While Bush Fiddled

By Dan Froomkin
Special to washingtonpost.com
Tuesday, October 14, 2008; 12:56 PM

Here's something to ponder: What would have happened if President Bush had listened to Paul Krugman three weeks ago instead of Henry Paulson?

Krugman -- a Princeton economist, New York Times columnist and newly-minted Nobel Prize winner -- was one of many financial experts who cast doubt on the original bailout plan that the Treasury secretary and his ostensible boss agitatedly insisted was the only way to avoid utter disaster.

How things have changed. Bush made it official this morning that his administration has now come around to the Krugman view -- that a partial nationalization of the banking industry is actually the best approach.

Back on September 22, in a column headlined " Cash for Trash," Krugman wrote that Paulson's bailout plan, "as far as I can see, doesn't make sense." Instead, he called for the government to provide capital to financial firms and get a share in ownership in return.

"Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world Americans have to do exactly what it says now now now," Krugman wrote.

"But I'd urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. . . . [I]f this plan goes through in anything like its current form, we'll all be very sorry in the not-too-distant future."

The day that column was published, the Dow was at 11,143. A little over two weeks later -- after the original plan was enacted, and before it became clear that Bush was going to adopt the new one -- the Dow had lost one fourth of its value.

Deborah Solomon, Damian Paletta, Jon Hilsenrath and Aaron Lucchetti write in the Wall Street Journal: "President George W. Bush announced Tuesday morning that the U.S. government is taking stakes in the nation's top financial institutions as part of a new plan to restore confidence to the battered U.S. banking system, a far-reaching effort that puts the government's guarantee behind the basic plumbing of financial markets."

But as they write, some critics "say Treasury should have formulated a comprehensive plan earlier in the crisis. Even if this move helps mend credit markets, the economy is likely to suffer in the months ahead from the aftershocks of the recent turmoil.

"The government's new focus is raising questions about why it didn't adopt such an approach sooner. Mr. Paulson actively opposed the idea of investing in banks because he worried about picking winners and losers, though Fed Chairman Ben Bernanke was an early advocate. Mr. Paulson was also concerned banks wouldn't participate because of the perceived stigma and the potential for the government to meddle in their affairs, according to people familiar with the matter.

"Senior executives and advisers to some of the nation's leading banks pitched such a plan at various points earlier this summer but were rebuffed by officials at Treasury and the Fed, according to people familiar with the matter. Instead, Treasury initially marched ahead with a plan to buy distressed assets directly from banks.

"House Democratic leaders, including Speaker Nancy Pelosi and House Financial Services Committee Chairman Barney Frank, held a closed-door session Monday with 11 economists and other advisers. The group threw its weight behind Treasury's decision to inject capital into the banking system.

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