02 Jan 2018

Krugman’s Interesting History

Krugman 6 Comments

I’ve been carrying this particular blog post on my browser since October, so let’s move on to the New Year…

This particular excerpt struck me as amazing:

When the financial crisis struck, there were many calls for new economic ideas – even an Institute for New Economic Thinking. The implicit story, pretty much taken for granted as true, was that the crisis proved the inadequacy of economic orthodoxy and the need for fundamental new concepts. Pretty obviously, too, supporters of calls for new thinking had a sort of Hollywood script version of how it would play out: daring innovators would propose radical ideas, would face resistance from old fuddy-duddies, but would eventually win out through their superior ability to predict events.

What actually happened was very different. True, nobody saw the crisis coming. But that wasn’t because orthodoxy had no room for such a thing – on the contrary, panics and bank runs are an old topic, discussed in every principles book. The reason nobody saw this coming was an empirical failure – few realized that the rise of shadow banking had done an end run around Depression-era bank safeguards.

The point was that only the dimmest of free-market ideologues reacted with utter bewilderment. The rest of us slapped our foreheads and said, “Diamond-Dybvig! How stupid of me! Diamond-Dybvig!”

This is absolutely amazing. Here’s Mark Thornton in 2004 writing a very prescient article. Here’s a compilation of Peter Schiff clips that are eery in spots because he was so spot-on with what was coming.

And here’s Tom Woods’ book that came out right after the crash. I don’t think he was utterly bewildered by what happened.

Of course, maybe those early guys were permabears. Maybe Tom is just ideological and is going to say “The Fed done it!” no matter what.

But that’s not what Krugman is arguing above. No, he’s saying nobody saw the crisis coming, and that after it hit, the free market guys were unable to put it into their framework.

(BTW just be careful in the comments if you are going to pile on. Krugman actually was saying there was a housing bubble long before many other commentators. [Indeed the connection if anything is the other way around–Krugman famously called for such a thing.] So in the quotation above he must mean the actual financial crisis itself, not merely the collapse in housing prices.)

6 Responses to “Krugman’s Interesting History”

  1. Kevin Erdmann says:

    The idea that nobody saw it coming is a bit of collective revisionist history. The problem was that everyone saw it coming and many people mistakenly welcomed it.
    Before the August 2007 FOMC meeting, the Wall Street Journal called for the Fed to maintain tight policy even though credit markets were breaking down. They explicitly predicted a panic would be the outcome of the decision they were demanding. A year later they were still cheering liquidationism. The panic didn’t surprise them. They asked for it. They got it. They liked it. And they asked for more.

    • Bob Murphy says:

      Kevin can you link to the WSJ calling for a panic? I’d like to see exactly what you mean, if you can find it.

      • Kevin Erdmann says:


        “Credit panics are never pretty, but their virtue is that they restore some fear and humility to the marketplace.”

        As I have slowly come to conclude that the housing bust and the financial crisis were unnecessary, going back and seeing the countless comments like this is chilling. Like seeing video footage of a mother with Munchausens by proxy slipping poison to her child before taking it to the doctor.

  2. Mike Sandifer says:

    It can’t help, but undermine your credibility when you link to Peter Schiff “predictions”. Schiff is a broken clock on economic collapse claims. Here’s a clip from 2002, after the tech crash and recession. Things did not get worse until the end of 2007. Does that count as a prediction?

    Also, Schiff got the nature of the crisis completely wrong. It said it would be hyper-inflationary, there would be decoupling, etc. Instead it was disinflationary and even briefly deflationary at one point. He wasn’t correct about the causes of the last crash or the timing, so he simply wasn’t correct.

    He looks far worse still when you look at all his crazy predictions since that’ve not come true. He keeps predicting hyper-inflation, predicted gold would hit $5000/oz, that there wouldn’t be much in terms of real gains in the US stock market, that the Fed couldn’t sustainably raise interest rates, etc. He claimed high inflation, for which there was and is no evidence, was papering over a continuing recession. While unemployment falls?

    All so wrong, no intelligent, rational person would have any confidence in his predictions.

    • Tel says:

      If someone was listening to Schiff in 2002, bought into gold around 300 USD per oz, they would be now at about 1300 USD per oz 15 years later, which averages out around 10% per annum growth.

      If you accept buying into the Dow Jones in 2002 at around 9000 to be representative of US stocks in general, and then reaching 24000, 15 years later, that averages out only around 7% per annum growth… so Schiff was giving the right basic advice for the time, even if things didn’t go exactly as he predicted. Put it this way: you could have done a lot worse.

      However, from Schiff’s point of view, gold itself is the reference so he would say that if you bought gold in 2002 and just held it, then you made zero gain and congratulations, you get to keep your money! If you bought into the Dow Jones you only made an average loss of 3% per annum, and if you held US dollars you were losing value at a rate of 10% per annum. That’s the same numbers, just seen from a long term perspective where gold has been the item that has most consistently held value over all of human history.

      From a short term perspective you could have made huge gains on horse races, lottery tickets, Bitcoin… but none of those are reliable.

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