Paul Krugman has the basic story of the financial meltdown right, but he would still like to see the Fed come to the rescue, even if it means handing over hundreds of billions of taxpayer dollars to the world's richest people. I have a hard time following the logic. We know how to keep the financial system operating even as banks go into bankruptcy and receivership. Will there be some disruptions on the way down? Sure, but that would probably be the case even if we went the full bailout route. We have too many custodians and waitresses who can't afford health care or child care for their kids, or to take a sick day from work, to rain hundreds of billions on the Wall Street crew who have yachts, vacation homes, nannies for their kids and teams of personal servants. These people and the institutions they run must be forced to pay the price for their own stupidity and the damage they have done to the economy. [addendum: Since several comments ask how we keep the financial system operating even as we let the banks fail, the model is the takeover of Northern Rock in the UK. The Northern Rock boys had apparently gotten themselves in over their heads in subprime and other assets that went bad. The losses made the bank insolvent. After several bailout efforts proved insufficient, the government took over the bank and brought in new management. The plan is to get the books in order and then resell the bank to the private sector as soon as possible. This approach has the advantage that the current group of top executives that made the bank insolvent are out of jobs, as they should be. The current shareholders will get little or nothing, since the company they own is essentially worthless. But the bank is kept operating so that there is not a chain reaction of collapses, in which firms and banks who have money on deposit with Northern Rock suddenly find themselves in trouble because they can't get access to their money in a closed bank. In reality, I am sure that there will be complications in these sorts of takeovers, but there are complications in bailouts also. At least this approach starts by setting things in the right order. ]
--Dean Baker--
