"When I read others' work, I try to read between the lines and put it in the best possible light. "

Thank God for Felix Salmon, Paul Kedrosky, and Justin Fox:

"The case for nationalizing Citigroup and Bank of America, and getting Robert Reich a fact checker

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A couple of commenters have pointed me to Robert Reich's list of "Criteria for TARP II." Nos. 3-6 seem the most important:

3. Prohibit any bank that gets TARP II funds from issuing dividends, purchasing other companies, or paying off creditors.

4. Bar any bank that gets TARP II funds from paying its executives, traders, or directors more than 10 percent of what they received in 2007.

5. Require that any bank getting TARP II funds be reimbursed by its executives, traders, and directors 50 percent of whatever amounts they were compensated in 2005, 2006, 2007, and 2008. This compensation was, after all, based on false premises and fraudulant assertions, and on balance sheets that hid the true extent of these banks' risks and liabilities.

6. Insist that at least 90 percent of the TARP II money be used for new bank loans. If the banks cannot find suitable lenders, they should return the money.

Okay, all somewhat hard to execute, but I get where Reich is headed with them, and generally share at least his sentiments on 3 through 5. But then he writes something that makes me wonder if he's been paying any attention at all over the past few months:

You may judge these conditions harsh. I think them prudent. They may force a number of big banks to go into chapter 11 bankruptcy, which would not be the end of the world but perhaps the beginning. At least then we'd find out what was on their balance sheets, because they'd have no choice but to sell off some of their junk, even at fire-sale prices (believe me, if the price is low enough, there are investors around the world who will buy them( I AGREE HERE )); they'd have to negotiate with their creditors and pay some of them off; many of their CEOs would be fired and directors replaced, which they should have been already; and most of their shareholders would be wiped out, which is unfortunate for them but, hey, they took the risk. In other words, these provisions would force the banks to clean up their balance sheets.

Because of the danger of bank runs, banks don't go into Chapter 11 bankruptcy. They get taken over and wound down or sold by the FDIC( TRUE ). Lehman Brothers went into Chapter 11 because there is no FDIC for investment banks, and the messy result is widely agreed to have escalated the financial crisis to a new and global-economy-threatening level( I AGREE ). So Reich's exit scenario is impossible, and taxpayers are on the hook here no matter what. ( TRUE )

The issue now is not really whether the government ought to impose new conditions that will force more banks into deeper trouble, it's whether it should bite the bullet and simply nationalize the banks that pose the greatest risk( MY PLAN ). The government-appointed receiver or conservator or whatever he or she would be called could conceivably then impose the conditions Reich outlines, although I would think the much higher priority ought to be forcing the fire sale of troubled assets that Reich thinks would happen in his imaginary bankruptcy.( I AGREE. BUT THE FIRE SALE CONDITION IS THE IMPORTANT ONE )

Felix Salmon makes the non-imaginary case today for nationalizing Citigroup and Bank of America, Brad DeLong has been on the topic for a while, and I highly recommend Steve Randy Waldman's more general September post, Real capitalists nationalize. As for Reich, his heart seems to be in the right place, and like a lot of people I've moved closer to his worldview over the past year or two( ME TOO ). But his troubled relationship with facts—as documented by Jonathan Rauch in his classic takedown of Reich's memoir of his time as Labor Secretary—continues to amaze."

As I say, it's good that a few people have their heads screwed on. Most others have their heads up...I agree with Greg Mankiw. We should be decent and generous in debating policies and theories:

"Fama on Fiscal Stimulus

Eugene Fama is a stimulus skeptic.

In fact, he is even more skeptical than I am. I am willing to concede that many Keynesian effects work in the short run, although I prefer monetary policy to fiscal policy and, within fiscal policy, I prefer the use of tax instruments to government spending as a tool for short-run demand management( I LIKE A COMBINATION, AS THE STIMULUS SERVES MORE THAN ONE PURPOSE ). By contrast, I read Fama's article as a largely wholesale endorsement of the classical model with complete crowding out.

Update: Brad DeLong takes me to task for not taking Fama to task:

No, Greg. It's not an endorsement of any model. It's just a mistake. Fama mistakes the NIPA savings-investment accounting identity for a behavioral relationship( IT IS A BIG MISTAKE ) that constrains the behavior of investment: when the government deficit goes up, Fama says, private investment must go down by the same amount.

When the government deficit goes up, private savings could go up by more--and private investment could increase. Private savings could go up by less--and private investment would fall by less than the rise in the government deficit. Private savings could remain unchanged. Or private savings could fall. Determining which of these is most likely to happen would require a model of the economy of some sort--and Fama does not have one: all he has is an accounting identity that he does not understand.

This post reflects a fundamental difference between Brad's approach to the world and mine. When I read others' work, I try to read between the lines and put it in the best possible light. In particular, when I read the work of an economist as distinguished as Eugene Fama, I am reluctant to jump to the conclusion that I am vastly smarter than he is.( I WISH HE AND OTHER ACADEMICS WOULD APPLY THIS TO THE WORLD AT LARGE. SOME OF US ARE EDUCATED AS WELL, IF NOT DISTINGUISHED. )

In the case at hand, I think Fama's arguments make sense in the context of the classical model, the model presented in Chapter 3 of my intermediate macro textbook, even if Fama in his brief essay does not spell out all the details of that model. Unlike Fama, and like Brad, I would not stop at that model. To understand the present situation, I would go on to the Keynesian model presented in Chapter 9 to 11. But whether one leaves the classical model behind to embrace the Keynesian model is a judgment call. On this particular judgment call, Brad and I agree, but I am not eager to castigate those like Fama who reach differing judgments."

This is the true spirit of inquiry. I enjoy satire, but outright meanness bothers me. None us us are all that wise or all that good. We need to keep that in mind.