Paul Krugman on Revamping the Credit Markets

Question: How do we get the credit markets to work again?

Paul Krugman: I think most of the responsibility, at least for the time being, is going to rest with the Treasury, not the Fed. It’s going to rest essentially with the Federal Government proper, which is going to have to, I think it’s going to, one way or another, it’s going to amount to a temporary, partial nationalization of the financial system. The financial institutions will have to be taken over, you know, capital will be injected, but it will have to, eventually it have to be voting shares, or one of the things you can do right away is actually have nationalized one crucial part of it, of the credit system, which is Fannie and Freddie, but we’re not treating them as if they were nationalized. They’re… we have not put the faith in credit of the US government behind their borrowing, and that’s one big reason why mortgage rates have failed to come down very much, despite all of these [loose things]. So, you know, there’s, as we’ve already assumed control, that’s actually, you know, run them like a nationalized enterprise. I mean, it’s a joke. Actually, my wife says that one of these days the Fed is going to start issuing us Federal Reserve Visa Cards, which is not going to go quite that far, but that’s the direction in which temporarily we do need to go.

Krugman talks about how to get faith back in the system.

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