commercial banks do underwriting of corporate customers. So you could argue that what I propose is somewhat in the spirit of Glass-Steagall in making a distinction between capital-market activities and trading activities and banking activities. But it is not specifically going back to Glass-Steagall. "
So what Volcker is saying is that we need to define the roles of different banks better so that one kind of bank does not get into trouble with another kind of bank's activities.
But as CJR and Dean Starkman have reported here many times, it was not the banks' mixed up roles that caused the problem. Yes, the banks were chimeras, which created systemic risk since the fate of the goat's head affected the health of the lion's, but they were also boiler rooms that used slimy tactics to siphon capital off of investors, borrowers, and other banks as they "hedged" against their own products. They didn't do these things because they were too big, they did these things because no one said they couldn't.
Let
#13 Posted by Thimbles, CJR on Wed 14 Apr 2010 at 01:12 PM
Sorkin basically characterized the folks who bought into the Swedish model as nationalizing pessimists who did not consider the possibility that throwing money at the banks might keep them intact.
Krugman did advocate for the Swedish / American Savings and Loan approach
http://krugman.blogs.nytimes.com/2008/09/28/the-good-the-bad-and-the-ugly/ because it was better than the Japanese approach:
(Krugman's post is a reference to the Vapors "Turning Japanese" which references this paper from Adam Posen, zombie bank expert, which describes accurately the situation we have today)
http://www.piie.com/publications/papers/posen0209.pdf
Adam Posen and Krugman never said the Japanese way would never work, but that as Adam Posen put it in his "Seven Broad Lessons for the United States from Japan’s Lost Decade" presentation to the Brookings Inst. on March 26 2009:
"Even the Yanagisawa plan of 1999 was a failure, as well, in the sense that, I fear, the Geithner plan will turn out to be—that it was too much of a giveaway to the banks with too little conditionality, even though it was well-intended. If it had been successful, you wouldn’t have had to have Takenaka come in four years later and really write down the value of the assets."
and
"So that doesn’t mean that the Geithner plan is wrong. As I’ve written, I think it may succeed, and if it does, it will succeed at a very high wealth transfer from taxpayers to certain financial firms. That may be the best deal that could be done right now. I would have hoped not, but I’m not in that position to make that call.
My concern is that we are not seeing Takenaka in 2002 right now, we are seeing Yanagisawa in 1998. That we are seeing someone who comes in, who has some good intent as a reformer, who is held to be a reformer, but who, in the end, for political reasons, wants to give away money to the banks with too little conditionality, and doesn’t want to close any banks. And we will see if that’s the case. If that is the case—again, if it is Japan in 1998 and Yanagisawa, instead of Japan in 2002 and Takenaka—more probably what will happen is 18 months, two years down the road we’re just going to have to put more capital into the banks. That is standard for this type of process. And that’s why, for all the talk about lack of complexity in Sweden, the real accomplishment of the Swedes was they got it done. It’s not about complexity of an economy, it’s about politically getting it done."
Both the Adam Posen papers are excellent reading, by the way. They really make the point that the Fiscal Stimulus was good, but America HAD to have bank regulation in place and the banks resettled by the time the stimulus ran out, and unfortunately much of that time was squandered by the dickering of the Senate over health care.
Unless Obama picks up the pace a little, we are going to see a lost American decade, resembling Japan.
#14 Posted by Thimbles, CJR on Wed 14 Apr 2010 at 02:03 PM
We shouldn't be worried about Krugman's attacks on TBTF and the "Volcker Rules". He's a columnist and an economist.
The guy we need to watch is Mitch McConnel:
http://www.youtube.com/watch?v=hmq3mzWJ9_k
To him, the resolution authority that prescribes which would wipe out executives and shareholders if and when they require bailouts is "institutionalizing the bailout".
Mitch McConnell is the coal industry ally which allowed them to get away with close to murder:
http://www.youtube.com/watch?v=SsSUCeRUXqA
And now he's using Frank Luntz's talking points to attack financial reform as if it is too friendly to wall street, while he's meeting with wall street looking for handouts and quid pro quos.
If you thought the republican disinformation and the tea parties water balloons were bad under health care reform, we're about to drink from the fire hose on financial reform,
These are the guys who need calling out and quick, not Paul Krugman.
#15 Posted by Thimbles, CJR on Wed 14 Apr 2010 at 10:56 PM
For more information:
http://swampland.blogs.time.com/2010/04/13/a-gop-financial-reform-bellwether/
#16 Posted by Thimbles, CJR on Wed 14 Apr 2010 at 11:04 PM
It's time to ask. Is Thimbles really Paul Krugman, writing incognito?
#17 Posted by Mark Richard, CJR on Sat 17 Apr 2010 at 08:22 AM
You think I can right that well?
I deserve me a pay raise and some nobel prizes.
#18 Posted by Thimbles, CJR on Sat 17 Apr 2010 at 01:30 PM
If anyone wants to give Krugman a legitimate penalty, you could do it on his post about the game afoot:
http://krugman.blogs.nytimes.com/2010/04/25/cant-anybody-here-play-this-game/
"If you want to argue that Wall Street is corrupt, fine; but don’t use emails showing Goldman employees crowing over their success in shorting housing — which is ugly but doesn’t amount to wrongdoing — to make your point. (Use the rating-agency emails instead; S&P may not be a vampire squid, but it did enormous harm)....
My sense is that too many people are taking the easy route of going for the cheap slogans instead of thinking things through; and some people are pushing their signature issues even when the evidence clearly shows that they’re wrong. And we can’t afford that kind of self-indulgence."
No, Krugman, the people at Goldman Sachs sold products they knew were defective and they bet money on the defects. The emphasis being "sold". They sold the products as safe when they knew that was false. Yes, the ratings agencies rated them as safe and they should have known, assuming they did not know, that they weren't but that's beside the point. They knew their products were unsafe and they represented them as otherwise. That is fraud, which is why the emails showing that are important.
Get your game back Krugman. That was pretty sloppy.
#19 Posted by Thimbles, CJR on Mon 26 Apr 2010 at 12:25 AM
Dean Baker pipes in:
http://www.cepr.net/index.php/blogs/beat-the-press/why-is-it-front-page-news-that-goldman-bet-against-the-housing-bubble/
"The Washington Post's most widely cited source on the housing market during the run-up of the housing bubble was David Lereah, the chief economist of the National Association of Realtors, and the author of Why the Housing Boom Will Not Bust and How You Can Profit From It. In many articles, Lereah was the only expert cited. This was ungodly bad reporting.
Today's paper has a front page story, the main point of which appears to be that Goldman Sachs made bets against the housing market and stood to profit from the collapse of the bubble. (The story actually leaves this conclusion in question.) It's not clear what in this story would be newsworthy and especially what would make it front page news.
If Goldman did bet against the housing bubble, then its actions were helping to bring the bubble to an end before it caused even further damage to the U.S. economy. Goldman's actions would have the effect of making homes more affordable for new buyers. It would also help to increase the national saving rate (a top Washington post priority), by eliminating bubble generated wealth that was spurring consumption. In short, while Goldman's actions were undoubtedly taken for profit, they would be beneficial to the economy as a whole.
Goldman has been accused by the Securities and Exchange Commission of misrepresenting its issues of collaterized debt obligations in order to get investors to take the long-end of the housing market. This is a serious accusation and presents the possibility of substantial civil, if not criminal penalties. However, there is nothing at all improper about placing a bet against a bubble in the market. It is not clear what the Post thought to be the news in this story."
Okay, that's an important qualifier. Goldman betting against the housing market in general wasn't illegal, though it seems to be a regulatory oversight to allow someone to bet on the house market burning down while they are in the position to set the blaze, but Goldman betting against it's own products, which they knew to be garbage, while selling them as safe was fraud. Dean put it a lot better than Krugman who, at face value, seemed to be excusing Goldman's problems with the SEC.
Oh well.
#20 Posted by Thimbles, CJR on Mon 26 Apr 2010 at 11:45 PM