Krugman v. Morgenson on Too Big to Fail

By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen

Paul Krugman has a thing where you know what his column will look like on Monday based on what goes on his blog that Friday. Sure enough, he transformed this blog post on the Government Accountability Office’s report on too big to fail into this column yesterday with the humble title “Dodd-Frank Financial Reform is Working.”

I pretty much called the reaction to the GAO’s report Friday, when I wrote:

The report as a whole is a little maddening, because it’s so hedged that pretty much anyone could take the findings and wield them as supporting their viewpoint (even as the report blares “important limitations remain and these results should be interpreted with caution”).

And Krugman didn’t disappoint in this regard. In the blog post, he gives the nickel summary of what Dodd-Frank’s resolution authority is supposed to accomplish, and really only offers this single paragraph to explain the GAO report’s contribution.

Still, you’d like some evidence. And GAO has the goods. There was indeed a large-bank funding advantage during and for some time after the crisis, but it has now been diminished or gone away — maybe even slightly reversed. That is, financial markets are now acting as if they believe that future bailouts won’t be as favorable to fat cats as the bailouts of 2008.

There’s quite the logical leap from the penultimate sentence to the last one. Krugman already gets out a bit over his skis when he says the subsidy “has now been diminished or gone away – maybe even slightly reversed,” but the next line is really a gross distortion. In fact the report doesn’t really say that future bailouts won’t be as favorable to the fat cats, or even that market participants believe that: it does say that large financial institutions would likely continue to enjoy lower funding costs than their counterparts in times of high credit risk (see page 40). Furthermore, the report so completely second-guesses itself that it shouldn’t be taken as evidence of anything, as the report itself states in numerous spots. Presumably a Nobel Prize winner has come across reports with muted conclusions before and would know not to get too far out in front of the facts by amplifying them.

So let’s see how this blog post, witnessed by a relatively modest set of readers, gets transformed into the newspaper column, presumably witnessed by more. Here’s the relevant exchange.

And a new study from the Government Accountability Office shows that while large banks were able to borrow more cheaply than small banks before financial reform passed, that advantage has now essentially disappeared. To some extent this may reflect generally calmer markets, but the study nonetheless suggests that reform has done at least part of what it was supposed to do.

Well, no, the report did not say that the advantage has “essentially disappeared.” GAO ran 42 models to try and assess the subsidy. In 2013, 18 of those models effectively tested positive for the subsidy, 8 tested negative, and 16 showed nothing. That’s fairly inconclusive, and not at all as definitive as Krugman makes it.

Of course, he does hedge that second sentence, right? That’s because Gretchen Morgenson reported on the same study in the news, and managed to get it right, contra what Krugman thought he could get away with on the op-ed page.

(GAO’s) methodology was convoluted and its conclusions hardly definitive. The report said that while the big banks had enjoyed a subsidy during the financial crisis, that benefit “may have declined or reversed in recent years.” […]

The trouble with this mishmash is that big bankers and even policy makers will cite these figures as proof that the problem of too-big-to-fail institutions has been resolved. Mary J. Miller, the departing under secretary for domestic finance at the United States Treasury, wrote in a letter about the report: “We believe these results reflect increased market recognition of what should now be evident — Dodd-Frank ended ‘too big to fail’ as a matter of law.”

Not exactly. As the report noted, the value of the implied guarantee varies, skyrocketing with economic stress (such as in 2008) and settling back down in periods of calm.

In other words, were we to return to panic mode, the value of the implied taxpayer backing would rocket. The threat of high-cost taxpayer bailouts remains very much with us.

There’s more: Morgenson actually watched the hearing about the report, and found credible questioning of GAO’s methodology, in particular the narrow way in which they defined the subsidy as entirely about lower debt costs, instead of the lower cost of equity and benefits to stockholders. I’ve also heard that bond prices, with their focus on immediate-term risk, are simply an inaccurate indicator of short-term borrowing costs, particularly those in the securities lending markets.

The reason Krugman took the shades of grey out of these conclusions, when he among anyone understands the value of data, can be seen in the pre-arranged narrative he concocted to fit around the GAO study. Krugman wants to tell a story about how Obama’s main two reforms, despite negative publicity and relative unpopularity, actually have performed quite well. That’s the Big Story, and everything has to conform to that. So he takes his shortcuts. You can draw your own conclusions about Obamacare. But on Dodd-Frank, he’s just dancing around the evidence. And ignoring a whole host of issues with the financial system, hanging his entire perspective on one GAO report, which it even admits makes its case on ground that’s about as solid as quicksand.

Two more things. It’s amusing that Krugman leans so heavily on Mike Konczal, in the blog and the column, as a primary source, because Konczal actually points out in the story Krugman links that financial reform shouldn’t be so concentrated on TBTF, which is of course almost precisely what Krugman does. Konczal also says that Dodd-Frank will hinge on how the regulators handle the living wills and resolution authority rules that are being decided right now (and there’s substantial reason to believe that they’re not being handled very well). But Krugman takes resolution authority as a fait accompli, because GAO “proved” (read: didn’t prove) that the market ended the subsidy (read: that’s completely inconclusive).

Finally, there’s this piece of effluvium, from the blog post (and largely replicated in the column):

But Republican leaders fiercely opposed financial reform — and claimed that resolution authority actually made too-big-to-fail worse, because it institutionalized bailouts. This always seemed implausible; bailouts will happen in crises, one way or another. And if financial reform was a giveaway to the banks, why did Wall Street, which used to look relatively favorably on Democrats, turn overwhelmingly Republican after reform passed?

First of all, Krugman writes “bailouts will happen in crises” in a post about how bailouts won’t happen anymore. Hilarity ensues. But I want to focus on the second half, this intellectually lazy statement that, if Wall Street is lobbying against Dodd-Frank, well then it must be working.

This is absurd. You can create an entirely consistent story of bank lobbyists trying to minimize the effect of regulations to maximize profits, PLUS the fact that the regulation won’t work in a crisis. Both things can be true. In addition, it shows an ignorance to how these things work. Wall Street fights tooth and nail against modest regulations so that stronger regulations never get contemplated. That’s how Congress gets neutered and regulations stay modest. Wall Street spends $1.5 million a day lobbying because of the excellent return on investment. Why wouldn’t they just lobby against any infringement on their business, no matter how small? Barney Frank himself, by the way, said in an article this weekend about Goldman and other big banks, “I don’t think that the [Dodd-Frank] legislation really hurt them much.” Presumably, he would know.

The bottom line is that this exhibits pure party-based tribalism. Take whatever half-truth you can turn into a talking point and parade it. And because it comes from an anointed spokesman of the Left in the mainstream circles, the hedged conclusions get spun into iron laws. The Reuters daily roundup Counterparties puts Krugman atop a summary they call “Farewell to Too Big to Fail.” (On the other hand, I was glad to see Bob Kuttner call Krugman out for this, however gently.)

If Krugman wants to become the President’s mouthpiece in the second term, that’s his business. But doing so by fudging the data is pretty weak.

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About David Dayen

David is a contributing writer to He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.


  1. mmckinl

    Paul “Magneto Trouble” Krugman is past his “sell by date”. Krugman operates on the big lie … That we can have infinite growth in a finite world …

    He kow-tows to the privately owned and operated Federal Reserve. You’ll never hear Public Bank from Krugman and company.

    It is obvious that Krugman wants to be on the Federal Reserve Board and certainly chairman one day. Krugman will never get the approval of those that matter.

  2. PaulArt

    I have followed Krugman for many years now and will continue to do so. I had no illusions about him. My take on him was that he tries to put the best face as he can on the Democrats while taking them to task on whatever he can. Krugman has repeatedly shown his shallowness on banking reform and generally all things banking. This piece by Dayen is the best take down I have ever seen of Krugman.

    1. Pope Ratzo

      Dayen’s’ posts on this are great, and his criticism of Krugman appropriate, but if this is the best takedown of Krugman, then he has had a very charmed career.

  3. Bob Swern

    Simply outstanding and spot-on post, David! I read Morgenson on Sunday. Then I read Krugman later Sunday night. Morgenson was her brilliant, incisive self.

    As you note, Krugman’s shameless kowtowing to the Democratic/neoliberal status quo and Ben do-no-wrong Bernanke belie much of the history of the professor’s NYT columns circa 2009-2011.

    The guy’s been a total disappointment over the past two-plus of years. When one compares some of the pieces he wrote during Obama’s first term with what he’s writing now, it’s hard to believe you’re reading the words of the same author.

    His columns read more and more like blog posts from the far-too-many Democratic cheerleaders alongside whom I blog over at Daily Kos these days.

      1. Bob Swern

        Yes, bigchin, I do remember you. It’s nice to see you’re still around! NC and a few other places (i.e.: FDL, etc.) are where many disaffected Kossacks hangout.

        More importantly, it’s where some of the very, very best past/present/former Kossacks now write (dday, Lambert are you reading this?) and otherwise provide us with the straight-up truth…something sadly missing over there in far too much of that utterly captured blog’s content.

        (Me? I live by the twisted motto: “I keep banging my head against the wall because it feels so good when I stop!)

  4. M1

    Krugman is making a point about current conditions, and it is good to see that TBTF banks have lost their lower founding costs.
    Your saying during a Panic, they’ll get them back.
    Pretty much what we’d all expect, in a panic.
    However, not in a panic, a TBTF bank will fail, on it’s on, like Long Term Capital Mgmt failed.
    Hopefully, with bigger fines.

    1. Yves Smith

      Unfortunately, it’s not possible to have a TBTF fail that way, due to derivatives contracts (where in many cases the counterparties have options as to when to close them out) and international exposures (which means a lot of the activities aren’t subject to US jurisdiction).

      See some past posts on this:

      Since the people in the know (the counterparties) know a TBTF failure can’t be managed, you’ll have a run again.

      And recall AIG, which was the closest event we had in the last crisis to an attempt at a wind down. AIG was supposed to be broken up and the parts sold to repay the loan. The board and the new CEO bucked that and they were permitted to get away with it.

    2. Matt

      The TBTF banks have 2.7 trillion on deposit over at the FRB collecting 6 billion a year in interest or so while long term debt is socialized over to the FRB. Lost lower funding costs? Their funding costs are so low they can lend 2.7 trillion to the FRB at 0.25 percent or less.

  5. fresno dan

    Krugman may essentially be an as* kissing toady….or not! (I did not insult the man….I said “or not”)
    It really does get to be annoying how some people want to look all progressive and such, but really want the status quo to continue.

    1. Lambert Strether

      Nobody ever explains what direction the “progress” is supposed to take. In this case, “progress” seems to consist of moving round and round in a very small circle.

    2. Oregoncharles

      This is the distinction between “progressive” (assuming the term actually means anything) and “Democrat.”

      “Progressive Democrat” is now a contradiction in terms.

      Of course, as you say, it’s also a measure of just how conservative Krugman and most other partisan Democrats really are, as well as of how corrupt economics as a field is.

  6. fresno dan

    good article
    “Krugman cannot be forgiven for his latest missive, however. There is simply too much at stake for our nation to allow Krugman’s misguided musings to stand. Krugman starts off with the subtitle “Dodd-Frank Financial Reform Is Working” and ends with this stunning pronouncement: “For all its limitations, financial reform is a success story.”

    “Judging by the comments section to Krugman’s column, that last leap of fantasy brought a gasp from readers of the Times business section who are greeted daily with one or another Wall Street crime cartel looting the country through some new derivative scheme or appropriately named “dark pool,” or “fixing.””

    It really just gets to be to much to put up with people who will not see that Wall Street really has reached, along with the supposed regulators, as well as congress, an apex of corruption, that has to be the FIRST thing resolved – all this other stuff is just window dressing….
    Krugman seems unable to understand criminality – its as if there is not a model, so it doesn’t exist – or if you could extract acknowledgment from Krugman that there was some criminality on Wall Street – why, he would come up with some model that shows it only affects the economy a smidgen. Really, its just astounding.

    1. wageslave

      i don’t get this web site and it’s hysterical anti-krugman he’s an american social democrat economist-shouldn’t he be an ally in the main battle against hardcore neo-con/neo-lib ideology? he’s relatively critical of many administration poltical moves and democratic timidity,including the AFCA, and the fed among others. it’s not that he’s one of my favorite public intellectuals -i’m much more interested in the MMT school of economic thought, but krugman doesn’t get my “renegade scoundrel” label of contempt.

  7. gordon

    This column of Prof. Krugman’s has also attracted comment at Economist’s View. In that thread, I pointed to this remark of Prof. K’s: “The answer is that the government should seize troubled institutions when it bails them out, so that they can be kept running without rewarding stockholders or bondholders who don’t need rescue. In 2008 and 2009, however, it wasn’t clear that the Treasury Department had the necessary legal authority to do that”.

    I was surprised to read that because I don’t remember any legal argument back in 2008 or 2009 to the effect that the US Govt. couldn’t seize bankrupt banks and restructure them. The FDIC has its mandate. In fact, I remember a lot of argument at the time about how the US Govt. should seize and restructure bankrupt banks, and why not doing so was such a mistake. Various commenters at Economist’s View have offered their opinions, and I had some further thoughts which culminated in: “Having thought about it a little more, having read some of Prof. Krugman’s old posts and having read the Wikipedia account of the Dodd-Frank Act, the most charitable explanation I can come up with is that Prof. K. is really referring to “shadow banks” and insurance companies. I still don’t see that there is or was any legal problem with banks”.

    I wonder what readers of Naked Capitalism think.

  8. rollotomasi

    Enjoyable read well-executed by David Dayen. I have been a fan of Prof. Krugman overall down through the years, but this critique is well-deserved. I especially liked the way Dayen seemed to become angrier (justifiably) the more he dug into Krugman’s pieces, going from”gets out a bit over his skis” to “exhibits pure party-based tribalism” toward the end. One area where I see Krugman commonly fall short in his analyses is taking into account the machinations of and relationships between powerful business interests and government, and Dayen’s critique hits squarely on this theme.

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