Wednesday, November 24, 2010

Making nice to Krugman

I pick on Paul Krugman a lot -- not because he's bad, but because he's good. (That's not an apology, Paul, but it's as close as you're gonna get.)

Anyway, I ran across an article of his on Slate, posted in 1998 if you can believe that. Like lots of economics, it's part interesting and part wrong. But he does say this:

You may tell me that it's not that simple, that during the previous boom businessmen made bad investments and banks made bad loans. Well, fine. Junk the bad investments and write off the bad loans.

"Write off the bad loans."

I've said it before, but the Fed now owns a huge chunk of bad loans -- the result of a rescue mission to get those loans out of the private sector. Well, they're out. But people are still trying to make payments on those loans.

We got the bad assets out of the economy, but not the bad liabilities. That's why the economy cannot recover. If the Fed would just "write off the bad loans," the economy would recover.

And yes, Paul, you said it before I did.


Nima Mahdjour said...

I would point out though that the Fed doesn't really hold a lot of bad loans. Even those they hold as part of TALF or similar programs are some of the best loans out of the "junk", and a lot of them are only swap agreements which require the bank to do a reverse swap at some point.

Unfortunately it's not in the Fed's own self-interest to self-destruct THAT easily :)

Most of the bad loans are on the balance sheets of banks and GSEs as far as I know. And they are not written down due to special treatment granted by legislators.

The Arthurian said...


Oh man, every time I assume something... But what about all that talk of "toxic assets"? I thought that was what the Fed bought with its $2T of new money in QE1. Got a good link where I can get up to speed on this? (Nothing too political!)

I almost don't care, really. If we can't write off bad loans, we should write off good ones. The thing that is necessary is to reduce private-sector debt, by hook or by crook.

Hey, they liked your "collusion" joke at our Thanksgiving table.