27 Aug 2010

Krugman Beats Paulson, Loses to Murphy

Financial Economics, Shameless Self-Promotion 3 Comments

Paul Krugman recently patted himself on the back for out-calling investor John Paulson. Krugman quoted from a Business Week article that said on July 1, 2010:

Now [Krugman’s] warnings have taken on an even more dire tone. The threat is not merely the dreaded “double dip.” If the leaders of the developed world hold to pledges they made at the G-20 summit in Toronto and cut government spending, Krugman argues, we face nothing less than a “third depression”—perhaps not as singularly devastating as the Great Depression, which ripped the U.S. economy in half, but comparable to the Long Depression that followed the Panic of 1873, a grinding period of chronic social need and dissension.

If that makes you want to head for the hills with your shotgun and turnip seeds, consider another view, expressed the week prior at the London School of Economics. The speaker was not a decorated academic with visions of 1873, he was a profit seeker, pure and simple: John Paulson, the hedge-fund manager on whose behalf Goldman Sachs (GS) cooked up those killer collateralized debt obligations designed to pay off handsomely in the event of a housing crash. He was right about that one, you’ll recall.

“We’re in the middle of a sustained recovery in the U.S.,” Paulson declared in London. “The risk of a double dip is less than 10 percent.” The housing market is now, he says, an attractive buying opportunity. “It’s the best time to buy a house in America,” he said. “California has been a leading indicator of the housing market, and it turned positive seven months ago. I think we’re about to turn a corner.”

No mention of a third depression.

After quoting the above (but note that I gave you one additional paragraph in the beginning, for more context), Krugman wrote:

So, how’s it going? I’m sure that if Paulson had proved right, there would be a followup article mocking yours truly. Wanna bet that there won’t be a piece saying that maybe professors know something that traders don’t?

That’s probably true, Dr. Krugman. But as the Plutocratic von Pepe reminded me, Krugman’s “third depression” stuff is quite new. Just a year ago, Krugman was telling everyone that we were in a recovery, but that it would be a jobless one. So just another case of Krugman saying 19 different things, such that one of them–when quoted down the road–will make him look prescient.

This issue of Krugman “calling” the fact that we weren’t in a recovery, and in fact were poised on the edge of another depression, is particularly significant to me. Why? Because back on August 21, 2009, I wrote the following blog post:

Two Men Enter, One Man Leaves: More on Krugman vs. Murphy

Now it’s official: Krugman has definitively said we are in a recovery. (In his previous writing, he technically didn’t say we were, just that it seemed as if we were, and if we were it was because of Big Government.)

Now what’s ironic in all this is that even if unemployment is in double digits for 2010 through 2013–which it very well might be–Krugman would actually weasel out of the post I’ve linked to above. He would say, “Yes this is unfolding exactly as I predicted. Real GDP started rising again for a few quarters in the summer of 2009, and I said at the time that it would be a jobless recovery.”

So just to be clear, when I say we are nowhere near coming out of this, I mean it in the same way as an economist speaking in 1932. Yes, the official recession dating of the NBER shows that there were two recessions in the 1930s–one from 1929-1933, and another from 1937-1938.

But c’mon, that’s ridiculous. We all know that “the Great Depression” lasted from 1929 until at least World War II. (And readers of Bob Higgs know that it actually lasted through World War II.)

When it comes to dating business cycles, I am a man of the people. If a tenth of the labor force can’t find work, the economy is broken. Don’t let those MIT economists like Krugman fool you with their fancy jargon.

As General Zod would say, my victory is complete.

Incidentally, I don’t explicitly come out in the above post and say, “This is going to go down as the Second Great Depression,” but I know I’ve said that many times in speeches, and I’m pretty sure I’ve written in, either on this blog or at Mises.org. If anyone can find a quote that would be great.

3 Responses to “Krugman Beats Paulson, Loses to Murphy”

  1. Marco says:

    That’s just from your blog. Maybe it doen’t go further back because you moved to this new site quite a few months ago?

    Laffer on Why This Is the Calm Before the Storm (july 8th)
    I have actually been surprised by how well the economy has held up so far. Obviously the economy is in terrible shape, by just about anyone’s reckoning, but if this is really going to be the Second Great Depression (as I’ve been saying for more than a year), it doesn’t seem too bad yet, does it?

    Reynolds Doesn’t Think A Double Dip Is Coming (june 10th)
    Anyway I think we are definitely in store for a “double dip.” I think this is the second Great Depression.

    Progressive Pile-Up On the Austrians!! (April 8th)
    The reason the Great Depression lasted a decade (or more, depending on how you count it), and the reason we are still mired in (what I predict will become known as) the Second Great Depression, is that central banks and governments are not allowing the reconfiguration of the economy

    Austrian vs. Fed Debate (March 24th)
    Yesterday at Campbell Law School in Raleigh, NC I had a friendly debate with Matthew Martin, a senior vice president at the Federal Reserve Bank of Richmond. The topic was, “Did the Fed Avert a Second Great Depression?”

    Caplan Calm (February 2nd)
    I agree that Leviathan’s juggernaut has been slowed for various reasons, but I still think this will go down in history as the second Great Depression. The government has already set in place several mechanisms for keeping the economy in the toilet, and for ramping up its power, when the public demands it in the next crisis.

    A Helpful Nag From Uncle Bob (26 January)
    Hey kids, just to refresh your memory, I still think we are the opening stages of what will become known as the second Great Depression. (I think they will hold off on calling it “Great Depression II” because then people might get worried there will be a whole series.) On top of that, I expect large price inflation in the near future.

  2. Marco says:

    Found this one too

    The Threat of Hyper-Depression (march 25th 2009)

    I had resisted predicting that we are now living through the early period of the Great Depression II. After all, the conventional statistics today are nowhere near as bad as they were in the 1930s. However, the recent tussle over AIG bonus payments convinced me that we are in this one for the long haul.