Wednesday, October 15, 2008

London leads on the financial crisis

Nobel laureate Paul Krugman praises the British bailout plan and notes the surprise that Britain and its embattled Labour prime minister Gordon Brown took the lead in the bank nationalization plan that the EU adopted this weekend and has begun implementing in Gordon Does Good New York Times 10/12/08.

(I should note that Krugman winning the Nobel means retrospectively that this year's Netroots Nation convention in Austin had two Nobel laureates speaking, Krugman and Al Gore. Not bad for a bunch of dirty freaking hippies.)

Krugman writes:

The British government is, after all, very much a junior partner when it comes to world economic affairs. It’s true that London is one of the world’s great financial centers, but the British economy is far smaller than the U.S. economy, and the Bank of England doesn’t have anything like the influence either of the Federal Reserve or of the European Central Bank. So you don’t expect to see Britain playing a leadership role.

But the Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn’t been matched by any other Western government, least of all our own.
Krugman gives a capsule definition of the problem:

The bursting of the housing bubble [2007] 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.

Partial nationalization, which means governments buying shares of bank stock to raise more capital for them, is needed to address the problem of under-capitalization. Krugman cites sources saying that Federal Reserve Chairman Ben Bernacke favors the nationalization program, but Treasury Secretary Henry Paulson is resistant. Paulson wants to use emergency funds provided by Congress to buy bad assets from banks which, as Krugman points out, provides no obvious solution to the problem of banks' under-capitalization.

Krugman has also criticized Paulson for his inconsistent decision to save Merrill Lynch but let Lehman Brothers go under. This sent a confused signal to the markets which contributed to the instability of the last few weeks. And in this column, he muses about how the general predator-state approach of the Cheney-Bush administration specifically affected Paulson uncertain response:

It’s hard to avoid the sense that Mr. Paulson’s initial response was distorted by ideology. Remember, he works for an administration whose philosophy of government can be summed up as “private good, public bad,” which must have made it hard to face up to the need for partial government ownership of the financial sector.

I also wonder how much the Femafication of government under President Bush contributed to Mr. Paulson’s fumble. 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.
Joschka Fischer like Paul Krugman is also surprised that Britain's Gordon Brown wound up taking world leadership on the financial crisis. But where Krugman contrasts that with the less responsible actions of the Cheney-Bush administration, Fischer in Kanzlerin auf Schlingerkurs Die Zeit 13.10.2008 is focused on what it has revealed about the weaknesses of Chancellor Angela Merkel's leadership in Germany and Europe.

Combined with the dramatic drop in the vote percentage of her party in Bavaria in the Sept. 28 state (Landtag) elections there, Fischer thinks that her image has been badly tarnished internally in three ways: she no longer looks like so strong a candidate for 2009's national parliamentary elections; her reputation for leadership in the European Union (important for German voters for their Chancellor) has been damaged; and, she no longer looks quite like the decisive and confident leader she appeared to be prior to the last two weeks.

Fischer approved Merkel's unwillingness to go along with French President Nicolas Sarkozy's original proposal for an EU-wide crisis fund to assist under-capitalized banks, because his proposal would basically have helped him to balance his national budget without realistically addressing the problem. "But", he asks, "why could the German government not at least have presents its own proposal for a common [EU] policy at least to the Euro-Group [the countries using the euro currency]?" (my translations)

Fischer finds it especially concerning that Merkel and the EU had to rely on Brown for such a dramatic proposal: "A plan which is based upon nothing less than the global (partial-)nationalization of banks and financial institutions." And he writes:

Germany in particular plays an especially important role for Europe in this global financial crisis, because it is easily the largest and most important economy of the EU. All other Europeans looked to Berlin and were bitterly disappointed. The German government clearly did not think about a European solution or even on European coordination. That Peer Steinbrück then last week in Luxemburg did not take part in the most important meeting of the EU Finance Ministers since the introduction of the euro only further underlines this image of Germany"s weakness in European leadership.

It left behind the fatal impression that the economic giant Germany in the hour of need played the national card and did not worry about Europe. In the other capitals - particularly in Paris and London - this not only inspired anger and distress, but also deep indignation and mistrust.
Fischer, by contrast, believes that strengthening the European Central Bank and to encourage its use for the common financial policy should be the highest priority of German politics in the current financial crisis.

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