The world economy has avoided “utter catastrophe” and industrialized countries could register growth this year, Nobel Prize-winning economist Paul Krugman said on Monday.

“I will not be surprised to see world trade stabilize, world industrial production stabilize and start to grow two months from now,” Krugman told a seminar.

“I would not be surprised to see flat to positive GDP growth in the United States, and maybe even in Europe, in the second half of the year.”

The Princeton professor and New York Times columnist has said he fears a decade-long slump like that experienced by Japan in the 1990s.

Read the rest of the story at Reuters

Krugman very plainly outlines some reasearch and a plan that says otherwise:

… the opponents of action claim that limiting emissions would have devastating effects on the U.S. economy. So it’s important to understand that just as denials that climate change is happening are junk science, predictions of economic disaster if we try to do anything about climate change are junk economics.

Yes, limiting emissions would have its costs. As a card-carrying economist, I cringe when “green economy” enthusiasts insist that protecting the environment would be all gain, no pain.

But the best available estimates suggest that the costs of an emissions-limitation program would be modest, as long as it’s implemented gradually. And committing ourselves now might actually help the economy recover from its current slump.

Read the rest.

Krugman’s column today further adds to the case he’s been making all along during this financial crisis – Wall Street’s emperors have no clothes and taxpayers are footing the bill to rebuild their wardrobe.

So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it’s hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.

Consider a recent speech by Ben Bernanke, the Federal Reserve chairman, in which he tried to defend financial innovation. His examples of “good” financial innovations were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?

Here’s what I think is most disturbing about recent financial history and the Bush and Obama Administrations’ policies:

GDP, which I believe is due for an announcement this week, has generally grown but over the last two or three decades that growth has been in areas like financial services and based upon “paper value.”  In other words, where we used to count more tangible goods as product, and those goods were made in the U.S. and that economic activity supported a middle class.  The financial services’ contribution to the overall economy has become huge, but their numbers benefit very few – the investment class.  Both the Bush and Obama Administrations have so far let financial services off Scot-free and pushed trillions of dollars that industry’s way.  On the other hand, the nation’s Big Three automakers are being treated as one would expect failing companies to be treated – with healthy skepticism.

• New – or “re” – regulation in the financial services sector needs to be undertaken now.  Treasury Secretary Timothy Geithner and others in the Obama Administration have talked the regulation game, but there’s been no action.  The argument was for a time that we need to stabilize things then move on to resetting the rules.  Apparently, Wall Streeters are shifting comfortably back into business as usual.  The TARP and PPIP have not had the effect both administrations hoped for.  All of the other legislative priorities of the Obama Administration, from health care to energy policy will be derailed by a second wave of the financial crisis.  Regulate now.
• I’m begging on this one … Not One More Bailout.  As currently configured, nearly all the risk of saving the financial system is on the taxpayer.  Future bailouts or federal actions to prop up the system should be approached like the auto industry.  No more carrots without sticks.  It’s past time for accountability from bankers and brokers.
• Finally, for today, it’s astounding to me that revelations last week by New York Attorney General Andrew Cuomo that former Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke held a gun to Bank of America’s head to complete the Merrill-Lynch deal.  Furthermore, Paulson and Bernanke allegedly told BofA CEO Ken Lewis to not disclose his and management’s misgivings about the Merrill deal.  Why isn’t the media or Congress all over this?  When Wall Streeters like Geithner, Paulson and Summers are in charge only Wall Street benefits.  Were there SEC rules broken by Paulson and Summers?  Can the government intervene to stop the flow of information to corporate boards and shareholders?

Apparently the presdent has abandoned the righteous indignation of the campaign trail for the Washington Easy Button.  When one pushes this red button, the difficult parts of governing are cast aside with rhetorical flourishes that sound like this – “The president said that given all that’s on the agenda and the pressing issues facing the country, that a backward-looking investigation would not be productive,” a White House official who attended the session said. “The president was very clear…that he believes it’s important that there’s not a witch hunt.”

The “session” being recounted by the White House official was a meeting Obama had with Congressional leaders (presumably only Democrats) in which he counseled them that investigations into “harsh interrogation tactics” and other Bush Administrations legal missteps along the way in the War on Terror would do nothing to advance the political agenda of Democrats today.

That Democratic agenda – including health care reform and a new energy economy – is vital.  But, who is to say that the Congress and the U.S. Dept. of Justice can’t walk and chew gum at the same time?  Paul Krugman today:

What about the argument that investigating the Bush administration’s abuses will impede efforts to deal with the crises of today? Even if that were true — even if truth and justice came at a high price — that would arguably be a price we must pay: laws aren’t supposed to be enforced only when convenient. But is there any real reason to believe that the nation would pay a high price for accountability?

For example, would investigating the crimes of the Bush era really divert time and energy needed elsewhere? Let’s be concrete: whose time and energy are we talking about?

Tim Geithner, the Treasury secretary, wouldn’t be called away from his efforts to rescue the economy. Peter Orszag, the budget director, wouldn’t be called away from his efforts to reform health care. Steven Chu, the energy secretary, wouldn’t be called away from his efforts to limit climate change. Even the president needn’t, and indeed shouldn’t, be involved. All he would have to do is let the Justice Department do its job — which he’s supposed to do in any case — and not get in the way of any Congressional investigations.

I don’t know about you, but I think America is capable of uncovering the truth and enforcing the law even while it goes about its other business.

The fact is, there are reasonable and important questions that need to be answered regarding the Bush Administration, and in particular the role of Vice President Dick Cheney and Secretary of Defense Donald Rumsfeld and their staffs in the subverting the Constitution and rule of law.  Above all else, the United States is held together by the rule of law and citizens’ acceptance of this state of affairs.  The U.S. is a beacon of freedom and fairness when we honor the best of our traditions and hold everyone – no matter their station in life – to their obligations under the law.  This includes international treaties like the Geneva Conventions.

The world is not only wary of the U.S. because of debacles like Iraq.  Our standing in the world is stained at the very least due to the impression that we broke a few rules over the past several years.  Serious rules.

Those in Washington arguing that to honestly investigate alleged rule breaking and shed the light of day on it are missing the point that it’s not primarily about punishment and retribution.  It’s about upholding the rule of law in a land made great by those laws.

Despite everything that has happened, most people in positions of power still associate fancy finance with economic progress.

But I also hear economists and others saying the securitization market needs to be ginned back up.  They seem to talk about securitization as if it yields the same economic value as, say, credit which should be going to small business loans.  Paul Krugman’s column in the Times today got me thinking about whether or not a securitization free-for-all is what will really help the structural economy.  Krugman points out that banking and insurance used to be “staid” professions.  In the 1960′s financial services were 4% of GDP, now they are 8%.  It’s obvious that economic activity benefited relatively few and brought us to the brink of collapse last year.  Whereas if there were to be a doubling of manufacturing’s portion of GDP, everyone benefits – from the plant owners to the guys sweeping the floors at night.

Deregulation of financial services spawned big numbers, but for whom?  I’m not sure how Obama Administration plans to take care of toxic assets and the other gremlins in our current economy get at the fundamental unfairness of the structural U.S. economy.

A little context from Krugman:

Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.

But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.

Over the weekend The Times and other newspapers reported leaked details about the Obama administration’s bank rescue plan, which is to be officially released this week. If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.

This is more than disappointing. In fact, it fills me with a sense of despair.

After all, we’ve just been through the firestorm over the A.I.G. bonuses, during which administration officials claimed that they knew nothing, couldn’t do anything, and anyway it was someone else’s fault. Meanwhile, the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money.

And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.

It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.

Follow the link above and go read the rest.  Krugman explains the economics of the issue.  Anyone else getting the feeling the Obama Administration – like the Bushies before them – are bending over backwards to not offend the people who brought our economy to its knees?