Et tu, Krugman?

Everybody in America should be quite concerned about Paul Krugman’s most recent Op – Ed piece in the New York Times. Mr. Krugman is a staunch and loyal supporter of Barack Obama. However, Krugman is now saying that the current recovery may very well collapse leaving the economy in what he is calling The Third Depression. His recent Op-Ed piece can be found here.

In order to understand the magnitude of Krugman’s recent column it’s important to understand a bit about Mr. Krugman himself. Krugman is a Yale and MIT educated economist who won the Nobel Prize in Economics in 2008. His academic credentials are beyond repute.

However, in addition to being a pre-eminent economist Krugman is also a liberal’s liberal. Like his credentials in economics his credentials in liberalism are also beyond repute. Mr. Krugman writes a twice weekly Op – Ed piece in the New York Times. He is a long time and bitter critic of George W. Bush to the point that he often seems to exhibit Bush Derangement Syndrome (BDS). Finally, he has written what I can only imagine to be the world’s shortest book – The Conscience of a Liberal. If you look up “liberal” in the dictionary you find Nancy Pelosi’s picture next to the definition. However, if you look up “coherent liberal” it will be Krugman’s hirsute likeness next to the definition.

For the last 18 months Mr. Krugman has been heaping praise on Barack Obama in general and Mr. Obama’s economic policies in particular. Which is why Krugman’s recent Op – Ed piece is so shocking. At first, he seems to be admitting that the New Keynesian economics theory which he and President Obama espouse has failed. However, a closer reading of the Op – Ed piece reveals that Mr. Krugman actually thinks that New Keynesian economics is just what the world needs. Unfortunately, the world is just too dumb to realize the economic healing power of the monetary printing press. Mr. Krugman finds special fault with the recent European belief that endless spending and deficits may actually be harmful. It seems that Krugman and Obama have accomplished the seemingly impossible – they have “out liberaled” Europe.

Despite all this apparently bad news I see three rays of light in an otherwise jet black sky. First, Bacon’s new book ought to be a best seller if we are really headed for a Third Depression. Hopefully, Mr. Bacon will remember all of us “little people” when we send him e-mails asking, “Hey buddy, can you spare a dime?”. Second, even uber-liberal Paul Krugman has stopped blaming Bush and moved on to the somewhat improbable thesis that it is the Europeans who are the new villains. Finally, Ed Risse’s long running predictions of doom and gloom may be coming true. Perhaps his prescription for reducing the inevitable pain will gain a wider audience.

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26 responses to “Et tu, Krugman?”

  1. Larry G Avatar

    With regard to Bush Derangement Syndrome, let's take a hard look at why Krugman and others including myself hold such a harsh view.

    Item 1: Bill Clinton warned that even though he was handing over a surplus that longer term, dark financial clouds loomed if we did not accomplish health care reform.

    He tried and failed but he continued the warning.

    Bush took office with this warning on the table.

    Bush decides to fight a war over bogus reasons – bad enough – but his "deficits don't matter" Presidential mindset let's him go to war AT THE SAME TIME he is cutting TAXES!

    Next – the housing market had red warning lights going off early in his Presidency and what exactly did he do about it?

    Here's the bottom line – Bush was not only a fool but a stupid fool..

    He ran the American Enterprise into the ditch and the worst part about it – the coupe de grace – is there is more than a little doubt that he actually knew what went wrong.

    You can call that Bush Derangement Syndrome if you want I guess but if you can't understand why some of us think Bush could take a bar of gold and turn it into something brown in the toilet, you may not understand.

    NOW… NOW.. that our economy is a basket-case and the surgeons are arguing over what kind of life-support is best…

    you want to critique those who advocate one kind of life support over another… as if this is what really matters right now.

    This is like you going bankrupt Groveton and worrying about the bugs plastered on the hood ornament of your Mercedes.

    This country is in deep, deep, serious economic distress and Mr. Bush was SO ASLEEP at the switch, he may as well been taking a dump for all the interest he took in the affair.

    To this day I see him standing beside Paulson trying to find the better words to say instead of "Gee guys what happened"?

    FOOL! The man would run WalMart into the ground.

    and you guys.. ya'll still love him… and that is really quite touching….

    it's a very special kind of "derangement" …..


  2. Groveton Avatar

    LarryG –

    Even Krugman has stopped blaming Bush. Maybe it's time for you to do the same.

    I can find a way to blame Woodrow Wilson. EMR can see guilt all the way back to Andrew Jackson.

    It's not that Bush or Coolidge or Wilson or Jackson didn't all do dumb things. They all did. However, when you take over the reins by selling your economic plan to the electorate – you eventually have to take responsibility for the results yourself.

    Finally, I find your "Clinton handed Bush a gold bar" theory unconvincing. The excesses of the dot com bubble, the telecom meltdown and the hopelessly bad behavior of Enron and Worldcom all trace their roots to the Clinton Administration. Additionally, captured Al Qaeda terrorists have said they they were stunned by Bush's response to 9/11. Based on Clinton's weak kneed response to many previous attacks they expected the US to do no more than launch cruise missiles into Afghanistan.

    As it turned out – they were mistaken.

  3. James A. Bacon Avatar
    James A. Bacon

    Groveton, Excellent post. You are absolutely right, Krugman's column was very important. He sees the disaster coming, and he's laying the groundwork for blaming others than himself and the Keynesian doctrine he has espoused for so long.

    Of course, there is plenty of blame to go around (yes, yes, Larry, George W. helped to get us into this fix, but he had a lot of help from the Democrats).

    If I were an Obama supporter, I would be scared silly. One of Obama's premier intellectual enablers is jumping ship.

    Of course, if I were an American of any political stripe, I'd be scared silly, too. It is becoming increasingly apparent to the apparatchiks of the political class that there is NO WAY OUT of the predicament we have created for ourselves. If the apparatchiks reach this understanding — they are, after all, the ones with the most to gain from perpetuating the system — it will not be long before *everyone* sees what is happening.

    We are boxed in. All the old policy nostrums are failing us. Boomergeddon is coming.

  4. Larry G Avatar

    I think what most Presidents handed to their replacements was a mixed bag ..

    I don't think Clinton handed Bush a gold bar but he did not hand him a steaming pile either.

    but what Bush handed Obama was a steaming pile… for sure.

    and what ya'll apparently are expecting from Obama is for him to convert the steaming pile to a gold bar.

    but there is only so much that can be done with a steaming pile.

    But you have to say one thing about Republicans – ONLY REPUBLICANS would kick and stomp each other to see who could get their hands on the steaming pile first.

  5. Gooze Views Avatar
    Gooze Views

    Dissing Keynes has been a concervative sport since the 1930s but a lot of what he says is right. In a slump, you prime the pump. Many people believe that Obama's stimulus doesn't go far enough. They don't sing out of your song book. When your economy is going down the tubes, you don't exactly get that old time religion and tighten your belt. The illustrious Jim Bacon may present us with jeremiads but deep down he really wants to be a Protestant minister warning us of our sinfulness and lack of personal responsibility.
    Also I find it amusing that Krugman is being "discovered" by your right wingers after being trashed for years.
    What;s next in your hymn book?

    Peter Galuszka

  6. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    The G20 is staring over the abyss watching the first lemmings like Greece in free fall. They know they are next, with 70 percent debt to GDP and taxes already at 50 percent of GDP. The US is a little better off, with only 30 percent taxes, but Obama is anticipating great pain in cutting the debt in half in three years.

    Soon the unaware citizens will be screaming, as their homes go away, the tax man pays a visit, and employers hold down wages or dump jobs. Printing press or no printing press, the result will be the same. Worthless dollars, broken pensions, and a new work less ethic.

    Many people are already saying the heck with working your rear off being a debt slave. The thinking is it's better to hoard cash now by not paying bills, than to be caught penniless when your job goes away like so many others have already suffered. More will join in, as Krugman's prediction of 'never working again' becomes the new strategic default, anti-establishment slogan.

    The two previous depressions never had a society where getting ahead was a common expected career goal. Krugman's thesis, like the government's recession recovery plan, fails to account for the new worker psychology of Too Small To Win.

  7. James A. Bacon Avatar
    James A. Bacon

    Larry, any reasonable person would concede that Bush handed off a steaming pile to Obama. All we ask is that Obama shrink the steaming pile instead of add to it.

  8. Groveton Avatar


    You have an interesting worldview. In fact, I read Krugman's Op – Ed pieces religiously. He is a "full throated" liberal who espouses the party line in a particularly effective way. While it may come as a surprise to you I admire his writing in much the same way that I admire the writing of Pat Buchanan. Both are effective spokesmen for their cause. Finally, and to really torque LarryG off, I have a lot of respect for Ann Coulter and her very humorous approach to writing. I also respect both you and Jim Bacon for your ability to put thoughts into written words.

    Krugman is hardly new to me.

    As for what hymnal I use when singing – it's the same hymnal I have used all my life – the one I pick up every Sunday when I go to Mass. For the record, I am a devout Catholic and a devout Christian. While that may not be particularly fashionable today I suspect the pews will start to fill up as the almost inevitable crisis we have created manifests itself. I'll save a seat for you, LarryG and Jim B too.

  9. Larry G Avatar

    re: stop adding to the steaming pile

    I think this is deja vu all over again… with regard to whether one believes that the govt needs to spend money to keep us from spiraling into a depression.

    In the first go around – we had the same basic disagreement that centered on a concept called the liquidity trap.

    At that time – there was a concern among those who believe in the liquidity trap concept that if there was insufficient effort that what would occur would be that we would start to climb out but then without sufficient funds – fall back anyhow.

    There were at that time and continue to be people who do not believe the liquidity trap concept then and not now either and in their mind this govt spending is not doing anything except add to the steaming pile.

    It's an honest disagreement in my view.

    Krugman and people like Bernanke and Geitner see the TARP/Stimulus as ….adding to the deficit – but unfortunately vital.

    I'm not sure I see this as a "liberal" idea but I would agree that it appears to divide along party lines much like the resulting political alignment that occurs with the idea that tax cuts create jobs and bring in more tax revenues.

    We also know this.

    From Bush to Obama, one of the primary drivers to the increasing deficit was dramatically less tax revenues coming in – because unemployment is so high.

    There is absolutely no doubt this is true – just look at what impact the down economy has had on Virginia's and other states revenues.

    Now, here is the ironic thing.

    Without the stimulus, Va would be in even worse condition.

    We'd would have had to lay off thousands of teachers and deputies.

    And this is what we are facing next year if the stimulus does not continue.

    I suppose at the end of the day, Jim and Groveton believe that at some point we have to end the stimulus and states like Va have to bite the bullet – even if it puts us a situation where unemployment goes to 15% and stays there for the next 5-10 years.

    To give sound context or this. In Stafford county, it is estimated that next year – without the stimulus funds, almost 300 teachers will have to be laid off.

    Stafford is not looking to save all 300 jobs but rather is hoping for a soft(er) landing of sorts.

    I think that's the basic tension between the stimulus and the deficit.

    What the stimulus is basically doing is taking out a loan from the future in hopes that it will jump-start the economy sooner – and ultimately get us back to higher revenues that will then help bring the deficit down.

    In other words, the more healthy our economy is, the better chance we have to deal with the longer term deficits and the more our economy is in the tank, the deficit gets even worse because out-of-work people do not pay taxes, and do not buy stuff that generates taxes.

    So.. you not only have the steaming pile.. but you have rattlesnakes curling around your ankles and the steaming pile as bad as it is .. is the least of your worries until you take care of the snakes.

    The non-Keynesian conservatives are convinced that if we ignore the snakes and start shoveling the steaming pile.. that the snakes won't bother us.

    The Keynesians on the other hand are much more afraid of the snakes.

  10. Larry G Avatar

    Why did the folks who call themselves fiscal conservatives wait until the economy has turned into a steaming pile to regain the lost tastes for fiscal rigor in the first place?

    That's the most galling part of this.

    Apparently it was just fine to spend money we did not have on Humvees and MRAPS.. prosthetic arms and legs and body armor but it's "unwise" to spend money we don't have to keep us from sliding into a depression?

    I just have a really hard time accepting the self-pronouncement of these folks as "responsible" fiscal conservatives when just a couple of years back.. they gleefully dumped PayGO to "fight terrorism".

    Apparently "hiring" thousands of young people as soldiers to pay them with money we don't have … is acceptable…

    but hiring those same young people as teachers and deputies is not….acceptable…

    We've got ourselves into two wars that we STILL ARE NOT PAYING FOR and we have this ardor to NOT ADD TO THE DEFICITS.. unless of course the money goes for more military …..

    this is not fiscal conservatism folks.

    I don't what we should call it instead… arguing against deficit spending while claiming that we have no choice with the wars is not fiscal conservatism.

  11. Larry G Avatar

    Let's go one step further. Apparently, those on the right view the need to spend money we do not have in prophylactic nation-building of other countries as dealing with what they consider an existential threat to our national security.

    But they do not consider a depression an equivalent existential threat to our national security.

    So they're not really fiscal conservatives in a consistent sense – they're only fiscal conservatives when it comes to spending for things they don't believe in.

    If you give them a cause they believe in, they have absolutely no problem spending the country into oblivion.

    "crushing debt" on kids is "okay" if it is their share of what it took to nation-build a country that has not had a central governance for 500 years but "crushing debt" on kids is "not okay" to keep their parents from becoming unemployed.

    I give Ron Paul credit.

    At least the man is consistent in his principles – across the board.

    He does use a Chinese Menu of fiscal conservatism.

    When you think about this – it actually makes perfect sense because we have a substantial portion of our population that believes that weight-management means having a diet coke with your 1000 calorie big mac.

    Or you "go green" by saving and recycling plastic bags while continuing to drive solo to work every day.

    So it's not that there are not high calorie items on the fiscal conservative menu.. it's just that they are more "careful" than those who are not self-avowed fiscal conservatives.

    so our domestic economy is diet soda and our nation-building is big macs, eh?

  12. Groveton Avatar

    "The Keynesians on the other hand are much more afraid of the snakes.".

    I believe that the Keynesians are afraid of invisible bats trying to get tangled in their hair or large pink rabbits which only they can see.

    The Keynesians have no plan. They have a fairy tale. Once upon a time a bag ogre named <> put a cruse on the land. It was the curse of invisible snakes, bats and rabbits.

    One day a fair knight named Barry came to the land. He said, "I'll drown all those invisible snakes, bats and rabbits in oceans of money.".

    Sir Barry asked the court jester Timmy the Timid to start printing money with which to drown the invisible creatures. But even Timmy the Timid had some concerns. "Since the snakes, bats and rabbits are invisible how will we know when they have been drowned?".

    "Don't you worry about that, Little Timmy", said Sir Barry. My mystical sorcerer Krugman will tell us when the critters are all dead. He has magical powers.". "But what about the people in the kingdoms of Greece or Spain or Ireland … they all tried to drown the snakes, bats and rabbits with oceans of money. Now things are worse there then they ever were before."

    Sir Barry glanced down at his teleprompter, rubbed his luck Nobel Prize and said, "That's because they didn't use enough money to drown the creatures. I won't make that mistake.".

  13. Larry G Avatar

    Oh I think you could rightly call 10+% unemployment headed for 15-20% more than mythical bats.

    Home sales have cratered and 1/3 of them are foreclosures.. simply because we have so many people who are out of work, had to retire early, can only find part-time work etc.

    If you take away the govt stimulus – most economists – even the ones who favor taking away the stimulus admit that unemployment could hit depression era numbers.

    The question in the air is do we cut the govt spending and watch the economy finish it's death spiral or do you try to do something?

    A lot of one's opinion about this might well rest on how secure they feel in their own position – not unlike those who have health care right now and don't want reform – because they cannot see one year ahead when they will not have health care – or a job.

  14. hydra Avatar

    I think something in four hundred homes is in foreclosure.

    Let's have a little perspective here.

  15. Hydra Avatar

    That is a different statistic. it makes things sound worse than they are.

    Of all the homes sold, one third are in foreclosure. Well, of course, people buying are looking for good deals / cheap prices and that means the homes in foreclosure. they will get sold/bought first, and preferentially.

    But homes in foreclosure are still a tiny fraction of all homes. most people are still in their homes and still making the payments, if any.

  16. Larry G Avatar
    Larry G

    Well, how about this one:

    "One in Four Borrowers Is Underwater"

    what do you think will happen to these mortgages if these folk lose their jobs?

  17. Hydra Avatar

    If you lose your job, it makes very little difference if you are underwater or not. You sell for what you can get, quickly.

    An underwater mortgage isn't the owners problem: it is the banks problem, and probably the banks fault to begin with.

    Zillw sent me email yesterday, my house is up another 20 grand, according to them. Of course, Zillow is not the buyer. What people do with their own money is a lot more imprtant indicator of true reality than any opinion.

    All money has to go somewhere: it does not just sit. No matter where it goes, there is some risk involved. The bank has money that has to go somewhere, and it takes the risk that your mortgage is underwater. Conversely, the bank also takes the anti-risk (if you will) that your mortgage will NOT be underwater, and you will be the one sitting there with equity in your home (money doing mostly nothing), and with the dead weight on your side, you will be highly incentivized to find some way to make the payments.

    You make it sound as if the borrower has some moral obligation to the bank, but that is not written into the loan contract. In fact, the bank writes the note such that they think it is in their interest, and most of the time it is: three out of four borrowers are NOT underwater.


  18. Larry G Avatar
    Larry G

    well.. the banks do not own most underwater mortgages but instead they are owned by investment firms as portfolios of mortgage-backed securities otherwise known as toxic assets.


    It's sorta like someone saying they will sell you 12 Mercedes for the price of 11 but then you find out 2 of them are junkers.

  19. hydra Avatar

    The banks do not own most mortgages, not just the underwater ones. Youmake it sound as if they deliberately unloaded their bad loans to the hedge funds.

    The banks, or mortgage bokers, own individual paper, which they can sit on or sell, but ususally they are sold. As long as they are individual paper, it is easy to see their performance.

    So If I'm a a bank and I have a note with a five year perfect payment record, I expect to sell that note for more money than I would sell a similar note with a history of spotty payments.

    That's the theory, at least. Practically speaking the bankd is going to flip that loan as soon as possible. Fannie Mae facilitates that quick turnover by enforcing some uniform standards for loand they will accept. Uniform standards, in this case does not necessarily mean high standards.

    Fannie mae would collect these as tranches, age them, and sell the mortgage backed securities to the hedge funds. Caveat Emptor to the hedge funds.

    So the hedge fund buys a collection of mrtgages, say there are four hundered mortgages in the box. All things being equal, one of them will go bad. If that was the case, no problem.

    But the banks and Fannie Mae are pushing these things through, so youget a box of four hunred loans that are mostly recent – not aged. now you have a higher risk of underwater loans, no payment history, and foreclosure.

    Only, no one knows what that risk is: you cannot (easily) see inside the box. Not knowing if one mortgage is bad or 20, the entire box becomes toxic.

    Then if that's not bad enough, funds would be created to own multiple boxes (theoretically spreading the risk further) and then sell shares in the fund. The fund shreholder has no idea what he owns, really.

    This is stupidity compounded, but it is ALLOWED to happen because such people (with millions in assets) are classified as, and are assumed to actually be, sophisticated investors.

    Arbitrageurs are now buying up the toxic assets (on the cheap) and doing the hard detective labor of sorting the good from the bad for resale again, once the toxicity has been treated.

    The sad part is that the pain spreads to those who have done nothing wrong. They have equity, they pay their mortgages, they are the nontoxic papers in the box of four hundred, but they get tarred with the same brush and the overall mess makes their houses worth less.

    And they are mad as hell about it. Same as if they owned a condo and a new condo development goes up nearby selling 5000 brand new condos – for less than they paid.


  20. Larry G Avatar
    Larry G

    and what caused this to happen and what was the timeframe ?

    As far as people being mad about the value of their house dropping – the question is if you buy something as an investment – are you entitled to it not losing it's value?

    Are you not at risk for anything you buy as an investment?

  21. Hydra Avatar

    Not ordinarily, but you are entitled to play on a level playing field with a functioning market.

    In this case, people in the market, hedge funds and others found a way to lower the risk by averaging it out over many mortgages.

    But in lowering the risk there turned out to be an unforseen external cost: the risks were lowered but also spead out so they involved nearly everyone.

    Then it turned out that the risks, although they may actually have been lower, were also unknown, at which point ths system blew up.

    Once again the Total Costs = Production Costs (making and processing the loans) + External Costs (Loss in home value and employment not caused by normall market forces) + Government Costs (Bailouts, new Regulations, Stimulus to reset employment losses, etc. etc.)


  22. Larry G Avatar
    Larry G

    I don't think they lowered their risks at all but instead shifted them to others – including those who wrongly believed that investing in a home was not the same as investing in other things.

    but what change(s) allowed the shifting of risk?

    What we learned is that investing in a home is – risky business with no guarantees.

    and second – that the average person who is not involved in investing is woefully ill-prepared to make investment decisions in things they know little to nothing about and they just assume it is safe.

  23. Hydra Avatar

    One more reason not to buy a home subject to an HOA.

    Turns out most HOAs are run by HOA management companies, and are only a handful of big one manage most HOAs the same way funeral homes are mostly owned/franchised/run by a few big chains.

    HOAs have the ability to foreclose on your home for nonpayment of dues. In one recent case a US enlisted man lost his home while he was in Iraq because his wife forgot to make a couple of HOA payments.

    Their (fully paid for) $400,000 home was foreclosed on for a few hundred dollars in payments in just 27 days. In Texas, non-judicial forclosures are allowed. An official of the HOA bought the home on the courthouse steps for just a few thousand dollars, and resold it for a tidy profit.

    There is no conflict of interest law to prevent this in Texas.

    When people get in financial trouble the HOA bill is an easy one to pass on. HOAs move fast to foreclose before the situation gets worse. It didn't take long for HOAs and HOA officials to figure out this was a good way to make money and as a result there has been a tidal wave of HOA foreclosures.

    In the Texas case the state does have a homestead protection act for servicemen. The seargeant in question is suing but his case won't come to court until January. if he wins, both (or more) of the previous sales will have to be unwound. How he acquired the home is unknown, but as an enlisted man a home of that caliber will likely be unattanable again, if he loses in court.

    HOAs from around the nation have joied forces to make sure that he loses.


  24. Hyder Avatar

    " I don't think they lowered their risks at all "

    As it turned out, you are correct. had the ratings agencies done their job, the risks would have been known. Highly rated mortgage backed securities would have been low risk, and the system would have worked as designed.

    Low rated securities would have been harder to sell, and that would have forced banks and brokers to offer fewer of them by tightening up their lending standards, otherwise they get stuck holding the loans and the homes, with no bailout available.

    Since those would not have made it into the securities market it would not have caused the general panic that we saw.

    The intrinsic value of US homes is still pretty much what it was, despite EMRs claims. It was panic and greed that caused the problem, not that homes ae not needed and desired.


  25. The average persin IS INVOLVED in investing, they just don't realize it. they make woefully bad decsions by not making decisions or by letting others do it for them.

    Any moron can invest in an index fund and be assured of doing pretty much what the market does. Or, as you point out, he can "invest" in granite counter tops, thinking granite is more durable than fickle markets.

    By definition, not everyone can "beat the market". Same goes for homes. but whatever they do or don't do carries both risk and reward: it is the ratio and frequency that matters.

    Now, how many high schools do you know of that teach anything about financial management and investing?
    We teach dfferential calculus and analytic geometry first.

    Maybe it is because teachers don't get paid enough to become investors and are therefore ignorant of the subject. I know that was my father's case.


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