Paul Krugmans Bailout Dissent

PREV 3 of 3

Krugman says the Wall Street meltdown has freed him somewhat from the political rages that dogged him through the Bush years. “The financial crisis was up my alley. My wife, Robin”—also an economist at Princeton—“says I’ve been a lot happier since it began.”

Traditionally, the White House holds a reception for every American who wins a Nobel Prize, and Krugman’s award was for scholarly work on international trade theory that had nothing to do with his adversarial Times columns. So has the White House set a date for honoring Krugman? “I haven’t heard from them,” he said at the time this article went to press. “If they did it for Al Gore, I guess they could do it for me.”

While the financial crisis acted as a tonic for Krugman, following the press coverage and the shrinking of my modest investment portfolio has been less fun for me. My wife, Krystyna, and I were on a long-planned fall road trip through the more remote parts of the Dakotas, Saskatchewan, and Montana during the first three weeks of the storm. We were news junkies cut off from our usual Eastern newspapers. So, driving across the seemingly endless vistas of a bumper wheat crop, we relied on satellite radio links to the financial reporters of National Public Radio and the cable-television news networks. We quickly came to identify the senior business correspondent of CNN, Ali Velshi, as a pacesetter on this story.

As a former political reporter, I wanted to know about the Republican Party’s abandonment of market triumphalism, to use the New Yorker’s phrase. But Velshi had little interest in what he later described to me as the “academic” story of how Paulson and his M.B.A.-holding boss had trashed the principles of free enterprise. “There’s a fire going, and it’s got to be put out,” he said by way of condemning the House of Representatives for its initial vote against the Paulson plan. “This is a really bad week to be putting all of your principles in front of you right now, because the market doesn’t work on principles,” he barked when CNN anchor Kyra Phillips fretted timidly about Congress approving “golden parachutes” and “high-paid C.E.O.’s.” “The problem here, Kyra, is that I fully understand why some people don’t like this. I have been sort of saying to people, ‘You have to close your nose and swallow it.’ ”

Bitter-pillism spread through the network news shows and the print media. On NPR, Steven Pearlstein of the Washington Post pummeled those who opposed giving Paulson “enormous power” to cover bad mortgages. “There’s no other way to do it,” Pearlstein said. A Fortune article used the term “class fury” to describe the public’s possible reaction to the suggestion that it bail out Wall Street. Conservative Republicans like Senator Jim DeMint of South Carolina, who didn’t want the G.O.P. to embrace “socialized risk” for Wall Street firms, were given the pro forma coverage reserved for quacks.

All this, it seemed to me, veered beyond advocacy journalism into what could be termed conviction journalism—sometimes admirable for its sincerity but often alarmist in tone. As Velshi later told me, he saw this as a 9/11 moment for the American economy. Our security systems had collapsed. It was necessary to act immediately, even if what Congress did was as imperfect as the Paulson plan. “The ‘it’ was sort of my focus, not the ‘what,’ ” he said. He foresaw a massive loss of jobs and a collapse of the business-credit system if lenders had to wait for a market correction to punish Wall Street. “So my advocacy was not about this deal,” he said. “It was about the need to do something quickly.”

Newsrooms often vibrate with calls to arms in an apocalyptic atmosphere. After all, Edward R. Murrow didn’t use his broadcasts from the burning rooftops of London to call for new diplomatic overtures to Hitler. But I don’t argue with press critics who said that cable television somehow fed the economic hysteria that brought record drops in the Dow. In any event, the story that most everyone missed during all this flapping was that Paulson was doing a 180.

As late as September 23, he had pushed aside the idea of investing in the banks, opting to buy their bad assets instead. His dismissive comment almost seemed targeted at Krugman. “Some said we should just stick capital in the banks,” Paulson said. “That’s what you do when you have failure. This is about success.” It was the sort of contemptible thing, he told Congress, that the Japanese would do. By his October 15 appearance on NBC’s Today, Paulson had redefined success. The Treasury was now going to save the banks by buying their preferred stock, potentially unfreezing the credit lines.

I give credit to the Wall Street Journal for finally connecting the dots on October 14, in a story about the Treasury Department’s new plan, announced after weeks of ad hoc solutions. However, I would have put the story on the front page instead of burying it inside. Halfway through the article, it was noted that Fed Chairman Ben Bernanke had favored recapitalizing the banks all along. You may not be surprised to learn that Bernanke and Krugman were acquainted at M.I.T., where they earned their doctorates. Bernanke’s area of expertise? The Great Depression.

PREV 3 of 3