When A Noble Economist Goes Wacko

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[Publisher’s Comment]

Yesterday The New York Times published one of the most preposterous hate-filled columns by Paul Krugman, the Nobel Prize winning economist who teaches at Princeton and also writes for the paper.

One wonders how a whole professor who teaches young students can write with such venom, envy, anger and ignorance. It was as if the professor went wacko. He abused the privilege of writing for a large circulation newspaper.

Krugman launched a pre-emptive strike against President Barack Obama’s banks bailout plan even before details were disclosed. His anger stems from the fact that the Obama Administration dared to adopt a plan that has no input from Krugman; he is so resentful.

Rather than nationalize all the major banks that are now burdened by toxic assets as Krugman has been preaching for months, the Obama-Geithner plan calls for a partnership between government and private investors: the government would match dollars from private investors who would then purchase the assets comprising of hard-to-value mortgages and other collateralized debt obligations.

The value of these assets evaporated when the housing market bubble burst. So banks have been reluctant to lend money and extend credit despite the billions in bail out money already made available by the government.

The banks, saddled with so much toxicity, fear that if the economy does not pick up, businesses and consumers won’t be able to repay loans going forward. At the same time, businesses and consumers can’t survive without loans and credits. Spending accounts for nearly three quarters of economic activity.

So it’s critical that the commercial banks, the engine of the economy, be jump-started.

Krugman’s criticism of the Obama option is disingenuous when he acts as if his version is the best solution. He is not a fortune teller –he may think he is—so how would he know that his idea is better?

Just because the Obama Administration decided to pursue a different strategy, suddenly, in Krugman’s eyes, the brilliant economic minds advising Obama –they include Paul Volker; Warren Buffet; Ben Bernanke; Lawrence Summers; and of course Treasury Secretary Timothy Geithner—are all incompetent buffoons.

"This is more than disappointing," Krugman, the great Sage, writes of the Obama-Geithner proposal. "In fact, it fills me with a sense of despair."

He adds, "And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they are doing."

This is a scurrilous attack against a very intelligent president.

In fact, I have no doubt that if Obama sequestered himself with all the great economics books for one year, he would end up being a better economic theorist than Krugman; he may yet become so during his time in office.

Krugman cannot conceal his bitterness:

"It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone."

Who is Krugman to determine and asses "the growing perception"? Where is this perception "growing"? In his mind and on the Editorial Board of The New York Times?

After I read these lines my first reaction was, has Krugman turned into a Rush Limbaugh Republican? Then I remembered: Krugman had backed Hillary Clinton until the very end; might he still have lingering resentment from the election’s outcome? There is no other basis or explanation for such an out-of-the-ball-park attack which seems totally unrelated or correlated to the matter at hand.

Is this envy at its very worst? Krugman seems peeved that Obama has chosen other minds instead of his—after all he is a whole Nobel Prize winner.

Here is a professor who is probably very good when it comes to economic theory trashing a proposal formulated by economists of the first mind –who convinced a president of the first mind— who actually work in the real world not classroom settings.

And, while he is probably clever, Krugman is not known for any path breaking ideas, unlike brilliant giants and other Nobel Prize winners like Joseph E. Stiglitz, Amartya Sen, Arthur Lewis, Bertil Ohlin, Gunnar Myrdal, and Paul A. Samuelson. The quality of the Nobel economics awardee has declined.

Krugman probably is not as clever as Milton Friedman was –even though I reject Friedman’s theories, that the market determines everything, his brilliance was undisputed.

Yet to read Krugman’s column "Financial Policy Despair," in yesterday’s Times, one would get the impression that the world was coming to an end just because Krugman’s advice –to nationalize—was not adopted.

Moreover, Krugman underestimates the challenges presented by nationalization. Does Krugman see Obama –even with his million dollar smile— as an Emperor who can just flash a magic wand? President Obama, already viciously denounced by right wing media as a "Socialist" and "radical communist" could barely get the $787 billion stimulus package through Congress.

It’s not so much that nationalization is the problem; it’s the principle behind it.

Consider this: After it was revealed that AIG paid senior executives a total of $168 million in bonuses, even after they almost sunk the ship, there was tremendous understandable and justified outcry.

Yet, when Congress moved to enact a Bill that would retroactively tax all the bonuses away, there was a huge outcry about how the measure was unconstitutional and violated all that was sacrosanct about contracts.

Clearly the Administration had this in mind when it chose to partner with investors rather than pursue the Krugman-Lenin approach of bank nationalizations.

Thankfully, Wall Street has so far ignored Krugman and the market has responded positively. The fact of the matter is that no one knows whether President Obama has elected the best approach or not.

But judging by Krugman’s column, it appears that he might have had a conversation with God the previous night.

"If this plan fails –as it almost surely will—it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place." In other words only the plan advocated by Krugman, nationalization, can work.

It is amazing that Krugman, a Noble Prize winner in The Dismal Sciences –for that is what economics is referred to by economist—has the audacity to state with certainty that only a solution that he favors will work.

Krugman seems to underestimate the entrenched power of monopoly and predatory capitalism, as when he laments "if asset values go up, the investors will profit, but if they go down, the investors can walk away from their debt."

How can they walk away from their debt if they also put up some of their own money? Moreover, how else can the government attract private capital without offering some incentives for investors?

Krugman obviously wants the government to keep printing money; which has been done already to the tune of trillions of dollars; trillions more will be printed down the line.

Yet, the US government by itself will never ever be able to rescue this economy. While there must be a bigger role for government –to prevent the kind of recurrent bubbles that seem to be getting bigger and more dangerous with every successive meltdown—the primary economic actors must always be private competitive industry –as opposed to monopoly predatory capitalism.

That is what has made the United States and that is why this country has remained the engine of global economic growth.

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