Paul Krugman's article "Gordon Does Good" in The Times today illuminates the banking issues at the heart of the American financial crisis and posits that the U.K. has taken on a leadership role:
Here are my favorite excerpts:
What is the nature of the crisis? The details can be insanely complex, but the basics are fairly simple. The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments; these losses have left many financial institutions with too much debt and too little capital to provide the credit the economy needs; troubled financial institutions have tried to meet their debts and increase their capital by selling assets, but this has driven asset prices down, reducing their capital even further.
...to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.
This sort of temporary part-nationalization, which is often referred to as an “equity injection,” is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.
But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying, “That’s what you do when you have failure.” Instead, he called for government purchases of toxic mortgage-backed securities, based on the theory that ... actually, it never was clear what his theory was....Meanwhile, the British government went straight to the heart of the problem — and moved to address it with stunning speed. On Wednesday, Mr. Brown’s officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday — five days after the plan’s announcement.
At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts.
...Mr. Paulson — after arguably wasting several precious weeks — has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities.
...All across the executive branch, knowledgeable professionals have been driven out; there may not have been anyone left at Treasury with the stature and background to tell Mr. Paulson that he wasn’t making sense.
Luckily for the world economy, however, Gordon Brown and his officials are making sense. And they may have shown us the way through this crisis.
It's an excellent article from Paul Krugman, now an even more influential journalist, after this morning's announcement of his Nobel Prize, and I am sure it reflects very well on The New York Times and other journalists there as well.
It also reflects well on Princeton University where he is professor of Economics and International Affairs, and more celebrated than ever.
Interesting that the Nobel Committee must have had its eye on him for at least five years "for his work on global trade patterns".
Lawmakers and government finance heads must actually and in real time "do the right thing" with lasting consequences, very serious achievements in my view. Let's hope they too get their just rewards.