On Sunday Paul Krugman wanted to nip in the bud the small-government fantasy that the way to deal with reckless bankers is to stop bailing them out:
One line I’ve been seeing in various places, including comments here, is the claim that the real way to deal with Wall Street is laissez-faire economics: no more bailouts! On this view, policy makers should raise their right hand in the air, place their left hand on a copy of Atlas Shrugged, and swear in the name of A is A that they will never again step in to rescue failing banks. And all will be well with the world.
Sorry, but that’s a fantasy.
…[E]ven if you persuade yourself that the moral hazard created by financial firefighting outweighs the benefits of avoiding a 1931-style cascading crisis, the fact is that policy makers will intervene. Hank Paulson set out to make Lehman an example; two days later he was staring into the abyss.
So the only feasible strategy is guarantees and a financial safety net plus regulation to limit the abuse of those guarantees.
So since Krugman gets to just declare that his view is the only politically feasible one, he wins. It’s not like there’s a role for heterodox economists to recommend crazy stuff like letting insolvent banks fail. That could never happen in our modern world, even if you thought it was a good idea.
Then again, Krugman wrote this in November 2010, contrasting the fates of Ireland and Iceland:
What’s going on here? In a nutshell, Ireland has been orthodox and responsible — guaranteeing all debts, engaging in savage austerity to try to pay for the cost of those guarantees, and, of course, staying on the euro. Iceland has been heterodox: capital controls, large devaluation, and a lot of debt restructuring — notice that wonderful line from the IMF, above, about how “private sector bankruptcies have led to a marked decline in external debt”. Bankrupting yourself to recovery! Seriously.
And guess what: heterodoxy is working a whole lot better than orthodoxy.
Now it’s true, Krugman wasn’t recommending a Ron Paul Option for Iceland. But my point is, he was recommending something that would prima facie seem to be politically impossible, according to his post from two days ago.
So, when Krugman doesn’t like a particular measure, he declares it politically impossible. When Krugman advocates something that doesn’t end up getting done (like a bigger stimulus), he doesn’t conclude that the fault is his own (for recommending the impossible), but whines for two years that everybody else is an idiot for not heeding his warnings.