22 Oct 2011

Krugman Is the Herman Cain of Bailouts and the Euro

Economics, Financial Economics, Inflation, Krugman 17 Comments

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!)

In a snarky post entitled, “A Tale of Two Krugmans,” I alluded to the fact that Krugman thought he blew up the case for laissez-faire on bailouts by declaring the position politically impossible:

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?”

17 Responses to “Krugman Is the Herman Cain of Bailouts and the Euro”

  1. James E. Miller says:

    Sometimes I get the feeling that Krugman just spews his crap just to sit back and laugh about how many people take him seriously. Basically, “I called for the creation of the housing bubble, denied what my very own words said, and all these schmucks still take me seriously?”

    • Tel says:

      You must admit it would be an awesome retirement strategy to just say, “All those years and you guys never caught on,” then take the loot and vanish to some private island, get a deck chair in the sun and never publish another word.

      Guaranteed immortality… after the gnashing died down.

      Mind you, it would also spark a whole mystique of conspiracy theories.

      The free market would no doubt be blamed for such an event… gets blamed for anything and everything else.

  2. Matt Flipago says:

    Well Herman Cain can have it both ways. If he adopts the nuanced view that abortion is always wrong, but just because it’s always wrong doesn’t mean we should make it illegal. Far too nuanced to catch on, but a valid position.

    • Matt Flipago says:

      So when he says it should not be legal, he could mean, ideally it should be illegal, but we have to keep it legal because of government enforcement.

      • Joseph Fetz says:

        LOL!!! That was truly hilarious, Bob. You haven’t lost your mojo…

      • Joseph Fetz says:

        Cain definitely covered every conceivable base in less than 60 seconds. If you cut up the audio, you can have a soundbite that makes all the statists happy.

      • Joseph Fetz says:

        It’s like slices of pizza. Only, it’s with politics.

    • Bob Murphy says:

      Oh come on Matt. I think cheating on your spouse is always wrong, but that it should obviously be kept legal. I wouldn’t have a 3-minute misunderstanding with John Stossel on that one. Or even being a heroin addict. People would know after 20 seconds of listening to me, that I was against the government arresting heroin abusers.

      We aren’t at all confident what Cain thinks the government should do regarding abortion. He seems to clearly say one thing, but then the other in the next breath.

  3. Yosef says:

    I am having some difficulty seeing the inconsistency here. Yes, Krugman thinks the Euro was (is) a mistake, but since the Europeans have decided on trying to save it, he is recommending policies with that as a given. You wrote “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!” But isn’t that because Iceland was able to say damn all, default and devalue? Which is an option (to Krugman’s chagrin!) that the Europeans have chosen to consider unpalatable. Basically he is saying ‘the right thing is not to have a currency union, see Iceland. If you insist on having a currency union, and really want to save the Euro, the best thing is to print/ bring out the Panzerfaust’.

    Krugman’s advice is, to quote Sir Humphrey, “If you must do this damn silly thing, don’t do it in this damn silly way” [Is there some irony in quoting Sir Humphrey in excusing double talk?]

    • Bob Murphy says:

      Yosef, you’re right–if the Europeans pump in another few trillion euros into their banks, and the whole thing collapses anyway, Krugman will indeed take the line you just gave here.

      But go look at the Panzerfaust post again. NOWHERE in that post, does Krugman give a hint that the optimal thing to do is let the euro collapse and screw all the bankers. No, he says the right thing to do would be to print a bunch of euros. But, since that is apparently off the table, the next-best thing is to have an unlimited credit backstop by the governments.

      It’s like if you listened to just 15 seconds of Cain. You would be absolutely certain he thought women shouldn’t have a legal ability to get an abortion. But then if you listened to a different 15 seconds, you’d be absolutely certain he thought women SHOULD have that legal ability.

      • Yosef says:

        “But go look at the Panzerfaust post again. NOWHERE in that post, does Krugman give a hint that the optimal thing to do is let the euro collapse and screw all the bankers”

        Yes, he did not say that in that post. Does every post need to repeat everything he previously said? On leaving the Euro Krugman has said:
        “For a long time my view on the euro has been that it may well have been a mistake, but that bygones were bygones — it could not be undone. I was strongly influenced by the view expressed by Barry Eichengreen in a classic 2007 article…as Eichengreen argued, any move to leave the euro would require time and preparation, and during the transition period there would be devastating bank runs. So the idea of a euro breakup was a non-starter.

        But now I’m reconsidering…” (http://krugman.blogs.nytimes.com/2010/04/28/how-reversible-is-the-euro/)

        or http://krugman.blogs.nytimes.com/2011/05/10/greek-out/ and http://krugman.blogs.nytimes.com/2011/05/10/more-greek-out/

        Also, thinking the Euro was a mistake and thinking that it is optimal for the Euro to collapse are two different things. In those links Krugman even says that he may not think a breakup is the best thing. A collapse of the Euro will have implications for the wider European Project, which Krugman fully supports. So Krugman’s argument might be ‘Damn it this Euro was a bad idea from the start (and I said so). But now it’s so associated with Europe that to for the sake of it all we must save it too. And this is how we can’

        Except he’d be wittier. Maybe throw in a pun.

        • Charlie says:

          I agree with Yosef. The same posts came to my mind. Here is a nice bit from one of the links:

          “The problem is that even if the country defaults on its debt, it still faces the problem of wages and prices way out of line with the core euro countries. So devaluation is what you do when default isn’t enough.

          As for the second point, the main argument against the possibility of a euro breakup has been precisely that any hint of exit would unleash the mother of all bank runs. So how could exit take place? I argued some time ago that it would have to take place in the context of a banking crisis that forces a temporary closure of the banks — something along the lines of the Argentine corralito — in any case.

          This is why I find it hard to see any European government making a solemn, deliberate decision to leave the euro. But I can easily see how events could lead to a situation in which euro exit becomes the least bad option.”

          • Tel says:

            I completely disagree. Germany could easily leave the Euro without any chance of bank runs.

      • Joseph Fetz says:

        Cain/Krugman 2012!!!

        I they win, who gets the blame?

    • Tel says:

      I would argue that “print a whole lot of Euros” is very consistent with the philosophy of “default and devalue”. The difference is only the mechanism by which a default is achieved — money printing is a soft default by repaying bondholders in devalued currency.

      In both cases it is a gift to debtors at the expense of creditors. That’s not something I personally agree with, but certainly it’s something that Krugman reliably agrees with.

  4. David S. says:

    Iceland wasn’t able to bailout its banks and Krugman favored nationalization in the case of the US. The EU is a different situation altogether, given the added complexities, which should be obvious to anyone with a brain.