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May 19, 2014

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Paul Krugman: Springtime for Bankers

Posted: 19 May 2014 12:24 AM PDT

Heckuva job?:

Springtime for Bankers, by Paul Krugman, Commentary, NY Times: By any normal standard, economic policy since the onset of the financial crisis has been a dismal failure. It's true that we avoided a full replay of the Great Depression. But employment has taken more than six years to claw its way back to pre-crisis levels...
Now Timothy Geithner, who was Treasury secretary for four of those six years, has published a book, "Stress Test," about his experiences. And basically, he thinks he did a heckuva job. ...
Much of Mr. Geithner's book is devoted to a defense of the U.S. financial bailout, which he sees as a huge success story — which it was, if financial confidence is viewed as an end in itself. ... But where is the rebound in the real economy? Where are the jobs? ...
One reason for sluggish recovery is that U.S. policy "pivoted," far too early, from a focus on jobs to a focus on budget deficits. Mr. Geithner denies ... any responsibility for this... That doesn't match independent reporting, which portrays Mr. Geithner ridiculing fiscal stimulus as "sugar" that would yield no long-term benefit.
But fiscal austerity wasn't the only reason recovery has been so disappointing..., the burden of high household debt, a legacy of the housing bubble, has been a big drag on the economy. And there was, arguably, a lot the Obama administration could have done to reduce debt burdens without Congressional approval. But it didn't... Why? According to many accounts, the biggest roadblock was Mr. Geithner's consistent opposition to mortgage debt relief — he was, if you like, all for bailing out banks but against bailing out families.
"Stress Test" asserts that no conceivable amount of mortgage debt relief could have done much to boost the economy. But the leading experts on this subject are ... Atif Mian and Amir Sufi, whose just-published book "House of Debt" argues very much the contrary. ...
In the end, the story of economic policy since 2008 has been that of a remarkable double standard. Bad loans always involve mistakes on both sides — if borrowers were irresponsible, so were the people who lent them money. But when crisis came, bankers were held harmless for their errors while families paid full price.
And refusing to help families in debt, it turns out, wasn't just unfair; it was bad economics. Wall Street is back, but America isn't, and the double standard is the main reason.

Links for 5-19-14

Posted: 19 May 2014 12:06 AM PDT

"I'm with Brad"

Posted: 18 May 2014 10:42 AM PDT

Jared Bernstein:

Diagnoses and Prescriptions: The Great Recession: There's a very interesting, albeit down-in-the-weeds, analytic debate brewing around a confluence of recent publications. Tim Geithner's new book defends the interventions of the Treasury department he led to reflate credit markets (and I worked with the team on this back then). Mian and Sufi's new book ... argues that Treasury got it wrong by not recognizing the extent to which debt burdens were restricting growth and intervening in ways to write off more debt...
Dean Baker has long argued the problem was not just the debt overhang but the wealth effect's sharp shift into reverse when the housing bubble burst. That's similar to Main/Sufi except it implies that even had you forgiven the debt, consumption still would have tanked. Brad DeLong articulates an "all-of-the-above" theory, suggesting each of these analyses gets at one part of the problem but you need all of them to understand what happened.
Here's what I think..., you have to do everything you can to get the system back up. You have to reflate the credit system through both liquidity (as in the TARP) as well as Mian/Sufi-style principal reductions and cramdowns of mortgage debt that cannot realistically be serviced without sustained pain. The administration did a lot of the former and little (not none) of the latter. ...
Dean's point means that debt forgiveness and revived credit flows must be met with deep fiscal stimulus that lasts as long as needed. ... With the private sector still licking its wounds, absent committed stimulus there's no reason to expect deleveraging, or even aggressive monetary policy, to trigger the growth needed to reach escape velocity. ...
So I'm with Brad—all of the above. And let's keep it real: the problem was not only that we didn't do all of the above. It's that even when we did the right things, we didn't stick with them long enough. The important thing is to try to learn from our mistakes, and I for one am thankful to all of these authors for continuing to plumb these deep waters. ...

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