17 Dec 2010

Two Quick Notes On Krugman

Krugman 5 Comments

* A while ago I thought I had found Krugman playing fast-and-loose with his readers, when he tried to make it look as if he had been the one advocating bankruptcy for overleveraged banks, as opposed to government bailouts. Specifically, Krugman was noting how Iceland was recovering much better than Ireland, and was insinuating that Krugman had been radical in advocating sitting back and letting the chips fall where they may, whereas the orthodox fuddy-duddies couldn’t bear to let the banks fail. I pointed out that of course Krugman had been in favor of TARP, while it was the Austrians and other “extreme” anti-government types who said the banks should fail.

Well, in the comments some readers thought I was nuts, and that there wasn’t even an apparent contradiction between Krugman’s views vis-a-vis Ireland, Iceland, and the U.S. If so, you need to explain that to Krugman, because here is how he handled the accusation:

Some commenters ask how I reconcile my disdain for Ireland’s bank bailout and praise for Iceland’s refusal to put taxpayers on the hook with my support for the US move to bail out banks back in 2008, via the TARP.

The answer is, numbers matter.

A good piece in the Irish Times makes the point: Ireland’s bank bailout had a face commitment around 15 percent as large as the TARP — in an economy 1/100th the size of the United States. The TARP was only 5 percent of GDP; even if a large part of the money (mainly used to purchase bank equity) had been lost — which it wasn’t — it would not have been a big factor in federal debt.

There have been other losses, largely at Fannie and Freddie; but in the end the cost of financial bailouts is not an important factor in US debt and deficits. In Ireland, by contrast, it is what has made a potentially manageable debt situation catastrophic.

I’d add that the big risk in October 2008 — that the whole world financial system would freeze up — was never a concern in the Irish case.

But mainly, putting taxpayers on the hook for 5 percent of GDP is one thing; putting them on the hook for 60 or 70 percent of GDP, something quite different.

If you want to argue that the “numbers matter,” and that Krugman is right in both of his judgments, OK. But I had some of you telling me in the comments that Krugman’s strategy was the same in both countries.

* In this post, Krugman uses the familiar leech analogy to mock his opponents. Yet I know at some point last spring or summer, I read a Keynesian who was making fun of an ignorant right-winger who had himself used the leech analogy to mock Keynesians. The Keynesian in question pointed out that actually, modern doctors do sometimes use leeches for certain conditions.

I was 95% confident that the Keynesian in question was Krugman, but now I can’t dig up the post. Does this wrong ring a bell with anybody?

5 Responses to “Two Quick Notes On Krugman”

  1. AP Lerner says:

    This is not meant to defend Krugman. It’s meant to defend facts.

    “I pointed out that of course Krugman had been in favor of TARP”

    Krugman was in favor of TARP only as an alternative to nationalization. Krugman repeatedly used Sweden as the model to deal with banking crisis, and was in favor of bank nationalizations in the US. Sure just letting the banks go under would have been an alternative as well, but implying Krugman believed TARP was the best option is false.


    And of course, Iceland nationalized its banks.


    So Krugman noting how Iceland was recovering much better than Ireland is not surprising, since the Iceland solution was what he was advocating from day 1 in the US.

    Also, just wanted to remind you of the question I posed in this post that you said you would address when you had time


    I recognize you are a very busy man, but since you (literally) wrote the book on how the government funds itself, I can only assume this would be an easy question to respond to. Thanks!

    • bobmurphy says:


      Do you agree that you are here disagreeing with Krugman’s own interpretation of his stances on the two issues? That’s fine if you are, I just want you to explicitly say that both Krugman and I are misremembering/characterizing what Krugman’s positions were.

      Re: funding, you are asking me a very specific question about the timing of the government debt issuance to fund TARP. No, I don’t claim to know that off the top of my head. I am still totally confident in my statement that the government can only get money through taxation, borrowing, or inflation, which is the general statement I made in the textbook.

      I do intend to answer your question, I am just behind on some paying clients’ work at the moment.

      • bobmurphy says:

        Quick addendum, the government can of course sell off assets that it either purchased with money raised from the other methods, or through coercion. E.g. if the government impounds a drug dealer’s car and then auctions it off, it can raise revenues that way too.

    • bobmurphy says:

      AP, OK I read that Krugman link you gave. And you are missing the real dichotomy. The issue isn’t nationalization or not, the issue is taxpayer-bailout or not. And there, in the link you just gave, Krugman is clearly calling for taxpayers to assume the liabilities of the banks that (yes) he wants to nationalize. And it’s his first-best option, too, absent a technical discussion:

      “That said, some decision must be reached on bank liabilities. Sweden guaranteed all of them. If forced to say, I would go the Swedish route; but of course we can’t do that unless we’re prepared to put all troubled banks in receivership. And I’m ready to be persuaded that some debts should not be honored — this is a deeply technical question.”

      So that’s why I (and Krugman) agree that his position vis-a-vis the US and Ireland is different. In the US, he wanted taxpayers to bail out the banks with infusions of capital (and yes, to protect the taxpayers he wanted them to just take over the banks outright). But for Ireland, he is saying that they should not have injected taxpayer funds to bail out bondholders who would’ve lost money. That doesn’t preclude seizure; the government can seize a bankrupt firm and figure out which creditors take a haircut.

  2. AP Lerner says:

    In regards to the funding question, maybe the better way to ask my question is if the US federal government needs to tax and/or ‘borrow’ before it can spend, then where does the private sector get the funds to remit to the treasury in the form of taxes? And where does the private sector get the funds to ‘loan’ to the government in the first place?

    “So that’s why I (and Krugman) agree that his position vis-a-vis the US and Ireland is different. In the US, he wanted taxpayers to bail out the banks with infusions of capital (and yes, to protect the taxpayers he wanted them to just take over the banks outright). ”

    I’m confused by this statement. The way I read this, it appears you are saying Krugman was in favor of bailing out the banks and nationalizing, which of course is not possible. It’s either or. Maybe I’m reading this wrong.