No, I don’t mean Krugman favors a $999 billion bailout (that’s much too small), I mean that he simultaneously tries to take both sides of a hot-button issue. (Poor John Stossel!)
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.
I then linked to Krugman’s discussion of Iceland, in which he praised its government for not bailing out it bankers, the way orthodox opinion had said was necessary (and of course, Krugman had been on the side of the good guys on the issue).
Yet that particular quotation was murky, because Krugman mixed it up with some discussion of debt restructuring, and because it was from November 2010.
But now, a mere two weeks after Krugman told us that it was a fantasy to expect politicians not to bail out their big bankers, Krugman cleanly declares the following:
You can play with different numbers and try to make Iceland look worse in comparison, but the bottom line here is that Iceland — while it has suffered terribly — really does not seem to have done as badly as other countries that seemed to have much less awful fundamentals.
Part of the story, of course, is that Iceland refused to take responsibility for the debts run up by runaway bankers.
So I guess the politicians in Iceland are big Atlas Shrugged fans? Maybe they listen to David Hasselhoff and read Ayn Rand?
Now here’s another really weird thing about Krugman: A mere two posts before the one explaining Iceland’s great decision not to bail out its bankers, Krugman said that the European governments urgently need to bail out their bankers!
The usually very insightful Kantoos seems to have missed what people like me are actually saying about the need for emergency funding in Europe.
[Krugman then quotes Kantoos on an alleged Krugman argument.–RPM]
That’s not the actual argument; I know very well that liquidity problems generally reflect solvency concerns. The point, however, is that Italy and Spain arguably are at risk of suffering from self-fulfilling panics. And you need open-ended credit to avert that fate.
Now, Kantoos is right that more expansionary ECB policy, including a higher inflation target, is really what the doctor ordered. But it would take time to get that moving; even if Mario Draghi suddenly rips off his mask and reveals himself as a closet Woodford/Svensson/Krugmanite, it would take a long time to turn monetary policy around sufficiently to restore confidence. And the existential threat to the euro zone won’t wait.
So the indicated policy is lend now, inflate later. If you don’t like that, say goodbye to the euro.
The part I’ve put in bold is why I’m claiming Krugman is now being Herman Cainesque on whether the European governments should bail out their bankers. This is analogous to Krugman’s infamous 2002 assertion that
[t]o fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
Of course, when that quote was later used to embarrass Krugman, his response was that he never meant Greenspan should try to create a housing bubble, but rather that Krugman was engaging in neutral analysis of cause-and-effect.
Krugman is playing the same game here. He has said repeatedly that the euro project was a mistake, and keeps explaining why it is crippling the constituent members’ ability to recover. (For example, the main point in the recent Iceland post linked above, is that Iceland could devalue its currency since it didn’t foolishly join the euro. Krugman says that explicitly.)
Like Cain, it’s not even that Krugman takes both sides of the issue at different times–on his blog today he takes both sides in the very same post!
The torments of the euro would be funny if they weren’t so tragic. At this point the urgent need is for a big Panzerfaust — a bailout fund big enough to head off a self-fulfilling liquidity crisis for Italy. But such a fund would be backed by the credit of the euro area’s remaining AAA governments, basically Germany and France — yet at this point the euro situation has deteriorated sufficiently that taking on another commitment would undermine French credit. There’s a hole in the bucket, and every attempt to fix that hole ends up being stymied because, well, there’s a hole in the bucket.
The answer to the whole conundrum is to back the rescue, not with French guarantees, but with the power of the printing press — to put the ECB behind the effort. But the ECB won’t and maybe can’t (under current rules) do that.
And meanwhile, austerity programs are leading to severe slumps in Greece and elsewhere. Who could have imagined that?
What a tragedy. A rich, productive continent, which has produced arguably the most decent societies in human history, is tearing itself apart because its elite insisted on embarking on a dubious monetary project, and now can’t bring itself to take the steps necessary to give that project a chance of working.
You see how he brilliantly covered all his bases there? No matter what happens, Krugman can say he called it. If there’s a big bailout of the banks (which has already happened and which will probably continue) and the region doesn’t blow up, Krugman can say he called it. If the bailouts aren’t big enough and the euro collapses, Krugman can say he called it. And if Europe is miserable for the next two years at least–which it surely will be–Krugman can say he called it, because they didn’t listen to his advice and insisted on embarking on a dubious monetary project.
Say what you will about Nouriel Roubini, at least he’s taking his own position seriously and saying they should cut Greece loose and let it devalue.
In contrast, as far as I can tell, Krugman is saying that Iceland was very wise to not join the euro and bail out its bankers, and thus his recommendation is for the European governments to bail out their bankers in order to save the euro and keep themselves tied into an awful monetary arrangement that prevents global recovery.
Two years from now, after trillions of dollars (worth) has been pumped into European banks and the system still collapses, mobs of Germans and French will dig up that smoking-gun quotation above where Krugman says, “At this point the urgent need is for a big Panzerfaust — a bailout fund big enough to head off a self-fulfilling liquidity crisis for Italy.” Krugman will shrug and tell them, “Yeah, what the heck did you guys do that for? Didn’t you read all of my posts on Iceland?”