1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/10047/krugmans-latest-financial-fantasy/

Krugman’s Latest Financial Fantasy

June 1, 2009 by

Paul Krugman often will wind a very big lie around a kernel of truth, and in his column today, he does not disappoint. Now, here is someone who openly extols the “virtues” of inflation and complains that the real problem today is that the government is not inflating enough.

Today, he turns his guns back on his favorite bug-a-boo, Ronald Reagan, promoting the Krugman myth that all was well in the banking system until Reagan and his “magic of the marketplace” ideologues turned finance into a free-for-all. And, like always, Krugman denies the real history of financial deregulation and creates his own morality tale.

But there was also a longer-term effect. Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending — restrictions that, in particular, limited the ability of families to buy homes without putting a significant amount of money down.

These restrictions were put in place in the 1930s by political leaders who had just experienced a terrible financial crisis, and were trying to prevent another. But by 1980 the memory of the Depression had faded. Government, declared Reagan, is the problem, not the solution; the magic of the marketplace must be set free. And so the precautionary rules were scrapped.

It all began, Krugman claims, with the 1982 passage of the Garn-St. Germaine Act. Well, not exactly. Much of the major deregulation of the financial system began before then, and it came because inflation was driving people out of the regulated savings accounts and into money market accounts. (I am sure Krugman believes anything outside of the government financial cartel should have been outlawed, but that is another post.)

Furthermore, most of the players in financial deregulation were not conservative ideologues, no matter how many times Krugman tries to convince us that they were. Ted Kennedy, not exactly a well-known conservative free-marketeer, was the main force behind airline, trucking, and railroad deregulation, and a lot of the heavy lifting came in 1980, a year before Reagan took office, and at a time when Democrats controlled all of the government.

Krugman gives us another howler here:

We weren’t always a nation of big debts and low savings: in the 1970s Americans saved almost 10 percent of their income, slightly more than in the 1960s. It was only after the Reagan deregulation that thrift gradually disappeared from the American way of life, culminating in the near-zero savings rate that prevailed on the eve of the great crisis.

Now, this is coming from someone who claims that there really is a “paradox of thrift” and that government should inflate to force people to stop saving and start spending. Krugman is someone with no sense of shame whatsoever, but I must admit that he always gets away with his howlers because the political classes, the “elite” academics, and the mainstream media have anointed him with the title of “seer.”

{ 12 comments }

Bob Roddis June 1, 2009 at 10:19 am

I propose that we cease using the terms “inflation” or “inflate” in referring to anything other than general price increases, at least when are trying to engage the general public. I would especially not use those terms in describing what the central actually does. The general public has an attention span of about 3 seconds. The average person hearing merely “the Fed creates credit out of thin air which leads to a depreciation the currency” much less “credit expansion causes a reduction in interest rates causing malinvestment in capital goods industries” experiences an immediate brain freeze and runs back to watching Oprah.

Our concepts are not that complicated. I propose using the terms “dilute” and “dilution” to describe BOTH the creation of fiat money AND the effect of fiat money. The average person will not notice the same term being used for two concepts. Explain that by diluting the money supply, the Fed is, in essense, STEALING purchasing power from others, which is theft. Once (if) the person can grasp that concept and hold it, the rest should be easy. Then explain that all market values are subjective and that money dilution screws up that process. In fact, it is money dilution that also causes the familiar price inflation. Finally, explain simply that in messing up the price system, money dilution really messes up long term investment.

Once your layperson has grasped those basic concepts, you can move onto the usual Austrian explanations.

After reading various blog posts for and against the Austrian theory for years, I am convinced that our opponents do not understand the above explanation, and have no response to it (generally, the Austrian opponent jumps on some corollary point further down the chain of argument thinking he has forever refuted the entire theory). Think of this “dilution” example as a lost preamble to Austrian economics, similar to the lost preamble to the Bill of Rights. Further, once a layperson understands things to this point, they can readily observe how the Keynesians and statists ignore and avoid any mention or argument regarding these core issues.

On a similar note, I would ask Krugman to explain how the dilution of the money supply by the central bank and the stealing of purchasing power of others holding the old money is not theft. I would like him to explain how such a continuous dilution of purchasing power will not invariably wreak havoc with the free market price information system, especially the long term investment price system. Finally, since it is undeniable that the Fed did nothing to fix the 1921 depression while spending and taxes were slashed at the same time, I would like him to set forth the historical, evidentiary and logical basis for Keynesian theories about curing depressions and recessions.

I generally find that at this point in the debate, the Keynesian either does not respond or else just changes the subject. It is esssential the the general public have some understanding of these basic issues and how they are being deceived. It is not that complicated.

Bob Roddis June 1, 2009 at 10:51 am

I should have mentioned the point of Mr. Anderson’s post in my first long-winded comment. It is the Fed in the first instance that is causing the money dilution problem. People are simply trying to find a store of value or a source of return on investment in these “unregulated” endeavors. Krugman’s position seems to be that a) yes, the Fed is going to dilute away your money and your wealth in the extreme; AND b) no, you can’t do anything about it; the government is doing God’s work in trying to preclude you from any successful attempt at protecting your wealth in the face of Fed monetary dilution through thorough regulation. Tough luck.

Michael A. Clem June 1, 2009 at 11:15 am

I like the phrase “diluting the money supply”. The inflation of the money supply is like watering down the drinks (or the gasoline)–you need more of it to get the same effect.

Dean June 1, 2009 at 11:35 am

I would literally pay money to see Krugman in a debate with Bill Anderson, Walter Block, Robert Murphy, etc.

Hell they could throw in Brad DeLong as well.

We already saw what happens when you question Krugman about the Austrian school…

GULP!

Audi June 1, 2009 at 12:08 pm

Another great howler:

“The S.& L. crisis has been written out of the Reagan hagiography, but the fact is that deregulation in effect gave the industry — whose deposits were federally insured — a license to gamble with taxpayers’ money, at best, or simply to loot it, at worst.”

Notice how he places all reason for gambling (even looting) taxpayer dollars strictly on deregulation – not on the fact that the deposits were federally insured.

An argument for getting the government out of the marketplace is right there in his own writings, yet his partisan ‘economics’ cloud him from seeing it.

Audi June 1, 2009 at 12:11 pm

Another great howler:

“The S.& L. crisis has been written out of the Reagan hagiography, but the fact is that deregulation in effect gave the industry — whose deposits were federally insured — a license to gamble with taxpayers’ money, at best, or simply to loot it, at worst.”

Notice how he places all reason for gambling (even looting) taxpayer dollars strictly on deregulation – not on the fact that the deposits were federally insured in the first place.

An argument for getting the government out of the marketplace is right there in his own writings, yet his partisan ‘economics’ cloud him from seeing it. Can’t help but laugh at that one.

Michael A. Clem June 1, 2009 at 12:19 pm

You’re right, Audi. Krugman doesn’t make moral arguments but the idea that rights without responsibility is possible without government privilege or protection is indeed absurd. That was true with the S&L crisis, and it’s just as true with the most recent economic crisis. This irresponsibility is bi-partisan.

Bob Roddis June 1, 2009 at 1:21 pm

I submit that if one understands Krugman’s arrogant totalitarian mindset, his statements tend to make sense within those confines. Keynes himself said that his policies would work best in a totalitarian system. Krugman clearly thinks that the government can indeed manage an economy and a society. He sees fiat money dilution as just another wonderful tool to be used by our betters (him) to manage our lives and the economy. However, if the fed is going to be creating all of this new credit out of thin air, but the peons are going to be allowed to borrow and spend as much of it as they like, the game will get out of control and the wheels will come off. Here, the Austrians agree with Krugman. Krugman’s solution, being a totalitarian creep, is not to get rid of the Fed and its credit expansion, but to forbid everything that isn’t expressly permitted. In his mind, if the peons are simply forbidden from speculating via government regulation, fiat money creation will not cause the boom/bust cycle but can be scientifically managed by the all-knowing genius overlords like him.

Bennet Cecil June 1, 2009 at 5:53 pm

Professor Krugman is a statist and thinks he and other smart people are more capable of managing the economy than individuals. Once the federal, state and local governments control more than half of economic activity everything will be fine. It worked well for Cuba and the USSR. Since the average American has chosen soaring rhetoric over common sense we will have to suffer.
When the talking heads are discussing the misery index and Carter more than Bush new politicians will be elected. Ten percent mortgage rates, unemployment above ten percent and the government’s admission that it must raise everyone’s taxes will focus the minds of Americans.

The US manufacturing sector is just 11.5% of the economy. President Obama and congress will try to destroy the rest of it with the carbon tax. We will ship our coal to China where they will burn it with impunity. They will send the cars to us and put the carbon into the atmosphere. We will pay unemployment benefits and healthcare to workers who cannot make things here because of high taxation and government regulation.

It may not be obvious now to average voters, but they will understand economics in a few years.

Vake June 1, 2009 at 8:18 pm

I think Bennet Cecil just about described Krugman perfectly with his first sentence. His Nobel Prize should be revoked because of his column. I refuse to read the New York Times until that man is fired.

Michael Lachanski June 2, 2009 at 3:04 am

Columns like this are why no one takes Austrian economics seriously.

This: Ted Kennedy, not exactly a well-known conservative free-marketeer, was the main force behind airline, trucking, and railroad deregulation, and a lot of the heavy lifting came in 1980, a year before Reagan took office, and at a time when Democrats controlled all of the government.

is clearly not financial deregulation, which was what Krugman was talking about.

B. Now, this is coming from someone who claims that there really is a “paradox of thrift” and that government should inflate to force people to stop saving and start spending.

is only true in a recession/depression. Combining misunderstanding of the concepts of long-term/short-term and basic Keynesian theory with looking-down-the-nose haughtiness will probably not the get the Austrian economists very far.

Conservative Economics June 2, 2009 at 9:22 am

Michael-

Do you cherry pick much?

The comment was that deregulation is not exclusively a conservative phenomenon as Krugman disingenuously concludes.

Hiding behind accusations of opponents misunderstanding of the concepts of Keynesian theory instead of laying out the historical, evidentiary, and logical basis for Keynesian theories for curing depressions and recessions is why few take Keynesian economists seriously.

Comments on this entry are closed.

Previous post:

Next post: