Krugman - right and wrong

Yes, Krugman is right in requesting the Fed that it needs to allow the economy to
recover. Classical Keynesians are always vary of the Gold Standard and Krugman
sticks to his roots! However, the lack of coordination between the branches of
financial policy could cause many problems.

Well, yes, Krugman is again right on the idea that Government is for the people and
the banks are for the investors. Yet he does not explain the issue correctly. Funds for
bailout/TARP etc. have to flow into the real economy. By picking up the shortfalls
of AIG, the system is set up for more imbalance, and credit markets are frozen while
bonus payments are not is an issue. It is the average homeowner and the economy that
needs a bailout, however only the creditors to AIG were bailed out.

Bernanke and Geithner and Summers seem to be missing this key issue and Krugman
should explain this well - to the people on Main Street - Freddie, Fannie and Ginnie can
possibly become full fledged banks whose main role is to repair the housing market. That
is where the TARP is best used. As banks go under, start selling branches to Freddie, Fannie
and operate in local depressed markets. Reopening credit in Mahoney City, Miami and Modesto
implies that the Govt. must operate in the sub-prime markets. New ways to do this include
equity instruments, insurance etc. Reflating housing will bring a semblance of restitution -
Scarcity theory today is the better model.

Today, there are prime-borrowers with sub-prime loans. and the downfall of some communities has lead to tough problems. quick govt. intervention that liquefies these markets is necessary.
one thing that the Fed can do is to buy up the CMOs and MBSs and then reintegrate them and resell them also. The answer is to have operations at the local level while cutting up the red tape
through efficient handling of foreclosures and stopping those that can be stopped. This calls
for the skills of a community organizer.

Today there are those who have lost their home who might like to be homeowners again. Lending to these folks can be the job of these new nationalized banks. Call this ownership society-II or the New Deal-II but reintroducing ownership albeit at a depressed price is called for.

Removing this structural issue from the economy will clear the way quickly. Fixing this fully and
well is extremely important - it is not the houses or the owners that need fixing, it might be
said.