Krugman: Obama, Geithner Need to Do More to Boost Economy

Nobel Prize-Winning Economist Paul Krugman says end Wall Street's "sweet deals."

March 24, 2009, 2:29 PM

March 25, 2009— -- Nobel Prize-winning economist Paul Krugman said President Obama needs to lift the confidence of the American people and "to prepare public opinion for the really bold policies that he keeps on promising but not delivering."

In an interview with ABC News, Krugman said the administration needs to stop making "half-measures" and should tackle the recession head-on.

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As for Treasury Secretary Timothy Geithner, he said Geithner "is conditioned by his Wall Street friends" to look at the economy from a certain perspective.

"For people who felt that Obama was going to bring change, a real difference, it somehow feels quite a lot as if we've got the same old gang still making the policy decisions, despite how discredited they are in the eyes of the public," said Krugman, who is a professor of economics and international affairs at Princeton University, a columnist for the New York Times and an ABC News consultant.

This week, the Obama administration unveiled a plan -- through a private-public partnership -- to buy up to $1 trillion worth of bad mortgages and other so-called toxic assets. Krugman has been critical of the plan, saying it doesn't do enough and places too much risk on the taxpayers.

"We're going to create very sweet deals for people who will buy this stuff off the banks and we're going to hope that just by creating this market, we make the banks' problems go away," he told ABC News. "It's just very hard to believe that that's all right. It's quite likely to cost taxpayers $100 [billion], $200 billion in losses by the time it's all said and done without actually reconciling the problems of the banks."

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Last night, Obama once again took his message directly to the American people. During his second primetime press conference, Obama recapped the steps his administration has taken on the economy which he believes have started to show "signs of progress."

But Obama said that the other governments are also going to have to steps to end the recession.

"What I've suggested is -- is that all of us are going to have to take steps in order to lift the economy," the president said. "We don't want a situation in which some countries are making extraordinary efforts and other countries aren't, with the hope that somehow the countries that are making those important steps lift everybody up. And so somebody's got to take leadership."

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The president also did a bit of cheerleading, asking Americans to individually do their part."What I'm looking from the American people to do is that they are going to be doing what they've always done, which is working hard, looking after their families, making sure that despite the economic hard times that they're still contributing to their community, that they're still participating in volunteer activities, that they are paying attention to the debates that are going on in Washington," he said.

So what exactly is troubling the banks?

To start with, Krugman said the assets aren't toxic. They aren't like a cancer that spreads and destroys healthy cells. They just aren't worth very much. He said if the banks wrote off these assets as zero, they would be off the banks' balance sheets.

"The problem is that the banks are not solvent unless they can claim these assets are worth 50, 60 cents on the dollar, whereas nobody is willing to pay more than 30 or 20 cents on the dollar to buy them," he said.

Krugman said Obama and Geithner think the solution is creating a false, inflated market for these bad investments. "They've lost sight of what it was really about."

Asked specifically how he thinks Geithner is doing, Krugman said, "I think not so good."

He explained it's better to have a stimulus bill than nothing. Even the plan to deal with these toxic assets is maybe better than doing nothing at all.

"But it's just inadequate," he said. "We've got the greatest economic crisis since the Great Depression and we've got a set of half-measures in terms of economic policy and a general sense that the Treasury Department and Obama think if they can do a little more on the technical side, we'd wake up and realize it's two years ago all over again."

Relief and Recession

Krugman said the recession might end long before Americans start to feel relief.

"The last recession officially ended in November 2001, but unemployment kept on rising for a year and a half after that," he said. "I see a real possibility that the freefall that we're going through will come to an end later this year, but I don't see a real turnaround on what matters to most people, which is the jobs picture, as far as the eye can see. I don't see where recovery comes from at all in terms of actually starting to become a job-creation economy again."

Krugman has become a bit of a celebrity these days. He is, of course, well-known for his New York Times column, and winning the Nobel Prize in economics didn't hurt, either. But now, he has crept into pop culture.

Circulating on the Internet is a song about Krugman, of all people. Yes, Jonathan Mann is on a mission to post one original song and video every day to his Web site until he's got 100 of them. One of the most recent song topics: Krugman.

"Hey, Paul Krugman, why aren't you in the administration? Is there some kind of politicking that I don't understand," Mann asks in the song.

"When I listen to you, things seem to make sense," Mann said, adding that when he listens to Geithner -- who he calls a "little weasel" -- "all I hear is blah, blah, blah."

So, what does Krugman think of the song?

"I found it a little horrifying. My wife thought it was terrific," he said.

As for Mann's criticisms, Krugman said, "I've got a voice" and that Geithner and White House Economic Council chairman Larry Summers read what he writes.

"The buck stops with Obama. He makes the decisions. In a way, I think I've got as much input as anyone can reasonably hope to have," Krugman said. "I'm rooting for him. I hope I'm wrong in being pessimistic about this plan."

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