Friday, March 27, 2009

Krugman's warning worth heeding; nation's dependence on financial industry spells our ruin

Nobel Prize-winning columnist Paul Krugman delivered a necessary history lesson on America's overdependence on the financial sector and the myth of securization by spreading risk over many types of investment vehicles.

Ultimately, President Obama's plan on toxic assets is an attempt to return the financial markets to what they were two years ago, and that certainly was not healthy for the nation, Krugman writes.

In post-war America and into the 1960s, the financial sector made up just 4% of the Gross National Product. No financial firm was in the Dow 30 and the standard of living doubled in that era.

During the Reagan and Clinton eras of deregulation, however, the financial sector's part of GDP hit 8%. Now is it into the double digits, at 12 or 13%, and that's why all the mess with AIG and the fraudlent home lending spread across so many sources were able to drag the fourth quarter GDP to its worst performance since the 1930s.

It's also why Tennessee's unemployment rate is 9.1% and at least four states are in double digits. Some 6.65 million Americans are drawing unemployment benefits. And there are fewer available jobs out there.

Simply returning this nation's financial system to what it was before the Great Recession should give no one any sense of security. It just always keeps us at the edge.

For me, that is why I would like to see some big banks and some insurance corporations such as AIG fail, to reduce the size of the financial industry and serve as a warning to others about taking on too much risk.

If the sector is too big for our economy's health, then let it naturally reduce its size without government intervention. But Krugman believes in more intervention, just different from Obama's.

Still, Krugman's NYTIMES piece is a worthy read if only to build an understanding of the stakes at hand with Obama's toxic assets gamble.

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