Krugman: Debt is Good
- Thread starter cigaretteman
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I get out more than most. Which is exactly why I disagree with the doom and gloom you advocate.
How did the housing bubble Krugman wanted Greenspan to push work out?
Krugman did in fact call for the Fed to create a housing bubble in 2002. The best Dean Baker can do is to quote Krugman doing so, but then deny that he actually meant it by asserting that Krugman was being “sarcastic”, adding “So let’s cut the crap.”
Yes, let’s cut the crap, indeed. All we have to do to see that Krugman did in fact mean it is to look at the quote Baker refers to in its context. Since I addressed Krugman’s denials already in Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis, I’ll paste the relevant excerpt from the book (with the key portion Baker quoted in bold):
On August 2, 2002, Krugman wrote an article in which he said that what the Fed needed to do in order to prevent a recession was to create a housing bubble. His statement, quoted in its full context, was as follows:
A few months ago the vast majority of business economists mocked concerns about a “double dip,” a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I’ve repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.
The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To 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.
Judging by Mr. Greenspan’s remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman’s crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging.
Curiously, he commented that Alan Greenspan needed a recovery “to avoid awkward questions about his own role in creating the stock market bubble”, but didn’t elaborate on what that role was. He closed by saying, “But wishful thinking aside, I just don’t understand the grounds for optimism. Who, exactly, is about to start spending a lot more?”http://iowa.forums.rivals.com/file:... Krugman/Ron Paul vs. Paul Krugman.docx#_edn1
It is important to be clear on what Krugman was saying here. His earlier record on the housing bubble is unambiguous. He had repeatedly advocated that the Fed should lower interest rates for the explicit purpose of creating a boom in housing as a route to economic recovery. Here, he was implicitly acknowledging that the numerous interest rate cuts that had already been made had not solved the problem. The reason he offered was that people were still not spending enough, and his argument had been that the Fed should cut interest rates even further. He attributed the view that the Fed “needs to create a housing bubble” to Paul McCulley, but there can be no mistake, reading his remark in context, that Krugman was in agreement. This is evident in his prefacing the remark by saying that people warning of a double-dip recession “made a lot of sense”, by his own (not McCulley’s) comment that to “fight the recession” the Fed “needs” to do so, and by his expressed pessimism that the Fed could “pull that off”.
So there you have it. It is perfectly evident from the quote’s actual context that Krugman was not being “sarcastic”. But that’s not all. There is a broader context to consider, as well. While the above quote from his August 2002 article is the most infamous example, Krugman in fact repeatedly and consistently advocated a Fed policy of lowering interest rates specifically in order to create a housing bubble.
Krugman did in fact call for the Fed to create a housing bubble in 2002. The best Dean Baker can do is to quote Krugman doing so, but then deny that he actually meant it by asserting that Krugman was being “sarcastic”, adding “So let’s cut the crap.”
Yes, let’s cut the crap, indeed. All we have to do to see that Krugman did in fact mean it is to look at the quote Baker refers to in its context. Since I addressed Krugman’s denials already in Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis, I’ll paste the relevant excerpt from the book (with the key portion Baker quoted in bold):
On August 2, 2002, Krugman wrote an article in which he said that what the Fed needed to do in order to prevent a recession was to create a housing bubble. His statement, quoted in its full context, was as follows:
A few months ago the vast majority of business economists mocked concerns about a “double dip,” a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I’ve repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.
The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To 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.
Judging by Mr. Greenspan’s remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman’s crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging.
Curiously, he commented that Alan Greenspan needed a recovery “to avoid awkward questions about his own role in creating the stock market bubble”, but didn’t elaborate on what that role was. He closed by saying, “But wishful thinking aside, I just don’t understand the grounds for optimism. Who, exactly, is about to start spending a lot more?”http://iowa.forums.rivals.com/file:... Krugman/Ron Paul vs. Paul Krugman.docx#_edn1
It is important to be clear on what Krugman was saying here. His earlier record on the housing bubble is unambiguous. He had repeatedly advocated that the Fed should lower interest rates for the explicit purpose of creating a boom in housing as a route to economic recovery. Here, he was implicitly acknowledging that the numerous interest rate cuts that had already been made had not solved the problem. The reason he offered was that people were still not spending enough, and his argument had been that the Fed should cut interest rates even further. He attributed the view that the Fed “needs to create a housing bubble” to Paul McCulley, but there can be no mistake, reading his remark in context, that Krugman was in agreement. This is evident in his prefacing the remark by saying that people warning of a double-dip recession “made a lot of sense”, by his own (not McCulley’s) comment that to “fight the recession” the Fed “needs” to do so, and by his expressed pessimism that the Fed could “pull that off”.
So there you have it. It is perfectly evident from the quote’s actual context that Krugman was not being “sarcastic”. But that’s not all. There is a broader context to consider, as well. While the above quote from his August 2002 article is the most infamous example, Krugman in fact repeatedly and consistently advocated a Fed policy of lowering interest rates specifically in order to create a housing bubble.
The Krugster is a shill for the Man. At no time in history did people wake up and say, "Hey let's move over there to where all the debt is." All capital is moving to Asia right now because that is where the top creditor nations are located.
Uh...one year does not make a trend. Do you really think we are in great shape? 67 Trillion in debt, including unfunded liabilities.
if you include unfunded liabilities china's debt to gdp ratio is worse. Capital was moving to asia, its been moving away rapidly the past few months. capital outflows from china this year have been enormous.
Borrowing money at 2% can be destructive if your're spending it on the wrong things, like crack and hoes (or senseless wars and bloated welfare states)
Just wanted to thank dgordo for bringing reality to this thread and not giving up. It's a tough and frustrating job.
It's obvious that debt isn't bad in and of itself and that the focus needs to be on the use of the funds.
It's obvious that debt isn't bad in and of itself and that the focus needs to be on the use of the funds.
That doesn't mean it's not irresponsible. I can continue to rack up higher and higher debt on my credit cards, even take out new ones to pay old ones, but if I'm making the minimum payment every month and I'm never "overdue" does that excuse the behavior? I know it's micro- and not macro-economics here but same common sense applies.
Our debt:GDP ratio is projected to reach 156% within 25 years. That's nearly what Greece's was at the time of the collapse. Japan reached 200%, and while certainly not Greek levels it has never recovered and won't anytime soon.
Yes, borrowing 2% to get 10% seems logical if it's in a vacuum. But it's not. If you are taxed half of those gains, and blow the remainder on extravagances and other foolish investments that lose money, then at the end of the day you are just losing the 2% (or more) every year.
Even pro-Obama Democrats freely admit debt is a huge problem; or rather did until they were the source of the problem and made it worse. Go to : https://www.whitehouse.gov/infographics/us-national-debt . Obama and the White House cite how the budget surplus in the Clinton era was a good thing, and the rising debt in the Bush era was so horrible. And criticize Bush for not using a budget surplus in 2000 "pay off the debt". Hmmmmmmmmm..
The government is not supposed to be an investment house. You cannot compare government borrowing to private borrowing and investment. It is apples and hand grenades. Debt is not always a bad thing, there certainly needs to be some flexibility...but when government is carrying this kind of debt, it has done so at the expense of the free market, which would have invested (or made the sometimes wisest decision NOT to invest) in enterprises that are far and away more efficient, beneficial, and responsible. Lots of people racked up tremendous debt back when zero interest credit cards were so easy to open and transfer debt around and found to their dismay that being able to cover the interest did not serve them in the long run...I guess they were just savvy investors according to Krugman. The comparison of what our government is doing to someone who takes a calculated risk on using debt to achieve higher returns in the long run is just silly...the government is not Warren Buffett, it is the guy coming out of the pay-day loan store on his way to go buy spinning rims.
Technically you could continue to grow it provided your economic out put is greater than and outgrows the pace of new debt (plus your interest payments). A few problems we have w that though is interest rates won't stay low forever, the ROI of our newly issued debt doesn't seem to be sufficient (going towards more operational type stuff vs ROI producing investments), and the amount of debt to economic output has reached or is close to reaching a tipping point (if we haven't crossed it already).
So yes debt can be a good, leverage is an incredibly powerful and useful tool, but it can also be incredibly destructive.
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