Paul Krugman is WRONG about The Obama TARP Plan - Once Again

On March 24th, I wrote a short post on Economist and NY Times Columnist Paul Krugman and created this video below.




Today, in the wake of Newsweeks' rather unfortunate April Fools Day article on the Princeton Professor (which presented him as a kind of edgy intellectual but lacked real substance in the discussion of why Krugman is wrong about Obama), I decided to offer this expanded blog post. The problem is that Krugman is really angry that the Obama administration is and has ignored him and this emotion has driven a sloppy intellectual approach, paced by the fact that he's not presented a plan for our troubled banks, all the while taking an aim at the President's plan that has the effectiveness of a drunken sailor at an arcade shooting gallery.

Who is Paul Krugman?

Professor Krugman is a decorated International Economist, who recently - in 2008 - won the Nobel Prize in Economics for his solid theory on two-country trade. Here Krugman attacked the standard idea of two-country trade by explaining with some heft that a country like the United States that makes a Cadillac sports sedan will see that car purchased to some degree in Germany, which just happens to produce the competitor BMW 5-series. In other words, rich countries trade like goods more often than poor country to rich country or vie versa. This idea was path-breaking in that the economies of scale were not included in traditional models of trade, so pretty much any country could trade with another one in this immmaginary World. Krugman's theory explained the real World.

Now, why do I have an interest in this? Because my background is in urban economics and I focused on it at both Texas-Arlingron and Cal-Berkeley, but fell in love with a kind of way of modeling relationships called System Dynamics which causes one to see the World as a set of feedback and control connections. And that's where I break with Krugman. As a traditional economist, he does not see beyond a set "straw-person example" and into the more complex World around him -- the political aspect of economics (the political economy as its called) is lost on him, which is why the Obama Administration does not embrace him.

The Obama plan for bank troubled assets, using Troubled Asset Relief Program money to finance non-recourse loans to encourage investors to buy the "junk" is one example (called the "Public-Private Investment Program for Legacy Assets"). Krugman attacks this plan around the idea that we're giving taxpayer money away to create this market, then sets the idea that it will not work without emprically showing why it will not do so in detail or offering an alternative plan.

What Krugman missed is a read of the political landscape such that Obama's TARP plan is not only one the market asked for, and for months, but was needed to take the bad debts off the banks books. And that's what Krugman misses. He rants on about the plan's possible failure from within its own system, but says nothing -- zip -- about getting the assets off the banks books, which is the real success. Then Paul makes a real intellectual error by writing that the Obama administration sees the bank financial system as sound, which it does not, otherwise this plan would not exist.

He then writes as if the plan uses all of the TARP money, rather than the truth, which is that it uses a small portion of it, thus leaving enough left over for other plans.

As I have stated again and again, the plan lacks a payment to American taxpayers under $100,000 of $3,500 each -- or about $380 Billion -- to essentially help banks and to a degree stimulate spending. Why? The vast majority of Americans don't have massive debt problems asmany don't carry credit card debt and for those who do the average level of credit card debt is about $10,000, so this plan helps reduce that by one-third. But people aren't going to leave the money under a matress, they will put it in banks, thus helping both Wall Street and Main Street. Remember the unemployment program, designed for those who were laid off from large companies in the past, does not help the apprentice plumber who has a decade-long resume of customers that suddenly dried up.

See, my idea is a supplement that I introduced a while back in a talk with CNN's Ali Velshi, who agreed it could help. But it fits within the economic and political reality of what we need to do to fix America's economy in a way that Krugman's plan does not do.

Oh. I forgot. He doesn't have a plan.

In closing, I do not embrace crits of this post that are based on the "You're not an economist" view or juvenile name-calling, which is common online but not allowed here in my space, but I do like a good debate on rigor and detail. Bring it.

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Zennie Abraham Takes On CNN's Ali Velshi On Economic Stimulus

For me this was a ton of fun to do. But it's even better when someone takes time to let folks know you did a great job. Such was the case with the CNN iReport and CNN.com, who contacted me regarding my question for CNN's Ali Velshi on what he thought of giving $3,500 to each American taxpayer under $100,000.

Here's the video:



This is what CNN iReport's Rachel8 wrote:

Would you go head-to-head with CNN's top economic expert on an economic stimulus plan? How about live on the air?

Fearless iReport superstar Zennie Abraham did. After submitting an iReport suggesting a taxpayer stimulus package, he discussed his plan with CNN chief business correspondent Ali Velshi on CNN.com/live. Velshi said the plan -- which calls for a $3,500 stimulus check to those making less than $100,000 a year -- was not targeted enough to work. But Zennie courageously defended his idea.

"I disagree, with all due respect," he said to Velshi. "$3,500, particularly for college students or their parents, can help pay for their housing. For a person who's older, that could help pay their mortgage. ...You have to have time for the other aspects of President Obama's programs to work. The idea with this proposal is to buy time for those programs to kick in. I'm not saying that this is a cure-all. It works as part of a package."

And, after hearing the explanation, Velshi started to agree.

"In that context, I can understand that. If we are creating jobs, and we are helping people out with their mortgages, as an added extra, that could work," he said.

Nicely done, Zennie! You really held your own

.

Thanks Rachel! It was a lot of fun and I hope I get the chance to do something like that, again.