Paul Krugman, who tells us that assets and capital are homogeneous when it comes to economic policy, suddenly claims that there were malinvestments during the boom! (Actually, he does not use the M-word, as he would not know what it means, but I digress.)
The Great One writes:
Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls. They increased risk rather than reducing it, and concentrated risk rather than spreading it. In effect, the industry was selling dangerous patent medicine to gullible consumers.
His next quote is true, but then his analysis (as always) goes south:
And Wall Streeters have every incentive to keep playing that kind of game.
I always am glad when “elite” economists “discover” moral hazard, but, unfortunately they assume that the banking and financial system MUST be cartelized (regulated, actually, but the meaning is the same) and then regulated. In one breath, Krugman seems to understand the dangers of the federal financial “put”:
I won’t try to parse the competing claims about how much direct benefit Goldman received from recent financial bailouts, especially the government’s assumption of A.I.G.’s liabilities. What’s clear is that Wall Street in general, Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong.
However, before one thinks that Krugman has converted to the Austrian way of thinking, he adds this:
You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.
Now the last time there was a comparable expansion of the financial safety net, the creation of federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure that banks didn’t abuse their privileges. This time, new regulations are still in the drawing-board stage — and the finance lobby is already fighting against even the most basic protections for consumers.
Thus, in Krugman’s ideal world, the system would be both cartelized and regulated, with the government guarantees of rescue behind it. It never seems to occur to Krugman that maybe, just maybe, we would not see these huge malinvestments and reckless behavior if we had free-market finance.
The reason is simple. Krugman has no understanding at all of a system of profits and LOSSES. To him, it all is about the Keynesian “animal spirits” and nothing else. Yeah, real economic analysis.
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You know what I’ve realized about these guys? It’s true for pretty much all American foreign policy thinkers too.
History begins in 1930. There are five historical events:
- The Crash of ’29 and the Great Depression
- The Rise of Hitler
- WWII
- The Cold War
- 9/11
That’s it. That’s history. Economists seem to stop paying attention in the 1950s anyway, so their list is even shorter.
Adam I
I’ve always thought the same thing.
It’s easy to see why “History” starts in the 1930′s, that’s when Keynes put out his “General Theory.”
It gave the socialists and statists a new lease on life. The Soviet experiment was failing, Hitler and El Duche ruined Fascism for them, so all they had left was Keynesianism. I mean lest not forget that ultimately Keynes wanted to do away with profits and interest, the mainstays of Capitalism.
Hayek and Hazlit showed Keynesianism for what it was…unfortunately with progressives running the education system, statism and its counterpart, Keynesianism is making a comeback.
“so all they had left was Keynesianism”
That’s almost true. As the last eight years clearly demonstrated, if Keynesianism and Socialism fail they do actually have one ace in the hole left: religious statism and theocracy.
“When fascism comes to America, it will be wrapped in the flag and carrying the cross.”
“…unfortunately with progressives running the education system, statism and its counterpart, Keynesianism is making a comeback. ”
As a foreigner, I find it extremely weird that fascists and socialists are called ‘progressives’ in the US!.
Ditto with the abuse of the word liberal. You guys have it all ass backward.!
Right on Adam!
See, I get the feeling that economists, like foreign policy analysts, are trying to not just minimize, but eliminate the following four things:
1. losses;
2. competition;
3. bad choices and trade-offs; and
4. risk.
Their reason for every one of these items goes something like this: “Imagine what you could do without this restraint.” It’s the “holy grail” of controlling a society’s future.
Of course, the only method they’ve discovered so far for eliminating these restraints is to ignore them or obfuscate their existence. Like drugs, the prescriptions of elite social scientists give some the illusion of mastery over nature, when all you really have are probabilities and uncertainty. In effect, the social “scientists” were selling dangerous patent medicine to gullible policymakers.
Maybe policy advice should come with the same warnings on Tylenol bottles.
Cheers
Maybe we should send Krugman (and his ilk) a copy of David Gordon’s book: “An Introduction To Economic Reasoning”.
If this keeps up, we’ll be using a new calendar system, years Before Keynes (BK), and After Keynes, the year One being 1930.
“And low in the dark times before Keynes there was no law and the people were unkempt and unclean…”
As a not infrequent reader of Krugman’s blog, I’m not surprised. It seems that when it comes to financial stuff, Krugman is a Minsky-guy… which isn’t a surprise at all. He agrees that bailouts breed moral hazard. But, he also believes that financial systems are inherently fragile and crash-prone. So, the answer is simple: bailouts + regulation.
Because we all know that regulatory capture is just a silly idea spread by libertarians… We’ve definitely NEVER seen anything like regulatory capture actually happen… For example, we’ve never had a banker as Secretary of the Treasury, right?
Krugman campaigned for doing just this multiple times in the early 2000s. The man is a disgrace to science.
Krugman wrote:
“Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls.”
“Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls.”
He actually said “we now know”!!??!?
We now know. Wow.
I remember turning on the TV and seeing a show called “flip this house” and recommending to anyone I talked to to stay away from real estate. It was so obvious. You had to be in a vegitative state to not realize there was a serious distortion underlying the whole thing.
… and of course nobody could have possibly noticed that most of this new construction was located where you had to burn 4 gallons of gas per day per person to commute to/from it, or that it was priced at some absurd multiple of the median income, or that it was built largely in cities like Phoenix whose economies revolved around building houses and building shopping centers to service houses that were lived in by people in real estate… oh forget it.
“…we now know…” The mind reels.
Actually, Krugman and his kind are all over the map.
They blow with the wind. Anyone who follows Krugman
knows he contradicts himself all the time (even in the same article).
So if he accidently utters something that an Austrian might say, he has no idea what he’s saying – Period.
http://en.wikipedia.org/wiki/Infinite_monkey_theorem
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