A Tale of Two Krugmans
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.
One option not considered at all about systemic risk is this.
Force all banks to publish their daily credit exposures. Daily because it makes it hard to window dress with a bit of financial engineering – like Greece and its deficit deal with Goldmans.
Now with the exposures in the public domain, everyone can see who takes out whom if they default.
End result will be a reduction in systemic risk.
The problem is not credit exposures, or bad bank investments or whatnot. The problem is multiple people having full claims to the same dollar. Everything else arises from that.
Even if a bank made solid investments, it would still be unable to honor all of its promises to depositors the moment people want all their money back, since it would have to liquidate too quickly.
If they instead separated warehousing and investment operations (as I explained in a recent comment on Krugman’s blog), that couldn’t happen: either they put their money at risk, in which case they were never depending on it being there at any specific moment (e.g. via a mutual fund), or their money was just being warehoused, in which case the bank doesn’t rely on anyone else taking pity on them in order to get you your money back.
Publishing those numbers just makes runs more likely, rather than solving the more fundamental problem, which is that runs should not be a problem in the first place!
Sorry for the sloppy use of pronouns there, I hope it was clear, at least after you read my comment on Krugman’s blog.
You are delusional. Three years after Lehman’s collapse, PWC has more that 700 people working out who owes whom how much, and this will go on for years and years.
You think your average Roddis will be able to figure out anything?
You’re delusional. Three years after the bank bailouts, the economic distortions that have taken place have generated years of hardship, and will continue to generate more hardship as the low interest rates and continual high budget deficits both prevent the economy from recovering as well as generating new problems of their own.
My guess is that you and your ilk are subconsciously embarrassed and feel responsible for the calamity, which makes you feel protective of your disaster.
I don’t think Krugman holds that more deficit spending and more inflation are politically impossible, such that Krugman is “recommending the impossible.” He said that going the other way entirely, with laissez-faire austerity, is politically impossible. Also, as you noted, Krugman would not argue that Iceland did go the laissez-faire route. Iceland went the “capital controls, large devaluation” non-laissez-faire route.
So Krugman would probably hold that the interventionist route taken by Iceland’s government, and of course not the laissez faire route he is criticizing, is politically possible for the US government.
I think what Krugman is saying in the first post you cited is a particular form of the more general Marxian belief that socialism is bound to come “with the inexorability of a law of nature.” The only difference is how fast and which particular form it takes. It’s politically possible to go faster towards socialism, but it’s politically impossible to go faster towards laissez-faire, because that would violate the “law of nature.”
In the second post you cited, Krugman is trying to excuse Ireland’s problems on “orthodox” economics, which allegedly includes “savage austerity”. This is just dishonest of him. “Savage austerity” is heterodox, not orthodox. Krugman is trying to blame Ireland’s problems on the fact that they didn’t engage in “savage stimulus.”
Does Herr Krugman really see Iceland as a redemption story? Their currency collapsed back in 2008-09 and has yet to recover. By his logic Argentina from 2001 was a shining example of responsible economic and monetary policy
It’s funny, but BB&T bank requires all its employees to read Atlas Shrugged. They also refused to go down the state-paved road of excess mortgage lending. And they have gone through the crisis unscathed. I think they’re on to something.’
So yes, PK, we should swear on a stack of Rand that those who deserve to fail… fail!
The freedom to buy, the freedom to try, the freedom to sell and the freedom to FAIL!!! What can’t Paul K understand about that?
I love the way political feasibility is brandished like a shield at times and dismissed as pessimism at others. If letting banks fail is politically infeasible, what about stimulus? Perhaps Krugman should stop wasting air on advocating stimulus spending and get on the spending-cuts bandwagon to help make better cuts.
Krugman links to Yglesias’ inept post from yesterday. The key quote:
“Let me add that the fractional reserve thing exhibits a characteristic common to a lot of what I see in the Paulist camp: they have an oddly antiquated notion of what money and finance are about, one that misses the “virtualness” of the modern world. They still think of money as being pieces of green paper, rather than what it mostly is now, zeroes and ones in some server somewhere. They still think of banks as being those big marble buildings, in a world in which most banking is a lot more abstract than that.
This is, after all, the 21st century. Things have moved on a bit.”
http://krugman.blogs.nytimes.com/2011/10/10/if-banks-are-outlawed-only-outlaws-will-have-banks/
Right. Ron Paul and the Austrians have never before realized that banks can now create loans out of thin air and have never before mentioned it. Thanks Krugman. For more fun, read the inept blog comments.
Also note that to help the befuddled “Christopher”, Yglesias tells him to read his own inept and dishonest article “Fed Up”, the old attack on Tom Woods.
Our opponents have nothing. Ever.
> They still think of money as being pieces of green paper, rather than what it mostly is now, zeroes and ones in some server somewhere.
My god, what sort of distinction does he think he’s making here? I bet Krugman still thinks of the NY Times as being pieces of gray paper, rather than what is mostly is now, zeroes and ones in some server somewhere.
Changing from paper representation to digital representation surely has wide-ranging impacts, but these impacts do not relieve the Austrian horror at fiat, fractional reserve paper money but instead amplify such. At least modern paper money requires capital (printing press), innovation (think: anti counterfeiting), and raw materials in order to function, unlike Mosler’s spreadsheets.
I understand and appreciate the fact that it is your moral duty to counter the nonsense from Krugman, but let’s face the truth – he’s one of the most intelligent and at the same time brain-washed people on the planet. Let’s hope he turns towards sound economics one glorious day, because we could seriously use a person so smart that it’s possible for him to keep espousing such rubbish and still sound superficially credible.