Krugman Over The Edge
I wonder if I’ll ever read anything by Paul Krugman again. I doubt it. As Matt Taibbi put so elegantly in Rolling Stone Friday, “he’s been doing a lot of shovel work for the Hillary Clinton campaign lately” and what he’s shoveling is destroying his own reputation. Krugman’s “Sanders Over The Edge” piece in the NY Times Friday was an ugly character attack but what’s turned so many former Krugman fans off was his bullshit about the causes of the crash. Sounding almost as pathetic as bank board of director Barney Frank– who accepted $4,451,123 from the Finance Sector while working on the House Financial Services Committee, watering down reform after reform for his generous Wall Street contributors– did on MSNBC last week, Krugman well may be looking for the same Clinton Administration job Barney wants.
Or maybe not. Krugman is, however, part of an ideological debate around political economy. Krugman has always argued, ever since anyone can find public statements, that the government can’t do very much about inequality, and that free trade is a good thing but will cause inequality for unskilled domestic workers. The entire edifice of the 1970s onward Democratic apparatus, which includes a lot of people who benefitted from the home equity driven Reagan-era financialized economy, actually like this system or at least perceive it as the best of bad options. Those cut out of its fruits– aka young people and low income worker class voters– do not. And while Krugman’s arguments can be termed disingenuous, the disagreement progressives have with him is essentially ideological.
There is a different set of ideas animating Sanders supporters, it’s far more akin to New Deal liberalism than the modern Clinton model of globalized skill-building white collar driven arguments of prosperity. If it’s framed as an ideological question rather than a tactical question, a lot of this begins to make more sense. You can simply understand people who dislike Sanders as those who disagree with New Deal liberalism, or who do not understand it and are afraid of it. What’s nice about framing this as ideological is that ideas do not have to be bounded by political campaign seasons or tactics or media punditry or whatever. We have a vision, and it is different than the vision propounded by neoliberals. Now, back to Taibbi:
By way of making a criticism of the oft-repeated Sanders charge that the big banks need to be broken up, Krugman argues that banks were not “at the heart of the crisis.”
This is Krugman’s assessment of who was responsible:
“Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial; the crisis itself was centered not on big banks but on ‘shadow banks’ like Lehman Brothers that weren’t necessarily that big.”
Forget about the Sanders-Clinton race, because it’s irrelevant to the issue. Krugman is just wrong about this.
The root problem of the ’08 crisis lay in a broad criminal fraud scheme in the mortgage markets. Real-estate agents fanned out into middle- and low-income neighborhoods in huge numbers and coaxed as many people as possible into loans, whether they could afford them or not.
Those loans in turn were bought up by giant financial companies on Wall Street, who chopped them up into a kind of mortgage hamburger. Out of this hamburger, they made securities. These securities were then sold to institutional investors like pension funds, unions, insurance companies and hedge funds.
In the typical scenario, the investors buying these toxic mortgage securities weren’t told how risky the merchandise was. Many thought they were investing in AAA-rated real estate, when in fact they were buying up the flimsy home loans of part-time janitors, manicurists, strawberry pickers, people without ID or immigration status, and so on.
There were two major classes of victims in this scheme: homeowners and investors. About five million people went into foreclosure after the crash, and investor losses globally ran into the trillions. It was an unparalleled event in the annals of white-collar crime.
Virtually the entire financial industry had a hand in this. The ratings agencies were complicit because they blessed a lot of these mortgage securities with high ratings when they knew they didn’t deserve them. Companies like AIG had a role because they created a kind of pseudo-insurance for these mortgage securities that disguised the risk they posed.
And Krugman is right that companies like Countrywide and First Century, the sleazy “mortgage originators” who sent teams of over-caffeinated real-estate hustlers into neighborhoods offering crooked loans, were primarily responsible for a lot of the street-level predatory lending.
But Krugman neglects to mention the crucial role that big banks played.
The typical arc of this scam went as follows: Giant bank lends money to sleazy mortgage originator, mortgage originator makes lots of dicey home loans, the dicey home loans get sold back to the bank, the bank pools and securitizes the loans, and finally the bank sells the bad merchandise off to an unsuspecting investor.
The criminal scenario that was most common was a gigantic bank buying up huge masses of toxic loans from a Countrywide or some other fly-by-night operation and knowingly selling this crap as a good investment to some investor.
We chronicled an example of this in The $9 Billion Witness, the story of JP Morgan Chase whistleblower Alayne Fleischmann, who lost her job after trying to stop the bank from selling a parcel of bad mortgages. JP Morgan Chase ended up saddled with a $13 billion settlement after it admitted to making “serious misrepresentations” to mortgage investors.
…When a company is not only too big to fail, but too big to prosecute, it’s too big to exist. Krugman may believe otherwise, but he shouldn’t pretend that others– including his own paper– don’t have legitimate concerns.
Over at HuffPo yesterday, Zach Carter and Ben Walsh, also tore into Krugman’s dubious anti-Bernie arguments. They were incredulous at Krugman’s assertion that Lehman Brothers “wasn’t that big,” even though it “had a peak market cap of $60 billion just 18 months before it collapsed. When it failed, it was the fourth-largest U.S. investment bank, and with $600 billion in assets became the largest bankruptcy in the country’s history.” He apparently forgot his own arguments about Lehman’s culpability.
Krugman’s argument, which he has made before, is that big commercial banks didn’t create the toxic morass of worthless mortgage securities that almost toppled the world economy. Instead, it was “shadow banks”– hedge funds, investment banks, money market funds, securitization vehicles– that did us in.
It’s true that the shadow banking system ran amok in the years before the crisis. But the division between it and the big commercial banks isn’t tidy. They’re intimately connected, and laying blame for the financial crisis on the shadow banks misses a key point: Without huge banks, the mortgage bubble machine could not have worked.
Big banks lent billions of dollars to the shady mortgage originators Krugman rightly vilified. Big banks gleefully took the millions of terrible, often fraudulent mortgages those originators created and securitized them. And then, they sold them and traded them. Big banks love to say they provide the funding that makes the economy go– and in the case of the mortgage bubble, there is no question that they provided the liquidity that inflated the bubble to historically dangerous levels.
It seems weird to have to argue in 2016 that yes, too-big-to-fail banks were at the center of the financial crisis, but here we are. That’s what the Financial Crisis Inquiry Commission found. Federal Reserve Chairman Ben Bernanke, former IMF chief economist Simon Johnson, former Federal Deposit Insurance Corp. Chair Sheila Bair, former bank bailout Inspector General Neil Barofsky, FDIC Vice Chairman Thomas Hoenig, and Sen. Elizabeth Warren (D-Mass.) have all concluded that “too big to fail” was, in fact, central to the crisis.
None of this means shadow banking isn’t dangerous and shouldn’t shoulder some blame for the financial crisis. Similarly, attempting to write big banks out of the history of the financial crisis, and claim that anyone who blames them “misses the point,” as Krugman does, reduces the history of the financial crisis to campaign talking points.
You can’t fault Hillary Clinton or Bernie Sanders for trying to one-up each other on the campaign trail, but you’d expect better from Paul Krugman.
Not anymore I wouldn’t.