01 June 2009

Krugman runs rampant

What is Krugman smoking?  And if it makes him so high, why he doesn't share?

I followed a bit of the public debate he had recently with Niall Ferguson of the FT regarding the inflationary pressures of the gargantuan fiscal deficit in US.  Here is the story: Ferguson, along with several economists, believes that the inflationary risk of the recent fiscal expansion is very high.  Krugman on the other hand, seems to believe that we are in a typical Keynesian "liquidity trap" where deflation and not inflation is the actual danger (1). It is not uncommon for economists to disagree, in that case however, the importance of this argument lies on its political implications.  Krugman as a raving tax-and-spend liberal clearly thinks that this is an once in a lifetime opportunity for a fundamental expansion of the US government and no inflationary concerns should bother us.  His attitude is fair enough and consistent with his ideology.  It is ridiculous however,  to actually blame the economists that disagree as politically motivated!

His latest NYT op-ed with the provocative title "Reagan did it" is even more ridiculous.  Here he puts the blame of the recent crash on Reagan (seriously) and his policy 25 years ago to partially  deregulate a minor segment of the financial sector.  Honestly, while I was reading the piece, I was certain that Krugman was actually ironic and making fun of people that are looking for culprits from the past to explain the crisis.  But I finished his op-ed, and I realized that Krugman actually meant it, Reagan did it, he is the culprit of the crisis.  I am no Nobel economist, but for me the culprits behind the recent collapse are clear:  The US government that made it illegal to have different mortgage approval rates for different minorities (when some of them are actually poorer) and that subsidized to death the mortgage market.  China's huge surplus that financed US debt.  Securitization that made possible the transfer of risk from these loans.  And the monopoly of the rating agencies that made them so incompetent in warning investors about these securitized loans.  We can discuss all the above and their relevant importance, but Reagan?  Then why not Adam Smith as well, he promoted free markets, didn't he?

(1) Judging by the recent rise of the yields on 10-year US treasuries (that are generally seen as benchmarks for long-term interest rates), it seems that Krugman is wrong.  

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