NYT's Krugman Predicts 'Partial and Temporary Nationalization of Financial System'

     Could the United States be forced into taking a page straight from Hugo Chávez’s playbook – down the path of nationalization? According to New York Times columnist Paul Krugman, there’s an almost 100-percent chance it will.

     Krugman appeared on MSNBC’s Oct. 6 “Rachel Maddow Show” and made that prediction after declaring the bailout legislation signed by President George W. Bush on Oct. 3 as a failure. Based on historical data – Krugman insisted it is the only way out of the current financial crisis.

     “[W]hat we really need is we need, well capital that the banks – we need to put money into the system,” Krugman said. “And in effect, what always happens in financial crises is a partial nationalization – partial and temporary nationalization of the financial system. And, that is – you know and, I predict with almost 100-percent confidence that’s how it will end, but the [Henry] Paulson Treasury wasn’t willing to talk about that.”

     Krugman subscribed to the notion that it wouldn’t be a seizure of the banking system, as is the case with some governments, but it would involve a process of the federal government purchasing shares in exchange for the badly needed capital for the banks.

     “Something which puts money in – something in which the U.S. government is providing cash and it’s taking partial ownership shares in return is the way it’s going to have to go,” Krugman said. “And, the question is how long before they’re willing to do that? And at the rate things are going, it might not be very long.”

     Krugman told Maddow he thought the bailout plan would eventually be chalked up as a failure, but after two days of significant stock market losses after the bill was signed – a 158-point drop in the Dow Jones Industrial Average (DJIA) on Oct. 3 and a 370-point drop in the Dow on Oct. 6 – a new bailout plan would have to come more sooner than later.

     “I thought that we would be back at the drawing board in a couple of months,” Krugman said. “I’m now wondering if that’s more like a couple of weeks or maybe a couple of days.”

     The Princeton economics professor explained to viewers that it didn’t make sense to him because it was based on blind faith and people were expected to believe the bailout would just work.

     “Well, the trouble with the bailout plan was it never really made sense,” Krugman said. “And, they never explained why it would work but the story was, ‘Well, you know this is – trust us, this will work and people will believe in it and it will be kind of a self-fulfilling prophecy,’ and none of that happened.”

     According to Krugman, legislators had their hand forced. The plan was presented in such a way that it was a make or break moment for the markets and failure of passage would result in some serious. When the initial bailout bill failed in the U.S. House of Representatives on Sept. 29 by a 228-205 vote, the Dow plunged 777 points and failure to pass the revised bill that made it through the Senate could have caused something worse.

     “Some kind of bailout is needed,” Krugman said. “I think what they really need to do is go back to the drawing board. But, this is a bad scheme and … I’m pretty angry because it was clear from day one, when this thing started being discussed that they did not have a clear view of why this thing was supposed to help and they stuck us with it. It would have been very dangerous not to pass it on Friday because who knew what would have happened, but it was the wrong bill.”

     However, Krugman described action by Democratic presidential nominee Sen. Barack Obama, Ill., to rescue beleaguered financial institutions once elected president as a “fantasy.” He claimed it would have to be done immediately because the two-and-half month transition between administrations would be too long to wait to solve the crisis.

     “You know, I’m having fantasies right now, that as soon as the election is over, we’re going to have to have – you know, we can’t wait until Jan. 20,” Krugman said. “We may have to have in effect the incoming Obama team move into the Treasury and start coordinating the rescue because this is going to be a very, very bad transition period if we don’t do anything until we actually have a new administration.”

     Krugman’s claim the nationalization of some aspects of the financial system is a near certainty is eerily similar to what happened in Venezuela under leftist dictator Hugo Chávez in August. Chávez took over the country’s third-largest bank in the name of “21st century socialism.” Chávez said the takeover was done to ensure the health of Venezuela’s banking system.