Nobel Winners Spence, Krugman Clash on Geithner Plan Prospects
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By Scott Lanman and Vivien Lou Chen
March 24 (Bloomberg) -- Treasury Secretary Timothy Geithner has a good chance of succeeding with his plan to cleanse banks of toxic assets, says A. Michael Spence, co-winner of the 2001 Nobel Prize in economics. Paul Krugman, the newest laureate, is so sure Geithner will fail that he’s full of “despair.”
Even winners of the highest awards in economics can’t always be right. Which prediction proves correct depends in part on whether private investors can be enticed to bid on as much as $1 trillion of illiquid loans and securities that banks are now stuck with.
“This program is crucially dependent on the private sector as participants and price setters,” said Spence, 65, who shared the Nobel Prize with George Akerlof and Joseph Stiglitz for a theory that found some government intervention can make markets more efficient. “It could work,” Spence said in a telephone interview yesterday.
That’s not an opinion shared by 2008 Nobel laureate Krugman. “The real problem with this plan is that it won’t work,” Krugman, 56, said in his New York Times opinion column yesterday.
Geithner appears to be going back to the “cash for trash” approach of his predecessor as Treasury Secretary, Henry Paulson, Krugman said. “This is more than disappointing. In fact, it fills me with a sense of despair.”
Krugman’s Advice
Instead of financing the purchase of illiquid assets, the government should guarantee many bank debts, take control of “insolvent” firms and clean up their books, similar to what Sweden did in the 1990s, Krugman said.
While Spence, a Stanford University professor and former business-school dean, has more confidence in Geithner, even he isn’t positive the Treasury secretary can pull it off.
The Treasury plan “is a little complex to implement,” Spence said. “I assume the Treasury has done its homework, and has people lined up” to commit private capital to Geithner’s public-private partnerships, he said.
A crucial question is whether private investors can stomach potential threats and scrutiny from Congress, whose move last week toward taxing employee bonuses may drive bidders away, said Carnegie Mellon University professor Allan Meltzer, 81, author of a history of the Federal Reserve. |
