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Friday, May 02, 2014

Krugman has learned nothing

The ur-Nobel prizewinner still hasn't accepted that his economic theory is flat-out wrong:
On Wednesday, I wrapped up the class I’ve been teaching all semester: “The Great Recession: Causes and Consequences.” (Slides for the lectures are available via my blog.) And while teaching the course was fun, I found myself turning at the end to an agonizing question: Why, at the moment it was most needed and could have done the most good, did economics fail?

I don’t mean that economics was useless to policy makers. On the contrary, the discipline has had a lot to offer. While it’s true that few economists saw the crisis coming — mainly, I’d argue, because few realized how fragile our deregulated financial system had become, and how vulnerable debt-burdened families were to a plunge in housing prices — the clean little secret of recent years is that, since the fall of Lehman Brothers, basic textbook macroeconomics has performed very well.
I saw the crisis coming. From the fall of 2002 to the spring of 2008, I pointed out that the housing market was going to crash and potentially take down the global financial system with it. Because no individual, family, business, or nation can sustain infinite debt. And the claim that "basic textbook macroeconomics" has performed very well is a bad joke, especially in light of the stagnant GDP report that was just released. There is no recovery.
And the diagnosis of our troubles as stemming from inadequate demand had clear policy implications: as long as lack of demand was the problem, we would be living in a world in which the usual rules didn’t apply. In particular, this was no time to worry about budget deficits and cut spending, which would only deepen the depression. When John Boehner, then the House minority leader, declared in early 2009 that since American families were having to tighten their belts, the government should tighten its belt, too, people like me cringed; his remarks betrayed his economic ignorance. We needed more government spending, not less, to fill the hole left by inadequate private demand.

But a few months later President Obama started saying exactly the same thing. In fact, it became a standard line in his speeches. Nor was it just rhetoric. Since 2010, we’ve seen a sharp decline in discretionary spending and an unprecedented decline in budget deficits, and the result has been anemic growth and long-term unemployment on a scale not seen since the 1930s.
Lack of demand isn't the problem. The problem is the credit-imposed limits of demand. To Krugman, demand is a magical entity. Invent money ex nihilo and the spirit will be summoned to magically expand the economy. He's appealing to a logically incoherent system that can NEVER address the problem; it's like trying to fix a car that won't start by pouring water on the driveway. Krugman keeps calling for more water and insisting that just one more big dowsing of water will make the car start.

He's also being wildly deceptive here. Have a look at that "unprecedented decline in budget deficits" from 2012 to 2013.

In other words, the federal government is still rapidly increasing its debt-spending, but at a slower rate than the four record-setting years. This is hardly the "austerity" he elsewhere claims it to be.

Mainstream economics didn't see the crisis coming. Mainstream economics has not fixed the problem. And mainstream economics is obviously unaware that the first crisis was only the first wave downward. The magnitude of the next one is indicated by the length of the anemic five year "recovery".

Labels:

78 Comments:

Anonymous lurking May 02, 2014 5:39 AM  

"Because few realized how fragile our deregulated financial system had become..."

What's a good rebuttal to the "deregulation is what caused it" that leftards always use concerning the financial crises? And then they invariably blame republicans for deregulation. Aren't libertarians into mass deregulation?

Anonymous Speaker-To-SFWAs May 02, 2014 5:52 AM  

This is hardly the "austerity" he elsewhere claims it to be.

Leftists parrot the long-since-disproven "Austerity! Austerity!" squawk for exactly the same reason a spoiled, covetous two-year-old tantrums on Christmas morning: he literally cannot grasp -- cannot even conceptualize -- the brute possibility that there might not exist enough ready free-floating wealth, at any given instant, to buy him anything and EVERYthing he might ever conceivably desire, now and forever, world without end, amen.

If/when confronted with so gob-smacking a notion, he will footstamp and proclaim -- rather than simply reconfiguring his expectations, the better to conform with the dictates of everyday reality -- that said great, bulging, Scrooge McDuck-ian money sacks absolutely, positively DO exist, by God; but that said lucre is being selfishly hoarded by shadowy cabals of the ruthlessly unfair and undeserving, whose straightforward claim of having legally earned however much they might have, after all, in adherence with societally established and agreed-upon rules is, de facto, concrete and irrefutable evidence of gross malignity.

They want, because they want, because they want. Such hollow, wretched creatures can no more be reasoned with than one might profitably engage in discourse with a tapeworm, or a tick.

Anonymous Peter Garstig May 02, 2014 5:52 AM  

"Decreasing Budget Deficit" - how many people even understand this?

Also, why does he keep talking about debt if debt doesn't matter? That's kind of...rabbity.

Anonymous emdfl May 02, 2014 6:43 AM  

Krugman, with a bone in his nose wearing a feathered headress, chanting dancing around the fire; while his followers sit around the fire's edge, waiting patiently for the manna to fall from heaven.

Blogger James Dixon May 02, 2014 6:49 AM  

> as long as lack of demand was the problem

And if demand is the problem, giving it to the banks, funneling it into the stock market, and spending it on big infrastructure problems helps exactly how, Paul? If demand is the problem, then the money needs to go to those who will spend it. Not to banks and corporate bigwigs based on political affiliation and connections.

Bush, as bad as he was, at least understood this. Obama doesn't have a clue. If the TARP had simply been given to the people who owed their mortgages, they would have spent the money and it would have made it into the economy. Instead, it's all gone into the stock market, creating another dot.com scenario. And when the market eventually goes south (which it always does), the banks will be back screaming for more money again.

Anonymous VD May 02, 2014 6:56 AM  

These half-savage economists can't seem to grasp that it isn't the mere existence of the credit-money that matters, but also where it goes. It's almost astonishing that even after five years of seeing their plans completely failing to perform, they still refuse to grasp the obvious.

Anonymous joe doakes May 02, 2014 7:19 AM  

We borrowed less in 2013 because we spent less . . . because of the sequester. Weird how cutting spending reduces borrowing, almost as if they were somehow linked. Too bad there isn't some dismal science to explain it, eh Krugman?

Blogger Rantor May 02, 2014 7:19 AM  

Oftwominds had an interesting take on this. The problem of the current stimulus is that it only stimulates the banks and the stock market. It has no stimulative effect on the economy. If you want to stimulate the economy, and the productive members at that, he proposes that you would have a better result by cutting the social security tax and throwing your deficit spending into that. The worker earns 6% more! the business spends 6% less and they both spend it in the real economy! not in the rarified, financializer's realm.

Like the suggestion to use TARP to actually pay off debt instead of propping up banks, these ideas would have helped the common man more than a stimulus plan for the rich. These plans also would have not increased income disparity that the Democrats are cackling about today.

While I agree with no stimulus plan, the fact that the Government chose to stimulate the financial markets and not the people shows us clearly their allegiances are to money and the wealthy. The government in no wise cares about the people, only in sharing power and wealth with their rich friends. The massive money in Obamacare going to large healthcare corporations is further evidence of there love of money.

Anonymous Stg58/Animal Mother May 02, 2014 7:37 AM  

If the Feds had used TARP to pay off the mortgage of everyone im the country, that would have stimulated the economy. That they didn't do that shows what a fraud this whole show is.

Anonymous Salt May 02, 2014 7:42 AM  

Which will blow first, the economy or Yellowstone? I know which my bet's on.

Anonymous Stilicho May 02, 2014 7:48 AM  

Krugman has studied income inequality enough that he has developed a guaranteed method to create more of it. CUNY got their money's worth!

Anonymous jk May 02, 2014 7:57 AM  

Vox... you gonna review Thomas Piketty's Capital in the Twenty-First Century? That seems to be the next great theory...

Blogger James Dixon May 02, 2014 8:16 AM  

> That seems to be the next great theory...

From everything I've heard it's just a rehash of Marxist theory in a new guise. Another wolf in sheep's clothing.

Anonymous Speaker-To-SFWAs May 02, 2014 8:18 AM  

This take, re: Piketty, was interesting:

Thomas Piketty Wants Income Equality -- And the Hell With Growth

Blogger Glen Filthie May 02, 2014 8:18 AM  

The housing crisis was guaranteed back in the late 70's when Jimmeh Carduh discovered a disproportionate number of blacks couldn't afford their own houses. It couldn't be because they couldn't afford it - it had to be because of racism at the banks! So he forced the banks to change their lending practices with blacks and they told him to shove it. When he replied that the gubbermint would hold the bag on bad loans - the die was cast. Pretty soon all the poor, low information and stupid voters were in a housing market they didn't belong in. This is no conspiracy theory - it is a matter of public record. Because of the racial and social overtones none of the repubs could touch it or fix it - so they let the snowball roll.

There are a couple ironies here. The biggest one was when Obutthole ascended to the throne promising to fix it with hope n' change. Putting the Donks in charge of solving the problem they created 25 years before was like putting a drunk in charge of a liquor store. The other is that everyone is blaming the banks. They are only doing what they are supposed to be doing - lending money out at a profit. If you want to hang the people responsible from the lamp posts or throw them out the window of a sky scraper...start with Jimmeh Carduh and have the fuggin democrats.

Anonymous Josh May 02, 2014 8:23 AM  

The reason that r > g in Piketty is monetary policy and banking. For anyone who's read his book, does he mention that at all?

Anonymous rho May 02, 2014 9:04 AM  

These half-savage economists can't seem to grasp that it isn't the mere existence of the credit-money that matters, but also where it goes.

I see what you did there.

I recall one Krugman column where he talked about his models, and how they predicted this or that, whatever it was that was going on at the time. His problem is that he believes his models, and is incurious enough (or narcissistic enough) to re-examine his assumptions, inputs or axioms. If his model predicted one thing, and his prescription was followed, any negative outcome is the result of insufficient slavish devotion to his model. The stimulus didn't work? Not big enough! Stimulus didn't work, and it was bigger than he called for? Whoops, didn't carry the 3, should have been bigger, Krugman is still right.

Anonymous bob k. mando May 02, 2014 9:07 AM  

emdfl May 02, 2014 6:43 AM
Krugman, with a bone in his nose wearing a feathered headress



good point.

given his fascination with 'animal spirits', Krugman is no half-savage. he's full blooded, through and through.



Glen Filthie May 02, 2014 8:18 AM
They are only doing what they are supposed to be doing



in order to say that, you have to ignore the wide scale falsification of records for derivatives sales, the constant pushing of "liars loans" mortgages to minorities which the bank officers KNEW to be fraudulent, etc.




Glen Filthie May 02, 2014 8:18 AM
start with Jimmeh Carduh and have the fuggin democrats.



i would hang Jimmy Carter for the NorK nuke deal he signed under Clinton.

for the crimes he committed in his own administration ( introducing annual 'baseline' budget increases, selling the Panama Canal, etc ) i'd turn him over to the Kratman for crucifixion.

and i'd hang half of *the Republican Party* ( RiNOs ) for violation of their oath of office.

"I do solemnly swear (or affirm) that I will support the Constitution of the United States."

Anonymous Alexander May 02, 2014 9:07 AM  

I still don't understand why the advocates of de facto unlimited spending are still being so coy and mealy in their proposals. If you *really* think that we can just invent money our way out of the problem, then let's cut taxes to 0 and just print & borrow 100% of the budget. Or even better, 150% of the budget, and use the extra to buy everyone ipads and cars. That'll stimulate!

OpenID simplytimothy May 02, 2014 9:08 AM  

What frustrates me is the lack of competition in money.

A light-bulb lit up in my meager brain yesterday when I was reading the The Wider Context thread and perusing the reviews of the book Vox recommended: 'Tragedy & Hope A History Of The World In Our Time' . I realized that I was only looking at money through the lens of 'getting more' or 'how to get more' or 'how to manage it'.

Yesterday, I realized that--for these cats--its power that matters and that currency and money is just a tool to that end. Krugman is a good little house-pet in their service.

So, why do we, a free people permit them the exclusive use of that tool? Yes I know 'the law' says no; fuck. their. laws. We are in a revolutionary war, right now. we need our own money. This playing around in their own power-pool is not changing the basic rules of how we will govern ourselves.









Anonymous Daniel May 02, 2014 9:12 AM  

With Keynesian alchemists running the economy, people who don't like science fiction running science fiction writer's organizations (and large publishers) and ham sandwich companies abandoning ham, what is amazing is that the B Ark hasn't crashed into an asteroid already. Thank God Brawndo's still got electrolytes.

Anonymous vercity May 02, 2014 9:20 AM  

"The single most important thing we want to achieve is for President Obama to be a one-term president," Senate Majority Leader Mitch McConnell

That quote was made at the height of the economic crisis.

This was not benign ignorance. It was quite a deliberate plan to deny President Obama the honor of saving the nation from the disastrous policies with which they laid waste to the nation.

They were able to obstruct, deny and derail many of his plans to help the economy recover and, of course, were always ready to blame him for his lack of success.

But he succeeded despite their best efforts and the American people re-elected him by the biggest margin since Eisenhower.

Anonymous nonmendcity May 02, 2014 9:23 AM  

A great deal of what is taught in economics departments these days is pure ideology intended only to justify the policies of free market fundamentalism. It has very little to do with analyzing the workings of the actual economy. One of the reasons that Thomas Piketty's "Capital in the 21st Century" has proven so popular is that it pulls the curtain away and reveals the flimsiness of the empirical grounding of so much contemporary economic theory.

Blogger David May 02, 2014 9:24 AM  

Krugman & the Cargo Cult he typifies ignore two things:
1. They have NO theory for capital formation....zero, nada, nothing. Keynesians all simply ASSUME capital comes into existence, they have not the slightest interest in how.
2. Everyone today ignores the role of money. Money is simply a chit for prior product sold in the marketplace. It replaces barter. Credit is a very special form of "money," in that it involves very clear lines of trust between issuer and acceptor of it (which is why only a Real Bills Doctrine should govern credit creation).

The bottom line is that money now is completely divorced from prior production. Money today is thus completely counterfeit; ones ability to spend (money) has nothing to do with one having actually added to the product pool of "things" supplied.

Can anyone doubt that such a dishonest system rewards the most cunning criminals and punishes the honest producer?

Anonymous rho May 02, 2014 9:24 AM  

This take, re: Piketty, was interesting:
Thomas Piketty Wants Income Equality -- And the Hell With Growth


Piketty has something of a point. Stagnant growth in the middle class will kill the economy. His prescription to fix "income equality" is ass-backwards as the problem isn't so much concentration of wealth in and of itself, but rather concentration of power, from which the well-connected acquire wealth through usury, regulatory capture or even outright theft.

I'm less impressed with Scott Winship's rebuttal. His adjusted figures for income between 1970 and 2012 seem to account for inflation (it's not entirely clear that it does), and includes things like employer-provided health insurance without accounting for the staggering rise in the cost of health care. It doesn't account for the fact that SS remains a huge, unfunded liability, nor does it account for the employee pension plans, private and public, that are either bankrupt or going bankrupt. Of course, downward pressure on wages from immigration isn't mentioned once.

Blogger David May 02, 2014 9:29 AM  

Piketty's is a typical leftist idiocy:
1. Claim today's centrally-planned totalitarian system is "capitalism."
2. Show how crime-ridden is today's system.
3. Propose more of the same as the cure.

As Bill Bonner pointed out so well, "Everybody Hates Capitalism." (especially including those who become successful, and then become anti-capitalists to defend their turf using the state to cripple competitors.)

Two idiotic ideas never seem to go away:
1. We can TAX our way to fairness.
2. The political system, producing nothing but misery, can seize the fruits of others' labor and redistribute it to produce a fairer, better world.

Might as well staff the fire department with arsonists.

Blogger traderdoc May 02, 2014 9:35 AM  

Japan. Abenomics.
Extreme stimulus.
Negative growth.

Anonymous Brother Thomas May 02, 2014 9:37 AM  

"Mainstream economics didn't see the crisis coming. Mainstream economics has not fixed the problem. And mainstream economics is obviously unaware that the first crisis was only the first wave downward."


Ah, but mainstream economics did save the big bankers at the expense of the rest of society. And isn't that really the purpose of mainstream "economics"?

Anonymous Brother Thomas May 02, 2014 9:42 AM  

Piketty is just further proof that if you write a book that justifies the continued dominance of the central state - and thus the wealthy power elite that controls it - over the masses, you'll get notice and praise.


Anonymous Josh May 02, 2014 9:47 AM  

Has anyone there taking about Piketty actually read his book?

As I said up thread, I haven't read it yet.

Anonymous Brother Thomas May 02, 2014 9:52 AM  

@simplytimothy May 02, 2014 9:08 AM "What frustrates me is the lack of competition in money."



The sole purpose of the state is to protect the wealthy power eltie from competition and to keep wealth concentrated in their hands. Competition in money would be a threat to their monopoly of wealth.

Blogger James Dixon May 02, 2014 9:57 AM  

> But he succeeded despite their best efforts...

Sure he did. The unemployment rate is still half again what it was in 2007.

http://data.bls.gov/timeseries/LNS14000000

> ...and the American people re-elected him by the biggest margin since Eisenhower.

Sure they did.

Electoral map, 1984: http://presidentelect.org/e1984.html
Electoral map, 2012: http://elections.nytimes.com/2012/results/president

You'd think these people would know better by now.

Blogger Xmas May 02, 2014 9:58 AM  

Vercity,

Mitch McConnell was NEVER a Senate Majority leader. When Obama came into office, he had both the House and the Senate firmly in Democrat hands. He had two years of single party rule to get anything he wanted done. The irrational fear that he would have to negotiate with a handful of Senate Republicans to get some things passed was very much a failure of his leadership. No president has come in with a stronger hand than Obama. Everyone was down on the Republican party because of the general ill will towards outgoing President Bush. Really, that is how Obama won, by promising to be everything that Bush wasn't.

6 years later, Obama has continued with most of Bush's policies, especially around the War on Terror. He's had a very weak hand in National politics, letting Reid and Pelosi push Democrat policies through the House and Senate. He weeweed up.

Blogger Desiderius May 02, 2014 9:59 AM  

"Japan. Abenomics.
Extreme stimulus.
Negative growth."

Yes. Mal-investment will do that.

We find ourselves now in the Long Run, with Keynes as undead as ever.

Blogger James Dixon May 02, 2014 10:00 AM  

> Has anyone there taking about Piketty actually read his book?

He's a known Marxist, Josh. Why would I want to waste my time?

OpenID simplytimothy May 02, 2014 10:11 AM  

@Brother Thomas

"The sole purpose of the state is to protect the wealthy power eltie from competition and to keep wealth concentrated in their hands. Competition in money would be a threat to their monopoly of wealth."

Our republic was designed to prevent centralization of power. The design has failed. Ok, now what? Submit? No way. It is time for the restoration.


Anonymous Foolish Pride May 02, 2014 10:13 AM  

Krugman and JAMeyerson are right about one thing. Conservatives really have no great conservative arguments against Picketty.

Sucks that they are so often wrong.

Anonymous rho May 02, 2014 10:34 AM  

Has anyone there taking about Piketty actually read his book?
As I said up thread, I haven't read it yet.


Even Michael Barone admitted he didn't read all of it. The excerpts and summaries may be cherry picked, but his is not a brand new unique idea. He appears to have backed it up with data (possibly also cherry picked) so I try to interpolate generously in his favor.

Anonymous bob k. mando May 02, 2014 10:37 AM  

James Dixon May 02, 2014 9:57 AM
You'd think these people would know better by now.



the truth is destructive to them.

they will continue to lie, and lie to cover their lies, because to accept and promulgate truth would destroy them.

and by God, if there's one thing they want, it's getting their chance to go face down in that .gov slop trough.

because they 'paid their taxes', damnit.

Anonymous Josh May 02, 2014 10:54 AM  

James Dixon,

Well, I'm going to try and read it. It looks like he's amassed an impressive data set.

Just because someone says "x is happening" and "we must do y to stop x" doesn't mean that we should immediately dismiss x even if y is silly.

My hunch is that his data will actually support Austrian business cycle theory. As well as what Karl and Keen have been writing about.

Anonymous Speaker-To-SFWAs May 02, 2014 10:56 AM  

Senate Majority Leader Mitch McConnell

Do what, now...?

Anonymous Dr. J May 02, 2014 10:59 AM  

These half-savage economists

That's Keynesiss!

Now someone tackle the proof - does Vox think Austrian economics is intrinsically superior to Keynesian theory?

Anonymous patrick kelly May 02, 2014 11:05 AM  

" If you *really* think that we can just invent money our way out of the problem, then let's cut taxes to 0 and just print & borrow 100% of the budget."

Exactly what I ask Keynesian/stimulas proponents. All I get in response is hemming and hawing an moral posturing about "fairness" or "moral hazards" or otherwise angering the animal spirits. Blech...

No one wants to argue against the logical conclusion to their ideology.

Anonymous A Plate of Shrimp May 02, 2014 11:23 AM  

"Our republic was designed to prevent centralization of power."

Yeah, and then you let the Ashkenazim in, without a thought as to the consequences.

Surprise, surprise.

Anonymous Porky May 02, 2014 11:23 AM  

because few realized how fragile our deregulated financial system had become, and how vulnerable debt-burdened families were to a plunge in housing prices

Well that shows that Krugman is just a liar.

Anonymous Porky May 02, 2014 11:26 AM  

how vulnerable debt-burdened families were to a plunge in housing prices

Riiight. And no one realized that bleeding people who swim in shark infested waters are vulnerable to sharks.

Krugman isn't a know-nothing. He's a lying shill.

Anonymous A Plate of Shrimp May 02, 2014 11:33 AM  

"Well that shows that Krugman is just a liar."

Liar, Chosenite, same difference. You have to make allowances. They can't help themselves, they really can't, it's a total frog/scorpion thing.

Anonymous Josh May 02, 2014 11:38 AM  

Many Austrian economists were and are Jews.

So I don't think it's necessarily Krugman's ethnicity that's the cause of his bad economics.

OpenID cailcorishev May 02, 2014 11:42 AM  

When he says "few realized," the "of those who attend the same parties I do" is silent.

Blogger ScuzzaMan May 02, 2014 11:45 AM  

Well, if one posits that the function of "mainstream economics" is to kick the can a little further down the road, for the benefit of criminal political operators who dont want to get caught holding the bag when the music stops - which Krugman* plainly knows it is - then it is quite accurate to say that textbook mainstream economics has performed well since the financial crisis first became undeniable.

(*Krugman being one of the highest profile apologists for this model of economics that there is.)

Anonymous scoobius dubious May 02, 2014 11:47 AM  

"When he says "few realized," the "of those who attend the same parties I do" is silent."

Language Nerd here: when you say "silent" I get what you mean, but "is understood" might be clearer. Just being a pain in the ass.

Blogger Geoff May 02, 2014 11:51 AM  

There are four main types of debt:

1. Government Debt – as you mentioned, the budget deficit/GDP is declining rapidly (probably below 3% as we speak) and govt debt/GDP is within reasonable limits. Wake me up when it’s at 200%

2. Corporate Debt – Corporate balance sheets are generally solid with tons of cash.

3. Bank Debt – Capital ratios are near record high levels.

4. Household Debt – Household balance sheets are much improved since the financial crisis and Household net worth is at record levels.

I don’t see a second leg down.

Anonymous Josh May 02, 2014 11:58 AM  

1) What is a "reasonable limit" for Govt Debt/GDP?

2) Corporate balance sheets have tons of cash because they've issued record levels of bonds and Fed stimulus has flowed directly into propping up stock prices. But they aren't doing anything with that cash.

3) The banks are still insolvent. They only appear solvent because of trillions of dollars injected by the Fed.

4) Household debt hasn't risen with the exception of student loans because there aren't enough credit worthy borrowers looking to borrow. Mortgage originations have collapsed.

Anonymous Josh May 02, 2014 12:03 PM  

1) What is a reasonable limit for govt debt/GDP?

2) Corporate balance sheets have tons of cash because they've borrowed record amounts and Fed stimulus has gone directly to prop up equity prices.

3) Banks are still insolvent, and they've received trillions from the Fed.

4) Household debt except student loans hasn't grown because there aren't credit worthy borrowers who want to borrow. Mortgage originations have collapsed.

Are any of those signs of a healthy economy?

Blogger Scott X May 02, 2014 12:21 PM  

Glen you're close but not exactly on target. Yes, the disaster started with the Community Reinvestment Act of 1977, which essentially forced banks to make loans to vibrates who had neither the social maturity to own and maintain a home or the money for an adequate down payment. The banks were told in no uncertain terms that the FDIC would scrutinize them out of business if they did not cooperate, so banks started writing bad paper and transferred the increased costs of the inevitable defaults onto home buyers who had good credit.

So now banks are holding loans that for the most part are good but has some bad mixed in as well, far more then at any time in the recent past. What to do?

Some smart wall street guy thought “Why not just bundle up a bunch of good paper with a tiny bit of the shitty stuff? We could spread the risk over a large number of mortgages and produce a product that banks will buy big time. Brilliant!" The Mortgaged Backed Security was born. These were legit for the most part and were rated as such. Everybody came out a winner: the banks unloaded their risky debt and got paid up front, the middle men (such as Lehman Bros.) got paid by bundling these mortgages and reselling them to investors who got, for the most part, a solid investment vehicle. Everyone’s a winner.

However, Mortgage Backed Securities created a vicious circle: Banks saw that they could unload bad paper without taking it in the pants by selling the bad loans along with the good ones to middlemen. Moral hazard went out the window and banks started to lower their lending standards. This, along with absurdly low interest rates led to increased demand for homes causing prices to rise. The rise in housing prices further encouraged the banks to lower their lending standards even more because in a housing market going up 10% a year, even if you loan to a deadbeat you'll still get your money back along with a nice return due to the increase in the value of the home. Everybody was fat, dumb and happy.

Nothing can go up forever and when the housing market cooled along with the economy everything came crashing down. It should be noted that the economy began to slow down before the housing crash, not after it. You know the rest from here.

It needs to be noted that in early 2007 the Bush admin tried to but the brakes on this whole thing but having lost both the house and senate the previous November, along with the chairmanships of the relevant committees, had no power to actually do anything. I remember our old friend Barney Frank swearing that both Freddy and Fannie were perfectly fine and that Republicans only wanted scrutinize them because they were helping poor people buy homes. Frank is on video tape saying this but denies it to this day. Wanker. Where’s the aids virus when you really need it?

Both parties are responsible for this mess. The leftists wanted to transfer wealth from whitey to blacky, which was the entire point of the Community Reinvestment Act in the first place, so they refused to intervene even when it became clear that disaster was inevitable. Bush and many conservatives were sure that owning a home would turn uncivilized urban savages into Ward and June Cleaver so they turned a blind eye to most of the madness. Morons….a pox on both your houses.

Anonymous Anti-Democracy Activist May 02, 2014 12:33 PM  

I remember back in perhaps 2003 or 2004 listening to Coast to Coast AM - the old Art Bell show, the one that runs in the middle of the night and talks about alien abductions and Bigfoot - and listening to a lady economist explain to the host how the entire US economy was based on massive securities fraud and how the whole thing was going to come tumbling down sooner rather than later. Her name was Catherine Austin Fitts, and she was on that show because nobody else in the media would listen to what she had to say or give her a platform with which to say it. Not CBS/NBC/ABC, not CNN, not CNBC, not Bloomberg - just the midnight alien abduction people.

Plenty of people saw the 2008 crash coming, and tried to warn people any way they could. They were roundly ignored because nobody wanted to hear it. Now the people who didn't see it coming pretend that it was impossible to predict. That the whole field failed instead of the truth - that they themselves failed.

That it isn't Fitts who has a Nobel Prize and Krugman who's sandwiched between Area 51 and the Loch Ness Monster is an outrage.

Blogger James Dixon May 02, 2014 12:34 PM  

> Well, I'm going to try and read it.

Better you than me. :) I just don't have the time for such anymore. I'm sure Vox would be willing to post a book review if you want to submit it to him.

> Just because someone says "x is happening" and "we must do y to stop x" doesn't mean that we should immediately dismiss x even if y is silly.

I don't dismiss x, but treating him seriously is asking a bit much.

> ...the budget deficit/GDP is declining rapidly (probably below 3% as we speak)

You do realize we pay interest on the total debt, not just the current deficit, don't you?

> Bank Debt – Capital ratios are near record high levels.

And how much of that capital is realistically appraised? How much of it is stock holdings?

Blogger Brad Andrews May 02, 2014 12:51 PM  

I am listening through Jim Rickard's book, Currency Wars now and have the next one in my queue. I like his discussion of Chaos Theory applied to the economy (the exact terms he uses escape me now). The idea is that the more complex a system is, the more dangerous something bad happen becomes and the more likely that is.

We have all the snow for the avalanche now, we just have to wait for whatever snowflake kicks it off, but cascading failures.

I have his latest book in my listening queue next. It would be interesting to have you review one or both of these VD.

Anonymous Josh May 02, 2014 1:16 PM  

If r > g, doesn't that suggest the game is rigged?

Anonymous bob k. mando May 02, 2014 1:25 PM  

cross posting from the Russian Professor thread, due to econ considerations:
42:00 ==
"Political Science is reduced to a model where people only know the theories of political science. But the theories of political science are very far from reality. Indeed, they exist to hide the thinking of the politicians. It's a misdirection."


note that well. note also that he says this directly adjacent to a just previous comment about economic theory.

carry over the principle:
"But the theories of economic science are very far from reality. Indeed, they exist to hide the thinking of the politicians and bankers. It's a misdirection."


it's also amusing that a pro-Soviet instructor would say this ... when the basis of the Soviet are the econo-political works of Marx and Engels ...

Blogger Bike Bubba May 02, 2014 1:34 PM  

It's worth noting that Krugman has an implicit straw man when he claims that "economics had no answers" for the current economic mess. Many of us are of course "Austrian" in our views to some degree, and it's worth noting that this school of economics was predicting the collapse. I remember seeing a billboard advertising "$300k mortgage $823/month" in Minnetonka back in 2003, and thinking "this won't end well", and also remember advertisements for "125% of equity" mortgages back in the late 1990s, and thinking "what kind of idiot would take one of those mortgages?"

So what Krugman did was to more or less assume that the classical and Austrian economists were not doing economics, and SURPRISE, the Keynesian school doesn't do well at mapping out the consequences of perverse incentives like Clinton's application of the CRA. Nice straw man, but hardly an argument. Sound economics knew things were going to happen, and it was just a question of when.

And who were the idiots who took those mortgages? My wife's sister for starters, sad to say, and at least twice. Dangle a nice home in front of someone who would otherwise be in an apartment, and things happen.

Anonymous Not Nassim Taleb May 02, 2014 1:35 PM  

Nassim N. Taleb @nntaleb · Apr 29
An academic (say Krugman) cannot lose his tenure, but a businessman, poor or rich can go bankrupt. That is the infuriating inequality.

Nassim N. Taleb @nntaleb · Apr 25
Added:How much of the wealth increase in Piketty came frm asset price inflation, mainly RE, 4x? Central banks low r! http://www.fooledbyrandomness.com/notebook.htm

Anonymous Gold to $10,000 May 02, 2014 1:42 PM  

"I saw the crisis coming. From the fall of 2002 to the spring of 2008, I pointed out that the housing market was going to crash and potentially take down the global financial system with it."

You must be a billionaire then, with this amazing foresight. Not at all like the collapse fantasists and pornographers perpetually predicting the next depression, year in, year out, over and over and over. Not that there isn't a market for that, I hear Peter Schiff's clients are holding on with a grim determination. Some people are masochists, what can you do...

Anonymous Dow Jones to 1,000,0000,0000,000,0000 May 02, 2014 1:46 PM  

The economy will go up, because black guy is president. Disagree you racist?

Anonymous Gold to $10,000 May 02, 2014 2:08 PM  

"Sound economics knew things were going to happen, and it was just a question of when."

And of course, if it hadn't happened, everyone would've continued to ignore "sound economics" (Austrian kooks and conspiracy theorists) like they'd been doing for the past 80 years and no one would've noticed. Finally the broken clock showed the right time and the Austrians all start pointing at it. You're going to have to do better than that buddy.

Anonymous bob k. mando May 02, 2014 2:10 PM  

Gold to $10,000 May 02, 2014 1:42 PM
Not at all like the collapse fantasists and pornographers perpetually predicting the next depression, year in, year out, over and over and over.


the end never does come. everything just goes on, forever and ever.

the pharaohs never fell. the Inca never fell. the Roman republic never fell. the Roman empire never fell. the Byzantine empire never fell. the Golden Horde still rules in perpetuity. the Moghuls still dominate India. the north american colonies are still possessions of the British. the Han royal family still rules China. Sumer never gave way to Akkadia which never gave way to Babylon which never gave way to Assyria.

no, there is no easily cycle by which great civilizations rise and fall ...

for there is no fall.

Blogger Geoff May 02, 2014 2:15 PM  

Josh

1) I was trying to make a funny with the 200% number but seriously, govt debt is sustainable as long as the interest rate remains below nominal GDP growth.

2) Part of the corporate cash is indeed matched by debt on the other side of the balance sheet but that doesn’t change the fact that corporate balance sheets are reasonably solid.

3) US banks are insolvent? I don’t think so. Check it: http://www.reuters.com/article/2014/03/20/us-financial-regulations-stress-results-idUSBREA2J24520140320

4) Mortgage originations have collapsed largely because interest rates have been so stable recently, so less incentive to refi. Household balance sheets look healthier than they have been in years.

The risk is not another leg down but a melt up

Anonymous Dow Jones to 1,000,0000,0000,000,0000 May 02, 2014 2:18 PM  

This chart explains all. Income inequality + Koch Bros + Bush = Sad Face.
https://pbs.twimg.com/media/BmpJYmuCMAA7_1K.jpg

I dare any of you Austrian kooks to dispute this chart:
https://pbs.twimg.com/media/BmpJYmuCMAA7_1K.jpg

Blogger James Dixon May 02, 2014 3:18 PM  

> ...but seriously, govt debt is sustainable as long as the interest rate remains below nominal GDP growth.

http://www.forbes.com/sites/samanthasharf/2014/04/30/u-s-gdp-grew-a-glacial-0-1-in-the-first-quarter-2014/

"The Bureau of Economic Analysis’ advance estimate of first quarter 2014 real gross domestic product shows output produced in the U.S. grew at a glacial 0.1% rate."

Uh oh.

Anonymous map May 02, 2014 3:33 PM  

Krugma is a Keynsian. What people need to understand is that Keynesianism is a political theiry, not an economic theory. It's purpose is to expand the size and scope of government bureaucracies and political control of the economy. Judging by the massive budget deficits, Keynsianism succeeded very well. Combine that with lying about government figures and you can see why the recession never ended.

The only saving grace is that the Keyensian policies of foreign countries are even worse, making the US look relatively well.

Anonymous map May 02, 2014 3:36 PM  

And if demand is the problem, then why not just lower taxes?

Anonymous Jack Amok May 02, 2014 3:49 PM  

The problem of the current stimulus is that it only stimulates the banks and the stock market...

But in all fairness, where the hell else could it go? To build a new car factory? Well, the EPA has a few things for you to read, and when they're done with you stop by the NHTSB for a chat, and set aside some time for the folks at OSHA and the EEOC. Oh, right, don't forget the UAW...

Well, maybe not cars. Maybe a factory to make smart phones in the USA... okay, okay, stop laughing. You're right, too many nasty toxic chemicals. Pharma? No, of course not... Maybe ranching, we could run a heard of cattle...

Retail stores. That's what you do these days. Minimal regulations, quick to build out the space, and if you're halfway competent, never more than two months worth of inventory on hand in the local government gets too greedy and you have to shut down.

Yes, it's possible to create real, productive businesses, but it's painful, slow, and has lots of friction. And there's a very limited pool if existing talent to staff it - you'll need to hire trainees and bring them up to speed before you can be really productive.

Buckets O Stimulus won't flow that direction.

We may have a financial crisis on our hands, but our economic troubles are not primarily monetary in nature.

Blogger James Dixon May 02, 2014 4:19 PM  

> And if demand is the problem, then why not just lower taxes?

Well, you see: a) that would work, and b) it gives the government less power over people.

Anonymous Foolish Pride May 02, 2014 9:00 PM  

Interestingly Krugman admirer Noah Smith claims that economists have figured out what causes recessions like the one we had from 2007-2009.

He also takes a dim view on the people who constantly claimed something was about to happen, saying that those people always claim that a recession is around the next corner, so eventually they'll be right.

He might have even referenced Peter Schiff as one of those people.

Anonymous Anti-Democracy Activist May 03, 2014 4:47 PM  

"But in all fairness, where the hell else could it go?"

If we're giving out government money to get people spending, how about a debt jubilee for common citizens? How many more iPads, Corollas, and Vegas vacations would people be spending money on if all their debts were suddenly gone - paid off by Uncle Sam? If that's too expensive for you, how about one in just one or two areas? Let's say, any remaining home loan debt for people over 65, and all student loans? Or all medical debt in excess of $100,000?

Or am I just being silly in suggesting that if the government is going to spend money to bail out the economy, it should do so in a way that benefits common people?

Blogger Serge_Tomiko May 04, 2014 6:45 PM  

And Vox once again offers nothing of substance this discussion.


1. Why didn’t economists see the crisis coming?

2. Why did economists and policy makers ignore the textbook lessons from economics?

Let’s take a look at both.

Question #1 has a pretty simple answer in my opinion. Most modern macroeconomists are not market analysts. They’re not being paid to do what Jan Hatzius does at Goldman Sachs (Hatzius actually did predict the crisis by the way). Instead, they’re policy analysts. They work for research institutions, Universities or think tanks and mainly teach and theorize about how to make the world a better place. But this is an important distinction when thinking about economics and its ability to predict or be used as a device to avoid crisis because the vast majority of “economists” simply aren’t in the macro forecasting game to begin with. And when they do make real verifiable predictions they’re often so vague that it hardly matters.

The point is, most economists didn’t predict the crisis because they’re not in the crisis prediction game. As for the many economists in investment banks and forecasting game – well, I’d say they probably didn’t do a much better job than most other people of predicting the crisis. That is mainly because predicting the future actions of the madness of crowds is really difficult to do. But it also doesn’t help that we continue to see so much mythology in economics and that brings us into the answer for question 2.

On question #2 I would have to disagree with Paul Krugman’s claim that policy makers “ignored both the textbooks and the lessons of history”. Instead, I would argue that there were several failures stemming directly from economic textbooks:

Many people used the textbook model of the money multiplier to make claims about what would happen when the banking system was flooded with reserves (see just about any modern macro econ textbook).
Many people used a loanable funds model of the monetary system to construct models for guidance through the crisis (see Mankiw’s Principle of Economics).
Many people failed to understand the Euro crisis because they didn’t recognize the difference between being an autonomous currency issuer and being a currency user (another failure of economics textbooks since they don’t even cover such a crucial topic!).
The result of this was widespread confusion about what might happen from QE or what might happen with interest rates and debt levels (see here). We saw dozens of economists and important policy makers saying excess reserves posed a substantial inflation threat (see here). We saw Nobel prize winning economists using crude models that implied there would be a “crowding out” effect from the government’s deficit spending (see here). We saw economists say that a debt crisis could come to the USA because they didn’t understand the distinction between the USA and Europe and how their monetary systems were different (see here).

These were huge failures of modern economics. And they are the direct result of failed textbook explanations and models of the world that don’t reflect our reality. Granted, some models performed better, but even Krugman was confused on some of these matters until just a few years ago (such as the case of Europe). And even his model uses loanable funds which renders it flawed in a world of endogenous money even if it comes to the right conclusions by some chance.

So yes, economics has failed us. But that’s not because we didn’t listen to the textbooks. In fact, it’s largely because of the textbooks and their many failures to reflect our monetary reality.

Blogger Serge_Tomiko May 04, 2014 6:46 PM  

http://pragcap.com/has-economics-failed-us

Blogger Joseph Dooley May 06, 2014 3:17 PM  

Demand-side is a dead end. First quarter growth this year was a pathetic .1 percent, if that. Demand, or consumption, was up, the Wall Street Journal reports:

Consumer spending was the “silver lining within a dour first-quarter growth report,” said Andrew Wilkinson, chief market analyst at Interactive Brokers LLC. But that enthusiasm is somewhat tempered because consumers tend to have little choice in spending on utilities and medical care.

Forced purchase of health insurance courtesy of President Obama and Chief Justice Ro
berts created lots of demand, but no growth.

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