Further Discussion of Krugman on Mervyn King, Greenspan, and Bernanke

Paul Krugman was kind enough to link to me with respect to a Guardian article pointing to his criticism of the fiscal stance, and arguably more important, the political role that the Bank of England governor Mervyn King is taking. However, Krugman said I was in error in claiming he never criticized Greenspan for compromising Fed independence.

As an aside, I’m taking King’s side a bit more than I might otherwise. Yes, I agree fully with Krugman that austerity is a bad idea in the UK and pretty much anywhere still in a hangover after the global financial crisis. But there seems to be a lot of opportunism in the broadsides against King. He is the only central banker that has stood firm against the bad practices of the major dealer banks. And his dim view is reportedly widely shared among Bank of England staff. My sense (which UK readers confirm) is that the piling on seems unduly aggressive, and looks to be an effort to discredit King in order to weaken him (and as much as possible, the Bank) as a reformer.

I’m still going to quibble a bit. The NC remark in question about Krugman was: “And he’s said nothing about the “political” Greenspan and Bernanke.”

Now I’ll admit I stuck my neck out; “nothing” is a strong word, and Krugman has a large opus. The 2005 op-ed he cited as refutation gets to the matter of central bank independence only after dismembering Greenspan’s economics arguments at length:

They acted as if he were still playing his proper role, acting as a nonpartisan source of economic advice. After the hearing, rather than challenging Mr. Greenspan’s testimony, they tried to spin it in their favor.

But Mr. Greenspan is no longer entitled to such deference. By repeatedly shilling for whatever the Bush administration wants, he has betrayed the trust placed in Fed chairmen, and deserves to be treated as just another partisan hack.

It’s important to note that Greenspan acting in a political manner was well established by then; we pointed out it started in the Clinton era. But I will concede that Krugman did comment disapprovingly of Greenspan taking a political role, although it was a secondary line of attack.

Where we differ with Krugman on Bernanke is whether “raw partisan advocacy” is the only way a central banker can compromise his independence. We’ve argued at length, as has former central banker Willem Buiter, that the extensive Fed involvement in extra-budgetary commitments is at least as serious a violation of the Fed’s proper role. Buiter makes the case with considerable vigor and authority:

The Fed does not have a full indemnity from the US Treasury even for its outright purchases of private securities. It has no guarantee or indemnity for private credit risk assumed as a result of its repo operations and collateralised lending.

For the Fed’s potential $1 trillion exposure to private credit risk through the Term Asset-Backed Securities Loan Facility, for instance, the Treasury only guarantees $100 billion. They call it 10 times leverage. I call it the Fed being potentially in the hole for $900 billion. Similar credit risk exposures have been assumed by the Fed in the commercial paper market, in its purchases of Fannie and Freddie mortgages, in the rescue of AIG, and in a host of other quasi-fiscal rescue operations mounted by the Fed and by the Fed, the Federal Deposit Insurance Corporation, and the US Treasury jointly.

I consider this use of the Federal Reserve as an active (quasi-)fiscal player to be extremely dangerous and highly undesirable from the point of view of the health of the democratic system of government in the US.

There are two reasons for this. First, it undermines the independence of the Fed and turns it into an off-budget and off-balance sheet special purpose vehicle of the US Treasury. Second, it undermines the accountability of the Executive branch of the US Federal government for the use of public resources – taxpayers’ money.

As for the Fed’s independence (whatever independence remains), first, even if the central bank prices the private securities it purchases appropriately (that is, there is no ex ante implicit quasi-fiscal subsidy involved), it is possible that, should the private securities default, the central bank will suffer a capital loss so large that the central bank is incapable of maintaining its solvency on its own without creating central bank money in such quantities that its price stability mandate is at risk. Without a firm guarantee up front that the Federal government will fully re-capitalise the Fed for losses suffered as a result of the Fed’s exposure to private credit risk, the Fed will have to go cap-in-hand to the US Treasury to beg for resources. Even if it gets the resources, there is likely to be a price tag attached – that is, a commitment to pursue the monetary policy desired by the US Treasury, not the monetary policy deemed most appropriate by the Fed.

As regards democratic accountability for the use of public funds, even if the central bank has sufficient capital to weather the capital losses it suffers on its holdings of private securities, the central bank should never put itself into the position of becoming an active quasi-fiscal player or a debt collector… The central bank can act as a fiscal agent for the government. It should not act as a fiscal principal, outside the normal accountability framework.

The Fed can deny and has denied information to the Congress and to the public that US government departments like the Treasury cannot withhold. The Fed has been stonewalling requests for information about the terms and conditions on which it makes its myriad facilities available to banks and other financial institutions. It even at first refused to reveal which counterparties of AIG had benefited from the rescue packages (now around $170 billion with more to come) granted this rogue investment bank masquerading as an insurance company. The toxic waste from Bear Stearns’ balance sheet has been hidden in some SPV in Delaware.

The opaqueness of the financial operations of the Fed in support of the financial sector (which are expanding in scale and scope at an unprecedented rate) and the lack of accountability for the use of taxpayers’ resources that it entails threaten democratic accountability. Even if it enhances financial stability, which I doubt, democratic legitimacy and accountability are damaged by it, and that is too high a price to pay.

Note that some of this information has been pried loose from the Fed, for example Maiden Lane I (Bear Stearns) exposures, but have been presented in such a manner as to be obfuscatory (it’s low level disaggregated data, with swaps reported separately from presumably related underlyings. It’s a given that Blackrock, Maiden Lane I’s asset manager, provides far more user friendly reports to the Fed).

And we are not the only commentator to see it this way. Ed Harrison wrote in “The creeping power grab by the executive branch and Federal Reserve“:

The Fed has been engaged in a policy of acting in concert with the Executive Branch in a non-arms length fashion since this crisis began. All of the liquidity programs and backstops the Fed has implemented are not just about liquidity, they are subsidies that lower the cost of capital and increase profits in the banking sector. As such, these subsidies are actually a part of America’s fiscal policy – stimulus, if you will. It is a clear no-no for the Federal Reserve to inject itself into fiscal matters. And to top it off, the Fed is refusing to be transparent about the process. Why would we make it the Systemic Risk Regulator?

Oh, and the head of the Philadelphia Fed was also not too keen about blurring the lines between fiscal and monetary policy:

The Federal Reserve should not be involved in financing toxic assets that date from the bubble era, Charles Plosser, president of the Philadelphia Fed, has told the Financial Times.

“I think it is a bridge too far,” said Mr Plosser, arguing that such proposed Fed loans would expose the US central bank to credit risk and tie up a sizable chunk of its balance sheet in long- term assets that would be hard to price and liquidate…..

“I have reservations about the Fed intervening in private credit markets as a matter of principle. I think it confuses monetary and fiscal policy,” Mr Plosser said.

We’ll concede we overstated our case about Krugman on Greenspan, but we beg to differ with his giving Bernanke a fee pass. The current Fed chairman’s better bedside manner should not obscure the fact that he has compromised central bank independence far more than Greenspan did or King has.

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  1. attempter

    1. In fundamental principle the very notion of a nonideological Fed is a contradiction in terms, since on the contrary the Fed represents the enshrinement of the ideology that money creation and management of the money supply should be in the hands of private bankers and not government. It’s an abdication of sovereignty in basic theory as well as according to Article 1 section 8 of the Constitution.

    Such monetary management will always at least indirectly lead to fiscal policy-making.

    2. Monetarism was a scheme to further deliver all fiscal policy into monetary policy hands.

    3. In practice the Fed has long seen itself as A. the enabler of the banksters, B. the tool of the existing administration. Since we’ve had no anti-bank administrations, it’s a moot point to ponder where the loyalty of a Greenspan or Bernanke would “really” lie. All administrations of recent decades preferred to launder pro-corporate fiscal policy through monetary policy.

    Indeed, the fact that Fed terms are staggered with presidential terms, while on the surface meant to indicate “independence”, is really meant to indicate to the incoming administration the timelessness and nonpartisan nature of pro-bankster government policy. To even argue about this is to play into the Status Quo Lie that the existing Fed is somehow “independent”.

    4. As for Krugman, he’s clearly delusional about how transparent his own grotesque partisanship is. (Every Bush policy and practice he opposed is fine now that it’s Obama, or at any rate Democrat, policy and practice.)

    So he thinks he can get away with claiming that because his Bernie isn’t clearly a “raw partisan advocate” (which Krugman also thinks he himself is not, or at any rate thinks he hides well), therefore it can be argued that he’s an impartial, disinterested technocrat.

    It may well be true that Bernanke isn’t as clearly a lackey of the administration as Greenspan was (this is probably easier to do under the contemptible Obama than it was under Reagan, Clinton, Bush 2, or even Bush 1). But that kind of partisanship is only skin-deep anyway.

    But Bernanke is clearly a raw partisan advocate of the banksters. Krugman’s enough of a banksterist himself that he may actually believe in the Status Quo Lie here, that pro-bank ideology isn’t political ideology at all. But it is, virulently so.

    And even if Bernanke and/or Krugman were such pseudo-objective technocrats in their own minds, that would only be a deeper level of corruption. They’d still be the tools of the basic anti-constitutional, anti-democratic ideology of private money creation and manipulation.

      1. Ellen Anderson

        Well put indeed. What does it say that Krugman must be reading this blog, and many others, yet continues to spout nonsense? Because that is his job and he needs it. Too bad there isn’t enough money to support a newspaper that is willing to show the empire with no clothes.

        Frankly, most of my acquaintances will still take a wad of bills down to the corner store and buy the NY Times. They are not evil or even that stupid. Neoliberalism is a religion – part of their value system.

    1. eclecticdog

      Krugman has been every bit as hard, case by case, on the Obama Admin as the Bush Admin. If you read his blog and editorials you would know this. It’s just that the Bush Admin was so much worse that it seems like partisanship.

      1. John Emerson

        Agreed. There may be things that I’ve missed, and I don’t agree with Krugman on (for example) free trade, but by and large Krugman has been very, very hard on Obama. Only a hack of some other kind could call Krugman a Democratic hack.

        1. attempter

          Well, I’m not going to recite the entire list again. I’ve written it out enough times.

          I’ll just repeat the most important examples:

          1. Krugman explicitly denies austerity is about class war.

          2. He supports the Bailout.

          3. He was shill #1 for the health racket bailout.

          4. Going back to the 90s, he was one of the ultimate globalization cadres, and therefore a criminal against humanity.

          5. What happened to his oh so eloquent opposition to Bush’s war? Right – it’s now Obama’s and Hillary Ribbentrop’s war, so he has nothing to say.

          It’s not possible to support any of these great crimes and not have those be one’s defining traits.

          Since you evidently support all that, we sure know what you are, hackboy.

          1. sglover

            “Since you evidently support all that, we sure know what you are, hackboy.”

            I suggest you look into John Emerson’s work before you make yourself look completely foolish. As you just did.

          2. attempter

            How? If one’s decidedly eclectic work includes sticking up for Thugman, insulting his fact-based detractors, and telling flat out lies about his record, then that’s all I need to know.

            I notice you don’t even try to refute any of the five points I listed, and like I said I could list more. The facts are incontrovertibly on my side.

            But since you’re evidently a liberal elitist (thus your supplication before someone’s “work”, and not his action in the here and now; Emerson must be in quest of a new identity, if he’s trying out Krugman sycophancy), it may not have occured to you to wonder why someone who’s not (and believe me, far more people are not) would think it makes me look “foolish” to counterattack this relatively obscure person? Why not just say it makes me look foolish to counterattack Krugman in the first place and be done with it? I reckon even you’d feel silly trying to do that.

            But once again, I’ll rely on the facts. While so far as I can see I didn’t explicitly call Krugman a “hack” in this piece, I’ve done it plenty of times before. (Perhaps Emerson’s familiar with my work.) So we can let that stand. He then calls me a hack for daring to raise my peasant voice against the great Krugman. And you chime in, “How dare you raise your voice against the great Emerson!”

            I think a hack is as a hack does. Krugman’s a hack, and a lying Krugman defender is a derivative of a hack, a hack squared. As for the defender of the defender, what? A Krugman hack cubed?

          3. Anonymous Jones

            Do you ever sit back and just wonder whether you’re embarrassing yourself? Hint: If you did, I think I know the answer you would uncover (well, then again…).

            Almost everything you assert is beyond verification. It is constant hyperbole. You list things as retorts which are no such thing under any reasonable basis of logic or knowledge. You do not know who is lying and who is delusional and on which topics. You clearly don’t understand what a hack is, or you have a very dim view of human capability in general (which if true, please shuffle along and stop bothering those of us who don’t meet your standards, which is apparently everyone…it’s like calling every color that is not white as black).

            Your antipathy and misanthropy is tiresome, unrelated to reality, and yes, embarrassing. That someone as off-kilter as you are has the temerity to accuse others of hackdom and delusions is just more evidence of the unending weirdness of the human psyche.

            Sorry…just tis.

          4. attempter

            I’ve never seen so many ignorant fools in one thread. (And on behalf of Paul Krugman, of all pathetic figures!)

            So you’re really denying my easily documentable claims? You must be a masochist.

            1. Krugman explicitly denies austerity is about class war.


            The 4th paragraph. Explicit.

            2. He supports the Bailout.

            Here’s just one column where he starts out admitting that Goldman Sachs is “bad for America”, and yet goes on to say they had to be bailed out, and we have to live under their thumb in perpetuity.


            Everything Krugman writes pretty much self-evidently supports the Bailout. Although he was point man pushing the Swedish-style nationalization scam, just in case they had ever needed that.

            3. He was shill #1 for the health racket bailout.

            I’m not going to bother selecting one or two out of literally dozens of columns and blog posts where he shilled for Obamacare. You can’t possibly be so ignorant the way you’re claiming, that you’re not already well aware of that.

            4. Going back to the 90s, he was one of the ultimate globalization cadres, and therefore a criminal against humanity.

            Here’s just two links I had at hand. It’s really hard to believe you’re as ignorant as you claim to be about Krugman’s record as a globalization cadre.

            His manifesto “In Praise of Low Wages”:


            Another manifesto attacking the Seattle protestors. Among the lowlights: Support for CAFOs.


            5. What happened to his opposition to Bush’s war? Right – it’s now Obama’s and Hillary Ribbentrop’s war, so he has nothing to say.

            Obviously I can’t provide a link to something that doesn’t exist. But I invite anybody to go search for Krugman’s anti-war writings since 1/09. I sure couldn’t find them.

            I said I was going to stick to just those five counts, but I have a much longer list. There’s over a dozen posts at my blog documenting the case.

            Here’s just one more choice item I wanted to highlight here: Krugman denies that the corporate structure is at the core of our problem. Indeed, he scoffs at anti-corporatism in itself.


            Instead, the problem is just a few bad apples. The system is fine.

            And that goes to the core of the malevolence of Krugman’s project, since that exculpation of the system is all he ever does.

            So as for this:

            Almost everything you assert is beyond verification.

            Evidently not.

            So I ask you and others who insist on breaking a lance for Krugman:

            Do you ever sit back and just wonder whether you’re embarrassing yourself?

            Evidently not.

      2. mmckinl

        But … the piece is not about Obama but the privately owned and operated Federal Reserve and the role of Bernanke in regards to the banksters control of the central bank functions …

  2. Max424

    I have to admit, I get confused at times as to what is fiscal, and what is monetary.

    When I think of the fiscal, I think of a Federal government growing fairly large quantities of reefer and then distributing pieces of this cultivated green bud — not always equitably, and certainly not without some theft and some bogarting along the way — to the various bureaucracies, from where an insignificant fraction of the original harvest eventually wends its way down to the masses.

    In other words, fiscal policy is when a reluctant United States oligarchy finally breaks down and decides to share a small portion of its Maui wowie with its people.

    On the other hand, when I think monetary policy, I picture an off-the-map warehouse, filled with bales of big H; and in this secluded smack factory, I also see fork lifts — working like busy little bees — packing the product into tractor trailers, which then set off for God knows where.

    I see immense profits rolling in for the warehouse owners and managers, and I also see damn fine salaries (and bonuses) being made by the fork lift operators and truck drivers.

    And who does this activity benefit outside of this tight little operation? As far as I can see, nobody.

    1. W.C. Varones

      Monetary enables the fiscal.

      What does government do? Cuts checks.

      Lots and lots and lots and lots of checks that go to individual citizens — $2.3 trillion worth last year alone.

      In fact, according to a table buried deep inside the little-noticed Historical Tables volume of the White House’s 2012 budget, these “direct payments to individuals” accounted for more than two-thirds of federal spending in 2010. That’s a post-war high.

      And that share has been steadily climbing. Payments to individuals accounted for 2.4 percent of all federal spending in 1945. By 1980 it has risen to 47 percent, and in 1992 it crossed the 50 percent mark.

      And of course if the government actually had to borrow the $1.5 trillion+ per year it needs, it would have to pay much higher interest rates. So Bernanke prints trillions to monetize the debt and keep the Great American Ponzi going a couple more years.

        1. skippy

          MMT is a panacea, is does not address the recurring instability do to corruption over the commons ie criminal sociopaths gaming the system to their advantage due to, proximity to the levers of power.

          Skippy…its a fine theory, but whom may we entrust it too…eh.

          1. Mansoor H. Khan

            “does not address the recurring instability do to corruption over the commons ie criminal sociopaths gaming the system”

            This part can never be completely fixed. But we can do better. Much better of course. Start with yourself. Start telling the truth to people around you and rest will take of itself (in 10 to 20 years).


        2. Siggy

          MMT is it, is that your cure?

          An irredeemable currency and fractional reserve banking, it the money medium where thr troubles begin.

          As to Krugman, here and there, now and again he comes forth with something of merit. Mostly he parrots neocclassical economics.

        3. Siggy

          MMT is it, is that your cure?

          An irredeemable currency and fractional reserve banking, it the money medium where thr troubles begin.

          As to Krugman, here and there, now and again he comes forth with something of merit. Mostly he parrots neocclassical economics.

  3. W.C. Varones

    Krugman is a hyper-partisan loon. Of course he criticized Greenspan helping Bush, and of course he loves Bernanke being handmaiden for Obama’s deficit spending.

    Krugman is a Kos kid. Don’t waste your time arguing with idiots.

    1. John Emerson

      As I said above, only a hack of some other kind could call Krugman a Democratic hack. He’s been very hard on Obama.

      1. Rob G

        Yes Krugman has been very hard on Obama- for not spending $2-3 trillion in the failed stimulus and not creating a socialist healthcare public option and giving in to the GOP and more importantly, the American People!!! yes Krugman has been very hard on Obama for not moving further left with his socialist agenda. Too bad it will not happen now with a GOP majority in the House and Senate in 2012.

  4. sdemetri

    Krugman has long been a very vocal supporter of fiscal stimulus. He has been harshly critical of the fiscal policy the Obama admin has had to settle with, saying, “Fiscal policy didn’t fail; it wasn’t tried.” (The Great Abdication, Feb 14 blog post).

    It is no surprise to me that he would be more generous to Bernanke than Greenspan if the policies Bernanke has implemented are effectively an unusual form of fiscal stimulus. Many believed that was the necessary prescription from the start. These are unusual times and it is not surprising having to navigate the treacherous waters of our political landscape unusual measures have to be resorted to. Had a strong fiscal response been adopted from the start Bernanke arguably would not be resorting to making the Fed the “Systemic Risk Regulator.”

  5. YankeeFrank

    I like Corrente’s posts where they point out that Krugman studiously avoids the word ‘fraud’ in any and all discussions about our financial system.

    Frankly, it seems to me Krugman has started his fitful dialog with NC in the vain hope that some of its credibility will rub off on him.

    We all know he got his suitcase of money (or whatever passes for that in economics academia) shilling for globalization — and somehow he is still able to pretend he has a conscience.

  6. steve from virginia

    I just skipped the appetizer (Krugman) and went straight to the Buiter main course.

    I recall when TARP was in the air and Hank Paulson was running around with his hair on fire and some wag told me the $700 billion was to re-capitalize the Fed. I told him they would have to add another zero …

    Where are we now? How about two more zeros or three? What is really on the Fed/Primary Dealer balance sheets? How about massive precious metal derivative short positions, trillions in worthless POMO stocks, tens of trillions of currency/interest rate swaps/forwards/schwaptions and god- knows what else. Bernanke is smart enough to know he’s in a war over his relevance, not smart enough to play it cool and pick his spots.

    His ‘double or nothing’ two- fisted gambling approach has left the sensible pulling their hair out in big chunks. What is there to gain but worthless propaganda points and to postpone the inevitable deleveraging.

    Too many stresses: the Fed will be called upon to support the Treasury when the Federal Government shuts down in a week or so. The Fed by way of its dealer net is massively overleveraged in all markets where a 1% or 2% move in any one of them is fatal; you have high oil prices eviscerating the productive economy by the minute and the opportunists are running amok blaming the world’s problems on garbage collectors and teachers.

    Obviously time to run out and buy some stocks, right?

  7. Jay Brizie

    Yves, please use Krugman well.
    He has a unique and extremely valuable platform in main stream media. Who else reaches so many readers on macroeconomic issues? He frames big important issues for public discussion. Sure, he has a style that can grate on some people. And, like everyone else he’s wrong part of the time. So, please help Krugman improve his framing of issues and analyses whenever you can. He is paying attention to you and taking you very seriously.
    Krugman is a small island of mostly reasonable macroeconomic discussion in a vast sea of economic nonsense and idiocy delivered daily by main stream media. Please nurture what little reasonable discussion we have.

    1. Joe Costello

      I couldn’t disagree more. Krugman is one of the worse of the lot, because when it comes down to it, he’s a complete apologist for the system and a major promoter of voodoo PHd economics. He is in fact the opposite of what you say, and anytime anyone pushes “economic orthodoxy”, Krugman will rush to defend.

      Far from an asset, he’s one of the greatest detriments to starting a real discussion on political economy reform, for the powers that be, he is an “useful idiot” and that is why he is in the position he’s in.

      1. psychohistorian

        Krugman, Delong and Thoma are the edge apologists on “our” face to the dominant powers that be. They can show you models on everything but subjects like the role that the US military has played in the spread of American imperialism since 1945 and the subsidies it has and currently provides to various sectors of the economy. Where are the models of the global control matrix of the powers that be that continue to set economic and social policy?

        If economic and social policy making is ever wrested from the existing powers that be these folks may be useful if they apologize publicly for the moral and ethical blinders they have worn in their past edge propaganda roles.

      2. Jay Brizie

        I apologize. I must be reading and watching different segments of the main stream media than you. The MSM I’ve seen frames a large majority of its economic arguments with Chicago School approaches and assumptions. I trust, as a faithful reader of Yves writings, you’re familiar with her treatment of this orthodoxy.
        You don’t dispute Krugman reaches a large audience. Don’t you want the content that large audience gets improved?
        You, and many others, rage and sputter at Krugman like a stupid bull charging a red cape. How does that improve the national economic conversation?

        1. Joe Costello

          If our future is either the Chicago School or Krugman, we have no future, that is my simple point.

        2. Yves Smith Post author

          Since when are my posts that discuss Krugman “raging and sputtering?” I think you’ll have to look hard to find examples (and particularly in contrast with the sort of rhetoric I use, say, on Timothy Geithner). It’s simply that he is normally treated with such deference that any criticism looks strong by virtue of comparison.

          And why should he be treated with deference when he is wrong? One of the dangers of being in his position is the lack of pushback (by informed critics, as opposed to ideological opportunists) means arguments that don’t cut the mustard get a free pass. I’ve upon occasion been hard on Gillian Tett of the Financial Times, and she thanked me for the criticism. And I actually think she meant it, in that it kept her on her toes and forced her to think

          1. Jay Brizie

            Yves, that barb “raging and sputtering” was not aimed at you. Clearly “sputtering” can’t be aimed at you, you’re much too eloquent. “Raging” can’t be aimed at you either because that requires a loss of control, equally inapplicable to you. Thus, I thought it was obvious it was aimed at those who summarily dismiss him and call him names, like idiot, rather than offering constructive replies.
            I very much appreciate your passion and enjoy it when it escalates to what you call snark. Many deserve snarky comments. (Geithner, yes!) But, I suggest, well-meaning truth-seekers do not.
            I see Krugman as a person who, like you, is genuinely interested in improving his and our understanding of the economic world. For example, recently he openly confessed to being relatively low on the learning curve about how agricultural commodity prices work. Then he offered a flawed analyses of the impact of QE-II. Someone who openly admits weakness and, by implication, begs for correction, is in my view a truth-seeker. Your reply that exposed major errors in his assumptions responded appropriately. We need a lot more of that kind of exchange.
            I agree, no deference. You are equals in a quest for better understanding.
            Krugman IS too soft on his colleague from Princeton. But, given their past close association, shouldn’t we expect that? How would you attack such a past colleague of yours if she happened to be one of the most powerful people in the world?
            Many economists and much of their recent work have earned merciless attack. But, it appeared to me you were going overboard on Krugman. It appeared appropriate derision for much of the economics profession was seeping over into a place where we desperately need dispassionate analyses. I was worried that would impair future exchanges between you and him.

  8. Jose

    Buiter also does not exactly appear to be an unpartisan, objective, scientific analyst. After accepting his new job as chief economist for Citi he started publishing papers with ridiculous assertions – such as, e. g., the US government can go bankrupt – clearly an attempt to give credibility to the austerity hacks in America…with all his shortcomings I much prefer Krugman. At least he is pro-stimulus.

    1. Yves Smith Post author

      You are incorrectly accusing Buiter of intellectual opportunism. He’s been consistent. He was concerned about debt overhang and sovereign defaults before he was in Citi’s employ. Go read his posts at the FT (for instance, “Reykjavik on the Thames”). HIs track record is clear.

      And what does his position on sovereign debt have to do with his observations about central bank independence? Your argument is ad hominem.

  9. Vicki Meagher

    I have to say: Paul Krugman has an excellent track record in writing about issues in the American economy. He’s been called “shrill” for so long about so many things. But what he has predicted has often–maybe even usually–come to pass.

    Not to say that he’s wonderful, or always correct.

    But he’s less of a partisan hack (and more fact-based) than his critics.

    1. Yves Smith Post author


      This is a straw man. Did I ever call Krugman a “partisan hack”? Not even close. Some people on this thread have made charges along those lines, so if your comment is directed at them, please make that clearer.

      I have specific issues with Krugman (his continued defense of Bernanke and his arguments on commodities speculation), not general ones.

      1. Vicki Meagher

        Yves: yes, of course I was writing in response to some of the commenters in this thread, though I don’t mention them by name because I don’t want to encourage them. Scroll up (and down, now) and you’ll see the intemperate comments some people have made about Krugman.

  10. we_are_toast

    You are both well respected economists with dedicated followers, and I respect both of you. So far, both of you have treated each other with respect, KEEP IT THAT WAY.

    I make my own decisions based on well reasoned, data supported arguments. I need to know both where you agree, and where you disagree in order to be well informed. I learn the most when you each are supporting your disagreeing points of view. If you let this deteriorate into some pissing contest, I won’t learn anything, and you both will lose respect.

    Anyone with an ounce of common sense knows that economics is not a hard science. That’s what makes it so difficult and makes for so many differing opinions.

    Both you and Krugman can help a good number of citizens better understand the mess we’re in by keeping your discussion at a professional level, and by not letting it deteriorate as other commenter’s are urging.

      1. we_are_toast

        My apologies.

        I’m afraid it will take me some time to remember that title, you sure you don’t want to just be called an economist?

        1. Yves Smith Post author

          No need to apologize. I just don’t want to be given credit where it is not due. Since I have spoken at panels at the AEA annual conference (admittedly “heterodox” which means “non-mainstream” which in turn means “fringe”), maybe I am an honorary economist (along with having been designated an honorary Japanese, honorary trader, and honorary geek).

          1. a

            Well, if someone called me an economist, I’d certainly want an apology. About the only worse insult would be “banker”…

  11. Gregor

    Krugman is America’s Rasputin. His economic prescriptions are snake oil, just ask the 30% of Japanese workers who have never had a permanent job.

  12. Matt

    Others have more analsysis on the illegality of the FRB actions.
    But even a simple look at the FRB books show that it is now extremely leveraged with over 0.96 Trillion in MBS, 1.1 Trillion in Treasuries with a longish average maturity and less than 60 Billion in capital.
    I suspect something like the Irish play book of banks selling notes to banks will come forward to enable the FRB to support the US deficits.
    But instead of the US Treasury printing the FRB notes, I believe their will be a new “electronic” FRB note on their books.

  13. We're into money

    I never did understand how Treasury became an entity engaged in commerce and trade.

    The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue.

    Manage (government account)revenue — versus providing the mechanism of accounting gimmicks

    At what point did Treasury decide that supervising national banks and thrift institutions implied engaging in fraud?

    Don’t get me started on the corrupt shadow banking entity known as the Federal Reserve System:

    The primary motivation for creating the Federal Reserve System was to address banking panics.[3] Other purposes are stated in the Federal Reserve Act, such as “to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes”

  14. floating body

    The main monetary policy instruments available to central banks are open market operation, bank reserve requirement, interest rate policy, re-lending and re-discount (including using the term repurchase market), and credit policy (often coordinated with trade policy).

    What is that, anyway?

    re-lending,re-discount and term repurchase market?

    How is it that the Fed re-invents itself on-the-fly like a floating casino?

    Repurchase and Reverse Repurchase Transactions

  15. Masonboro

    @attempter: You say Krugman denies being a “raw partisan advocate” or hides it well.

    The name of his blog is “The Conscience of a Liberal”.


  16. Brett

    What is interesting is that Bernanke regularly “Greenspans” himself by commenting on fiscal matters. I believe Krugman has denounced him one time, but Calculated Risk regularly keeps up to date with Bernanke and his calls for fiscal prudence and getting the deficit under control. These are things the Fed chairman should not be commenting on…

    1. Yves Smith Post author

      Yes, you are 100% correct and I had wanted to include Bernanke’s recent soft austerian posture (which is what makes Krugman’s singling out King seem even more bizarre) but didn’t have the energy to find a link at 6:00 AM.

  17. Indio007

    I hope people understand the import of the FED having to ,in effect borrow money, from the US Treasury.

    This statement,
    “The Fed does not have a full indemnity from the US Treasury even for its outright purchases of private securities”

    This means the FED is either putting up 90%. (of course this is “new money” for the purchase)

    The FED can’t issue new cash without the acceptable collateral T-Bonds ,Gold,SDR, paper gold certificate,residential property backed by a mortgage lien…… See how ugly the game is?
    Read the Federal Reserve Act

    The FED is getting a 10% discount for new money printing. It either has to borrow the difference i.e. T-bills and print.
    Or it has to use these crap residential mortgages as collateral and then print.

    It’s a sad state.

  18. RebelEconomist

    While I condemn Mervyn King for breaching the BoE’s monetary policy remit, I do consider it legitimate for him or any other central banker to express approval for frugal fiscal policy, because the pressure on them to monetise debt is likely to increase with the debt burden. Also, with UK inflation presently above target, it seems reasonable for Mervyn King to note that restrictive fiscal policy right now reduces the need for monetary tightening. What he should avoid – and I believe has avoided – is commenting on particular measures within the overall fiscal stance.

  19. Cedric Regula


    King=paid good interest rates – I liked him
    Krugman=tries to be a democrat way too much
    Fed Independence=Non Sequitur

    1. Yves Smith Post author

      I like people selectively. However, since most studies find that people save the clinically depressed have an unduly high opinion of themselves, realistic assessments will collide unpleasantly with most people’s self image.

  20. acontra


    You have some valid criticisms of Krugman. You should continue to articulate these as he is clearly reading you and wants to engage. However, he has not given Bernanke a “free pass”. Hyperbole only weakens your case.

    1. Yves Smith Post author

      1. The “free pass” in this post was on his violating Fed independence, and the shoe fits

      2. Krugman has consistently supported Bernanke or been silent, he’s only had one instance I can recall (and I’m drawing a blank on the issue, but it was in the last six months) where he did take issue with a Bernanke move, but even so his criticism was awfully mild compared to the matter at hand.

      3. The strident one in the post was Buiter, not me. Please read closely.

      1. acontra

        From 11/20/10:
        I agree that Krugman has been soft on Bernanke vis-a-vis the bank bailouts. I wish he read more of you and Taibbi and acquired a proper level of anger. I hope you continue to push him on this. But Krugman is not a finance/banking expert, and on macroeconomic issues he has been pretty critical:
        “I understand why Bernanke was cautious about seeming to insert himself into the political debate — but it’s unforgivable all the same. The inadequacy of the policies we have to reduce unemployment to less-than-catastrophic levels has been obvious for a long time; and everyone who might have been in a position to do something played it safe, until it was too late to do anything.”

        As a side note, I became a big fan of Buiter after the financial crisis but was bitterly disappointed when he took the job at Citi, it’s hard for me to read him. But you’re right I should read more carefully.

  21. water it down

    Greenspan’s Incompetence Badgers Wisconsin’s Workers

    If members of Congress are too intimidated to do what is needed to fix the economy, then Wisconsin’s legislators should do what common sense dictates: follow the money. Rather than taking pay and benefits from schoolteachers and firefighters, it makes sense to take money from the people who have it. This means taxing Wisconsin’s wealthy and its corporations. The tax increase only needs to be temporary, since the state budget should be fine once the economy recovers.

  22. CMike


    Is that March, 2009 Willem Buiter comment you cite still operative, the part where he says?:

    >>>>>The Fed does not have a full indemnity from the US Treasury even for its outright purchases of private securities. It has no guarantee or indemnity for private credit risk assumed as a result of its repo operations and collateralised lending.

    For the Fed’s potential $1 trillion exposure to private credit risk through the Term Asset-Backed Securities Loan Facility, for instance, the Treasury only guarantees $100 billion. They call it 10 times leverage. I call it the Fed being potentially in the hole for $900 billion.<<<<<

    A couple of weeks back Max Keiser referenced this Reuter’s article:

    >>>>>Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency much less likely.

    The significant shift was tucked quietly into the Fed’s weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on January 6….

    “Could the Fed go broke? The answer to this question was ‘Yes,’ but is now ‘No,'” said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. “An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital.”

    The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.

    …[A]nalysts feared the Fed might be forced to sell either its Treasury or mortgage-backed securities at a steep loss in a rising interest rate environment…

    Fed Chairman Ben Bernanke, asked about the possibility in congressional testimony earlier this month, said even the most extreme circumstances would not have very large implications.

    “Under a scenario in which short-term interest rates rise very significantly, it’s possible that there might come a period where we don’t remit anything to the Treasury for a couple of years. That would be I think a worst-case scenario,” Bernanke said.<<<<<

    1. Yves Smith Post author

      I also took note and grumbled in Links, this was clearly a measure to avert an overt bailout. It’s real BS and I hope Ron Paul is all over the Fed and Treasury on this one. Further circumvention of Constitutionally mandated budgetary approvals.

      1. steelhead23

        Yves, May I for a moment “rage and sputter?” I am lost in anger. In the Max Keiser quote above, it is argued that through an accounting change, a loss incurred by one of the Fed’s windows or its Maiden Lane operations is NOT a loss by the NY Fed, rather it is a loss to the U.S. Treasury?!!! I know these are not your words, and assuredly, not your policy, but how can a licensee (FED) tell the licensor (U.S. Gov.) what its liabilities are! Yes, I always knew that when Maiden Lane went south, the U.S. Treasury would recapitalize the Fed. But such an action would engender public awareness and resentment – perhaps increasing political pressure to rein in the Fed. By hiding such “losses” in its balance sheets, only the small fraction of Americans reading those balance sheets would know that another trillion of debt had been put on its plate.

        Dammit, its time to be shrill – or gather with a million of your friends in front of the Eccles building. THIS is taxation without representation. We, U.S. taxpayers, are expected to pay for the Madness of King Ben! I pray you are spoon-feeding questions to Ron Paul. No answer required.

    2. tawal

      And this is precisely how our federal government will continue to meet its obligations when Congress prolongs the vote on expanding the debt ceiling. Representative democracy, for what it’s worth, will have been opertionally abdicated.

    3. tawal

      And this is precisely how our federal government will continue to meet its obligations when Congress prolongs the vote on expanding the debt ceiling. Representative democracy, for what it’s worth, will have been operationally abdicated.

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