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Thursday, October 27, 2011

Paul Krugman, "The Path Not Taken": What Paul Doesn't Tell You

In his latest New York Times op-ed entitled "The Path Not Taken" (http://www.nytimes.com/2011/10/28/opinion/krugman-the-path-not-taken.html?_r=1&partner=rssnyt&emc=rss), Paul Krugman makes the case for allowing troubled banks to fail:

"But it’s worth stepping back to look at the larger picture, namely the abject failure of an economic doctrine — a doctrine that has inflicted huge damage both in Europe and in the United States.

The doctrine in question amounts to the assertion that, in the aftermath of a financial crisis, banks must be bailed out but the general public must pay the price."

But what does Paul fail to mention?

After the US government rescued Citigroup in 2008, American taxpayers netted a profit of $12 billion on the government's investment of $45 billion, when, in 2010, the Treasury Department sold off the last of its shares acquired as part of the bailout. This represents almost a 27% return on a two-year investment, which saved the jobs of more than 250,000 employees around the world and staved off global economic chaos. The general public paid the price? Yes, and did handsomely by it.

And how is Citigroup doing today? Although it continues to face numerous challenges, Citigroup announced its seventh consecutive quarterly profit earlier this month.

True, many people are currently suffering in the current economic downturn, but any recovery will require the mechanisms of the banks.

Was the banks' recklessness responsible in large part for the current crisis? No question about it. But do we want revenge, or do we seek better regulation of the financial institutions, which are needed to foster any upturn?

I don't know about Paul, but I prefer the latter alternative.

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