Friday, March 27, 2009


I just took a look at Paul Krugman's latest op-ed piece in the NY Times. It's one of his usual masterpieces - chock full of information, with powerful insights that others miss.

In a few words Krugman is pointing out that what President Obama is doing for the banking and financial sector is rebuilding the system that got us into this mess. Rather than get into the details of securities and banking the best way to think about what Paul Krugman is saying is to think about ABC's hit program Extreme Makeover.

In Extreme Makeover, ABC's design team arrives to bailout a struggling family who do the right thing through their lives, but find themselves overwhelmed by development, most of which they had no control over. Rather than take the family's old frame ABC's design team demolishes everything and rebuilds an entirely new home, with beautiful landscapes and, at times, they even throw in a car and tuition for college.

Krugman correctly points out that rather than demolish the commercial banking and investment infrastructure that got us into this mess - and then rebuilding everything with strong firewalls - the Obama administration has signed off on the old framework. The idea is to leave the framework (that encourages security markets) and strengthen the foundation with lots of taxpayer money and new regulations (which Geithner asked for this week). Krugman thinks this is a bad idea.

So do I.

This post is already long enough, but you can read Krugman's article to understand why he doesn't like what's happening. I also discuss the dangers of keeping the old framework in chapters 11 & 12 of my book. In a few words, we're setting ourselves up for an extreme do over.

- Mark

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