Did dinner with Obama pay off for the White House?

Krugman and Stiglitz concede that maybe, possibly, in a best-case scenario, the administration's "muddling-through" plan for the banks could work. But they're not jumping for joy.

Published May 8, 2009 5:32PM (EDT)

So just what exactly, besides roast beef, did Obama feed Paul Krugman and Joseph Stiglitz at their dinner with the president on April 27? Check out these passages from the two Nobel Prize-winning economists' latest opinion pieces (italics mine):

Paul Krugman:

What we're really seeing here is a decision on the part of President Obama and his officials to muddle through the financial crisis, hoping that the banks can earn their way back to health ...

It's a strategy that might work. After all, right now the banks are lending at high interest rates, while paying virtually no interest on their (government-insured) deposits. Given enough time, the banks could be flush again.

Can the economy recover even with weak banks? Maybe.

Joe Stiglitz:

The good news is that we may be at the end of a free fall. The rate of economic decline has slowed. The bottom may be near -- perhaps by the end of the year ...

The American government, too, is betting on muddling through: the Fed's measures and government guarantees mean that banks have access to low-cost funds, and lending rates are high. If nothing nasty happens -- losses on mortgages, commercial real estate, business loans, and credit cards -- the banks might just be able to make it through without another crisis. In a few years time, the banks will be recapitalized, and the economy will return to normal. This is the rosy scenario.

Now, I don't mean to suggest that the two critics have miraculously been transformed into administration lapdogs. Neither Krugman nor Stiglitz is happy with the muddle-through approach. Krugman fears, with justice, that the downside of success will be the abandonment of "fundamental financial reform." Stiglitz believes that bank bondholders need to be forced to take haircuts, and that it's already time to be readying another dose of stimulus. But that being said, Krugman's admission that the White House's current plan "might work" is, to my recollection, the nicest thing he's said about the Obama administration's approach to the banking crisis since Inauguration Day.

As for the dinner itself, Newsweek's Michael Hirsh has some more details, from attendee Alan Blinder, who appears to treat the "off-the-record" status of the dinner with a little less rigor than Krugman and Stiglitz.

Also in attendance: Paul Volcker, who has one foot in and one foot out of the administration as the head of Obama's largely cosmetic economic recovery board; Princeton economist and former Fed vice chairman Alan Blinder; Columbia's Jeff Sachs; and Harvard's Ken Rogoff. Representing the home team, as it were: Obama's chief economic adviser Larry Summers, Treasury Secretary Tim Geithner and Chief of Staff Rahm Emanuel. Why did Obama hold the meeting? "I think he wanted to hear the [opposing] arguments right in front of him," says Blinder. "All I can say is if the president of the United States devotes that much personal time, and it was about two-hour dinner, he must want to hear what people outside the administration are saying and hear what his own people say in rebuttal to that. Why would you do that if you aren't at least turning over your mind what to do next?"

But after Krugman and Stiglitz made their now-familiar case for nationalizing the banks and forcing other dramatic changes, Obama gave no indication he was changing his policies, Blinder added.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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