Paul Krugmans Bailout Dissent

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“That first day, it took me a couple of hours to figure it out. I sat down and tried to sketch out for myself what was missing,” Krugman said. For whatever reason, he realized, Paulson was ignoring the most basic step in international economics for recapitalizing failed banking systems. The United States bought up equity in the savings-and-loan crisis, as did Sweden and Japan in their own meltdowns. “What everybody did was come in on the equity side, not the debt side.”

Krugman, a modest man known for the elegant simplicity of his economic thinking, does not claim to have discovered anything new. He says the plan to stabilize banks by using taxpayer dollars for a temporary government ownership stake in major financial institutions took a basic page from the global-finance playbook. From the moment Paulson testified to Congress in late September, blogs and esoteric websites (like VoxEU) favored by international economists were buzzing with the same advice. The Treasury should buy stock in American banks. Recapitalizing the banks in this way had the added benefit of being far less socialistic than Paulson’s program of giving handouts to incompetent bankers. We expect Washington in general, and this administration in particular, to be slow on the uptake, but why did it take our financial news shows and business pages so long to get behind this obvious solution?

Before I get to that, a bit of personal disclosure is in order. Around 1999, New York Times publisher Arthur Sulzberger Jr. told me he wanted to hire the first full-time economics columnist in the paper’s 150-year history. It was a dream job. A Times economics columnist could hold sway in his field the way James Reston did on politics or, more recently, Thomas Friedman did on foreign policy. As editorial-page editor at the paper, I took the train up to Cambridge to recruit a young Harvard professor whose work I had seen on Slate and elsewhere. So factor into my praise for Krugman whatever bias arises from my having recruited him for the Times. While I am proud of his work, he and I did not go on to become close pals; we had not spoken in more than five years when I called to congratulate him on the Nobel.

We reminisced over his initial doubts upon being offered the Times job. Back then, I amused Sulzberger and other colleagues by quoting Krugman’s jittery initial response to our offer: He was afraid that dirtying his hands in daily journalism would ruin his chances of winning the Nobel Prize. He went on to explain, with an innocent candor seldom encountered in New York or Washington, that aiming at a Nobel was not the long shot for an economist that it would be for a novelist or physicist. The talent pool is much smaller in economists’ tight little world and, indeed, the Royal Swedish Academy of Sciences has been criticized for having a lower bar for economics laureates than for those in physics or chemistry (the other two disciplines for which it awards prizes).

“If you don’t take it,” I told him about the Times post, “you’ll always second-guess yourself about what might have been.” Even I was surprised at how quickly this nebbishy fellow became the bête noire of the right, enraging the George W. Bush crowd with his economic criticism and many other conservatives with his column and later his passionate blog, Conscience of a Liberal. At first, some of us at the paper were dismayed that Krugman seemed more drawn to bare-knuckle political commentary than to scholarly explanations of economic theory. Reminiscing about that time, Krugman said his shift surprised him as well; it seemed morally necessary as a response to President Bush’s transition from “compassionate conservative” to numskull. “It wasn’t me; it was the world,” he chuckled. “Remember, in 1999 the business of America was business. Very corrupt regimes were something that happened in other countries.”

Almost immediately, newspapering upended his quiet life in academia. “Hardly a morning goes by without me wishing I hadn’t been offered the column in the first place,” said Krugman, who has since joined the Princeton University faculty. “But I’ve never regretted taking it. Who knew?”

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