Philip Pilkington: Nobel Laureate Paul Krugman Selectively Quotes Rival to Stitch Him Up After Losing Argument

Yves here. If comments on this site are any guide, readers appear to have taken considerable interest in a blogosphere debate on the role of money and banking, with Steven Keen and Scott Fullwiler (among others) arrayed against Paul Krugman and Nick Rowe. Krugman’s latest piece not only misrepresents Steve Keen’s argument, as Philip Pilkington explains below, but Krugman also appears to have shut down any discussion at his blog after quite a few of his readers pointed out his sleight of hand.

There were 65 comments from 12:46 PM to 5:22 PM. Krugman put an update (no time marker) at the top of the post”OK, I’m done with this conversation.” Did the last comment, reproduced in full below, hit a nerve?

I predict this sorry exchange that started about Krugman’s misuse of Minsky will one day haunt the good Professor if he doesn’t do his homework with an open mind immediately. If not, the damage to his credibility will be permanent and irreversible.

Paul, at least come clean and admit you misread Keen here and quoted him out of context. It’s obvious.

Your doubling down with each new post is very unbecoming and your [sic] beginning to look like a Republican.

What was that post you wrote awhile back on hypocrisy?

By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil

Oh, its a dark day, my friends. A pall has been cast over the econoblogosphere. Yes, Paul Krugman has just used the New York Times website to undertake a vicious stitch-up on an intellectual opponent who should have, by rights, won the original argument.

Here’s how it went down. Post-Keynesian economist and sometimes Naked Capitalism contributor Steve Keen wrote a cogent article critiquing a Paul Krugman paper on Minsky and debt deflation. The key issue was that the so-called money multiplier does not function to restrict credit growth in modern economies operating on a floating exchange rate with a central bank that targets interest rate. We dealt with this briefly the other day and pointed out the flaw in Krugman’s argument.

Krugman then started to get overwhelmingly negative comments from his usually receptive audience. Many were people who worked in banks trying to appeal to Krugman’s good sense so that he might consider that he failed to understand some fundamental things about modern banking. No luck there.

Then Scott Fulwiller ran a comprehensive rebuttal here on Naked Capitalism yesterday. It was a one-two punch. Krugman fell back on a post written by Nick Rowe. Rowe’s post was dodgy in the extreme. He made up a quote — specifically that “the money supply is demand-determined” — called it gibberish and then undertook a ‘deconstruction’ of the quote… that he had made up. I called his rhetorical tactics sophistical in the comments section. He called me rude.

Fine. All in good fun, right? But then Krugman did something outwardly nasty and underhanded. He put up a quote from Keen’s second post about DSGE models that he took completely out of context so that Keen would appear ignorant of the matter he was discussing. You can find Krugman’s original post here, but just in case he decides to take it down here is a screenshot.

It’s a short post and everyone should read it. It’s not hard to see what Krugman is doing. He lifts a quote from Steve Keen about DSGE models in order to make out that Keen doesn’t know what he’s talking about. Keen basically says that DSGE models assume equilibrium. But Krugman counters that…

Point 1 [of Keen’s post] is all wrong — NK models are all about sticky prices, so what’s that about “instantaneous adjustments”? (And who said anything about rapid return to equilibrium?) Point 3 is also completely wrong: NK models almost always assume imperfect competition, so that we can talk about price-setting agents. This is all in Eggertsson and Krugman, by the way.

He then goes on to allude that Keen is talking through his you-know-what. But look what is to be found just two paragraphs under Krugman’s torn-out-of-context quote in Keen’s piece:

So economists like Krugman—who describe themselves as “New Keynesians”—have tweaked the base case to derive models that “ape” real-world data, with “sticky” prices rather than perfectly flexible ones, “frictions” that slow down quantity adjustments, and imperfect competition to generate less-than-optimal social outcomes.

Oh dear, oh dear, Mr. Krugman. For shame. This is not very professional at all.

What sort of an impact might having a Nobel Laureate allude to your work as being “shit” have on your career? Surely not a very good one. I think most people come to think that Nobel Prizewinners are careful, reasoned, scientific types who would never tear a quote out of context to stitch up an intellectual opponent. Not so, it would seem. Press their intellectual buttons in a certain way and kaboom!

This whole affair has become dank and sordid. While I was first happy to see Krugman engage with this topic, I now only hope the whole exchange will end. It has truly brought out the worst in him. He is clearly not willing to consider any new perspectives on any fundamental issues because he has too much intellectual capital at stake. Any pressing of the matter by his colleagues is now only generating flak from Krugman’s side.

On a positive note however, a lot of his readers seemed quite perplexed by Krugman’s evasiveness on the original topic — that of endogenous money. I saw one comment that said something along the lines that “I come to this with no prejudices, in fact my main prejudice would be to try to see sense in what Krugman is saying. But I’m finding it hard to understand how he refutes Keen’s/Fulwiller’s critique.” And that, as Keen always says, pace Max Planck, is how science advances: one funeral at a time.

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  1. SM

    Let me know where i’m wrong here, no yelling please.

    Is the prof saying that there is no reserve requirement at all, that at the end of the day, a bank doesn’t have to have, say 10% or whatever, in its accounts? Then what is required – just that the fed account is non-negative?

    And if its the case that there is no limit on the supply of money, that banks can just make whatever loan they want, including to each other, why would the interest rate ever increase, or be higher than slightly more than zero? I mean, if you could make a loan to a consumer at 1%, another bank could loan you the money to keep your fed account positive – and if the other bank can just create loans with no reserve requirements, why wouldn’t they just make any loan you asked for, just like you can do for your customers? Becuase making 0% on no loan seems like a worse deal than .01% on a loan to another bank. It would seem the only constraint on loans would be if you can find one from a customer that you think they can pay back. And why would the interest rate ever increase on loans between banks – you could always just borrow from one of the other banks out there that can also make infinite loans because there are no requirements, they don’t even have to look at their books, and definitely no reason to borrow from the fed – how is it that the infinite supply of money doesn’t mean that interest rates are always approaching 0% on lending between banks?

    I must be missing something so if someone could clear this all up i’d appreciate it.

      1. SM

        I get that, like i said, lending would be constrained by that risk – if you could find enough borrowers that you thought could pay back the loan. But if the cost to borrow money from other banks aproaches 0% because there is no cost to them to create it out of thin air, why would the cost of a loan ever be more than just the risk? Why would a mortgage be 4% today, but an identical mortgage be 6% in say, a year from now, or was 6% a few years back? The cost to borrow from other banks in a year from now would be the same as it is now if all banks could just create money for free. And why would anyone ever borrow from the fed at their rate when banks could always just borrow from each other because there is no cost to making loans for other banks? It would seem if the economy was doing better and the risk of defaults dropped, then interest rates would drop further, and not increase due to a lack of supply of funds. IE, if there is this unlimited supply of money at all times because banks can just make loans, why does the price (interest rate) ever increase from a very low base price?

        1. Nathan Tankus

          I think perhaps you misunderstood. First there is the obvious point: banks have balance sheets not asset sheets. A bank makes profits on the difference between the flow costs of it’s liabilities and the flow revenue of it’s assets.

          “But if the cost to borrow money from other banks aproaches 0% because there is no cost to them to create it out of thin air, why would the cost of a loan ever be more than just the risk?”

          The obvious point is that the central bank is setting the interest rate of loans between banks. It wouldn’t make very much sense for a bank to lend money at zero per cent to another bank when it could easily do so at the pervailing interest rate (which now is 0.25 but usually is much greater). The cost of the money created is the interest rate that must be paid on the newly created deposit (or if the payment goes elsewhere and the bank is short reserves, the cost of the new liabilities it has to acquire in order to cover the reserve shortfall), not to mention the services rendered.

          In short, the mistake i think you made was only examining the revenue of assets and not the cost of liabilities. The cost of creating money

          1. Nathan Tankus

            [ sorry the post accidentily submitted itself]

            … is not just it’s physical cost of production, but the things you must do in the future in order to service it. If i make a (contractual) promise to get you a mansion, the cost of that liability is not the ease in which i could sign the contract, but the cost of actually getting you a mansion/ the cost of breaking my contractual promise.

        2. Philip Pilkington

          Commercial banks cannot create money for free. No one says they can. That would be counterfeiting. They can create money out of thin air, but they will then have to ‘back up’ that money with reserves borrowed at the going interest rate.

          The point about creating money out of thin air isn’t that the banks can print. But that the constraints placed on them are far more lax than the likes of Krugman assume in their models.

          1. Anon

            “They can create money out of thin air, but they will then have to ‘back up’ that money with reserves borrowed at the going interest rate.”

            …if they are operating in a country in which the central bank has a reserve requirement. Many countries have no reserve requirements, hence the references to being capital constrained.

          2. Neil Wilson


            Technically a bank only needs to ‘back it up with reserves’ if it has to transfer the loan to another bank in excess of the transfers from that other bank to itself.

            If the payee has an account at the same bank, then they need no reserves at all for it (beyond the statutory minimum if there is a minimum limit in the jurisdiction).

            In countries with only a few very large banks (like yours and mine) reserves are even less of an issue

          3. Nathan Tankus

            @Anon incorrect. All central banks have reserve requirements. a 0% reserve requirement is still a requirement not to have negative levels of reserves. Some central banks (like the bank of canada) will resolve a banks negative reserve position by letting them automatically borrow reserves through them at the “bank” rate at the end of the day, but that is still borrowing reserves. Still not free.

            not to mention the need for reserves so that the bank can settle payments.

          4. Anon


            Yes, terse comments lead to unclear descriptions. My comment didn’t reject the idea that banks must borrow reserves if required, nor ignore the need for reserves for the payments system. I was simply making the point about the lack of a mandated (positive number) reserve requirement.

          5. Nathan Tankus

            ok, just wanted to be clear. You may understand the concern I have about making sure there aren’t quotes that can be picked out to dismiss the PKT (post keynesian thought, not paul krugman thought :P ) position.

          6. Kukulkan

            I’m with SM here, because this stuff literally doesn’t make any sense to me.

            Philip says:
            Commercial banks cannot create money for free. No one says they can. That would be counterfeiting. They can create money out of thin air, but they will then have to ‘back up’ that money with reserves borrowed at the going interest rate.

            If banks can create money out of thin air, then how does having any need to back it up with reserves of money in any way constrain them? If a bank has to have 10% reserves, for example, then when it lends $100 to someone rather than just creating $100 out of thin air, why don’t they just create $110 — $100 to lend and $10 to add to their books to meet the reserve requirement?

            Unless the reserves are in something other than money, the requirement to have reserves wouldn’t seem to limit banks at all. Given that, I’m beginning to understand where goldbugs are coming from; if the reserves have to be in something like gold, well that would explain why there is a limited amount of money available. Otherwise the only explanation for why people don’t have enough money to cover their needs is sadism on the part of those creating the money out of thin air; they could create enough money, they just don’t want to.

            I was taught that the problem with unlimited money was inflation — that is, while the supply of money is potentially infinite, the supply of goods and services isn’t. As Douglas Adams put it in The Hitch-Hiker’s Guide to the Galaxy:

            Since we decided a few weeks ago to adopt leaves as legal tender, we have, of course all become immensely rich. But we have also run into a small inflation problem on account of the high level of leaf availability. Which means that I gather the current going rate has something like three major deciduous forests buying one ship’s peanut.

            As such, the constraint on the banks ability to create money would be the total amount of goods and services (wealth) actually available.

            I always thought banking worked by creating money out of thin air to loan out and fund things that would then create the wealth that would correspond (or exceed) the amount of money created. That is, the banks basically borrow the money from the future to, in a paradoxical way, help create that future. Then, when the wealth is created, the bank has a claim on an amount of that wealth equal to the amount of money created.

            Of course, not all loans work out, so banks need to be careful who they lend to. That’s what underwriting is about; the bank needs to be sure that the money is going to something that is likely to create the wealth required to justify the money.

            However, since banks seem to have abandoned underwriting in favour of using complex financial instruments to eliminate risk, I don’t see that there’s any constraint on them at all. They can just create as much money as they want and use it to transfer ownership of as much actual wealth to themselves as possible.

            What is there to actually prevent that? Or isn’t there anything and the Global Financial Crisis we’re currently going through is just that scenario playing itself out?

          7. Nathan Tankus


            you misunderstood. what you are describing is counterfeiting. a bank can’t just create 10 dollars and keep it. if one tried (besides going to jail), it would now own a hundred dollar deposit it owes to itself (non-sensical) and owe 100 dollars in a loan to itself (again, non-sensical). This is like saying “i promise myself a 100 dollars”. you haven’t created money. you haven’t even created a liability (unless you have multiple personalities. making promises to yourself does not increase your access to money or resources.

          8. YankeeFrank

            Your worry is well-founded. But the banks have figured out that in creating all that money, they’d rather funnel it into assets like real estate, as they can steal those once a default occurs. How do you think all that money appeared to stoke the housing bubble? Low Fed rates on reserves encouraging banks to loan out money hand over fist… and finally, when all that money can’t be paid back, the bottom drops out and they get to collect all that real estate. Nice work if you can get it. Check out Michael Hudson’s piece with quotes from the Italy teach-in from early today/yesterday on NC for more and better details.

          9. SM

            I’m still lost here. So there are reserve requirements for each bank, so they can’t just print money? But the argument is that because each individual individual bank has a rough idea at the end of the day how much it will cost to borrow to cover those reserve requirements (from other banks of more costly, from the fed) and makes as many loans as it wants during the course of the day where the rate spread is acceptable to them, we should pretend there are no reserve requirements? Is this closer to what is being said?

          10. SM

            of=or, btw.

            …oh, and the fed is free to modify its reserve requirements at any time based on how much money it loans based on the rate it chooses, which it fluctuates?

            Is the argument that because the fed isn’t stick hard and fast to its reserve requirements, they don’t exist? But at any time, couldn’t the bank decide to swich gears and start sticking to it? Say it thought inflation was on the horizon and had a monetary base it desired based on a reserve requirement – couldn’t it enfore that requirement?

          11. jake chase

            The mistake made by all conventional economists, including Krugman, is that bank lending is constrained by deposits. It isn’t. Bank lending is constrained only by reserves, which are independent of deposits. It is that simple. Reserves are supplied not only by deposits in the banking system, but also by the financial markets and by the Fed. There are no limits whatsoever on Fed credit extension. Martin Mayer explained all this in his 1970 classic The Bankers, in a way even Krugman could understand if he wanted to. Banks make loans and then chase reserves to meet reporting requirements. These days they make only loans for insured mortgages and financial speculation. No matter what the Fed does to interest rates the banks will not be making loans of any other kind. Ultimately, the banks will become frightened about collateral values and precipitate the next crash. As to when this will happen and at what level of equity values, noboby knows.

          12. Jib

            What helped me understand this is to look at the steps taken to make loans. If reserves limit the amount of money a bank can loan, then the bank would start every day looking at how much money it can loan out and then stop when it hits that limit.

            Banks dont do that.

            Banks loan out as much money as they can at a profit and at the end of the day, if they dont have enough reserves, they borrow the extra money from the fed. At a cost.

            It is the bank cost structure that limits the amount of loans they can make, not the reserve requirement. Defaults are (or should be) very expensive. So credit worthiness is an important limiting factor to how much money will be loaned out.

            Or should be. You can see that in this model, the game would be to push default risk off on some one else while writing all the loans you can. And if you can shift the risk at a low enough price, then you can write a huge number of loans. And if you could some how come up with a way to actually make money while shifting the default risk, well then there is no limit to the amount of loans you could write. In such a world, a tiny bank could become a giant virtually overnight.

            Welcome to the real estate bubble.

          13. Deus-DJ

            Response to Jake Chase:

            “The mistake made by all conventional economists, including Krugman, is that bank lending is constrained by deposits. It isn’t. Bank lending is constrained only by reserves, which are independent of deposits. It is that simple. Reserves are supplied not only by deposits in the banking system, but also by the financial markets and by the Fed.”

            Deposits are reserves Jake. They think bank lending are constrained by RESERVES, hence they think the reserve requirement and hence the money multiplier is operative in constraining bank lending. Rather, the only thing constraining bank lending are any regulations and capital requirements. Yet financial/accounting innovation has done away with capital requirements acting as any sort of constraint anyway(well at least until the crisis hit).

          14. SM

            Isn’t it that banks just have a pretty good idea of how much its going to cost them at the end of the day to get the necessary “deposits” or “reserves” and make loans accordingly throughout the day? I mean, if a bank found a customer who wanted a $10 trillion loan and they were confident it would be paid back, 6% interest, wouldn’t they then determine whether or not they could get more “deposits” by the end of the day to cover the reserve requirement, by paying for those deposits at a rate of less than 6%? If the amount needed to be borrowed from other banks (“deposited” in their institution by other banks) was so large that the interest rate increased so 6% was no longer profitable, wouldn’t they then forgo the loan?

            What is the difference between a “deposit” from a average joe and a “deposit” from another bank when meeting “capital” or “reserve” or “deposit” requirements?

            And if the fed has a reserve requirement at all, which i’m told they do, wouldn’t that constrain the entire system, even if each individual bank doesn’t look at the vault in the morning? That they just used the interest rate as a proxy for how constrained the system is due to the reserve requirement?

            I guess i’m saying, is the reserve requirement a “limit” to how much the banks could create in total, and the closer they get to that amount collectively, the higher the interest rate gets, if the “limit” isn’t changed? And right now, we’re in a different positon, where it seems any bank could make any loan it wanted and find unlimited “reserves” – but isn’t that a function of being no where near the limit the fed has imposed because the economy is so bad? Not that there *isn’t* a limit?

            I mean, do you all think when the econmy is doing better and banks could write trillions more in what they perceived to be profitable loans, do you think the fed is just going to toss the reserve requirement altogether and allow unlimited money creation? Don’t they get to choose the “limit” on the monetary base, systemwide? Banks will be able to “force” the fed to keep pouring out enough money so there are always “reserves” available for any loan they want to write?

          15. Chris Cook


            In fact banks can and do create virtual cash out of thin air a great deal of which is not actually the object of loans.

            This is the cash which they create and credit to the accounts of staff, supplies, management, and shareholders (for dividends). This cash is credited as a demand deposit to the accounts of these bank stakeholders.

            Most important of all private banks also create the credit/virtual cash which is used to acquire Treasury debt and thereby funds public spending.

            In this way private bank undated credit – which is a look-alike (some might say counterfeit) of Treasury and Central Bank credit replaces what is not in fact Treasury debt, but is in fact dated Treasury credit.

            At least the money which is created and then lent is backed by the loans. But there is nothing backing this money at all.

            In the UK the very name ‘gilt-edged stock’ for Treasury funding gives the game away. Stock was for hundreds of years the undated credit issued by the Exchequer and returnable in payment of taxes. Gilt edged stock is simply dated interest-bearing stock ie a credit instrument.

          16. Mansoor H. Khan

            Chris Cook said:

            “At least the money which is created and then lent is backed by the loans. But there is nothing backing this money at all.”

            Loans don’t back new money created by banks. Performing businesses creating goods and services back all spending.

            Future capacity to produce goods and services back all future spending.

            We could simply send checks (without any loans) to US citizens and let then spend until inflation is observed (that is until the economy heats up too much).

            Ever heard of social credit?

            By the way I think with peak oil here we will have to do reverse of social credit. That is we will have to start taxing high spenders to control inflation and to maintain social stability.

            Note that the banker’s stupid game justified by double entry accounting works as follows:


            There is absolutely no need to have to loan money into existence to issue new currency.

            mansoor h. khan

          17. Kukulkan

            Nathan Tankus said:
            you misunderstood. what you are describing is counterfeiting. a bank can’t just create 10 dollars and keep it.

            Why not? If they can create a hundred dollars to lend out, they can create ten dollars to keep as the reserve to back the hundred dollar loan. It’s not as if they’re doing anything with that ten dollars; it just sits in their ledgers as the reserve.

            You talking as if the difference between the two is obvious, but it isn’t. If creating the hundred is possible, so is creating the ten. If one is counterfeiting, so is the other. If all that happens is one bank creates the hundred and another creates the ten, then all that’s happening is that the process is being spread around to create complication and obscure what’s going on. In the end though, the bank(s) are just creating $110 out of thin air and there’s nothing to constrain them from doing so.

            if one tried (besides going to jail), it would now own a hundred dollar deposit it owes to itself (non-sensical) and owe 100 dollars in a loan to itself (again, non-sensical).

            You’ve completely lost me here.

            The hundred dollars is lent to someone, we’ll call them Patty. Patty has a hundred dollars; she might deposit that in the bank, but taking a loan just to deposit it in a bank strikes me as strange behaviour. Why would she do that? More likely, she will use the hundred dollars to buy actual goods and services, in which case whoever supplies the goods and/or services — we’ll call him Dave — will get the hundred dollars and while Dave might deposit it in a bank, that deposit would be unrelated to the loan the original bank made.

            So at the end of the day, Patty has a debt of a hundred dollars and a hundred dollars worth of additional goods and services, Dave has a hundred dollars on deposit and a hundred dollars less of goods and services, and Patty’s bank has ten dollars on reserve.

            This is like saying “i promise myself a 100 dollars”. you haven’t created money. you haven’t even created a liability (unless you have multiple personalities. making promises to yourself does not increase your access to money or resources.

            You keep losing me at this point.

            If I get someone else to dig a hole, I end up with a hole. If I dig the hole myself, I also end up with a hole. The existence of the hole in no way depends on the number of people involved in the transaction to create it. If it’s just me, the hole still exists; if it’s two people, the hole still exists; if it’s an entire family, community, company or crowd, the hole still exists.

            Why is this other process dependent on the number of people involved?

            Even things like reproduction which normally take two individuals can be done solo — parthenogenesis, cloning.

            So what’s the constraint on this process of money creation? If it’s possible, then I don’t see why it’s dependent on having multiple parties involved.

            If bank A creates $55 out of thin air, $50 to lend and $5 to deposit in bank B; and bank B creates $50, $50 to lend and $5 to deposit in bank A; then at the end of the day, both banks have created $110 out of thin air (as in the original example), only now your more-than-one-person-must-be-involved–in-the-transaction requirement has been met. The practical difference between the two scenarios is pretty much non-existent; there’s still $110 dollars in existence that there wasn’t at the start of the process.

            As far as I can tell, the fact that counterfeiting is a crime means that it is possible, it’s just frowned upon. After all, they don’t make laws against things that are impossible; they let the fact that they’re impossible prevent people from doing it.

            If banks (either individually or collectively) can create money out of thin air, then what prevents them from doing so in limitless quantities? How is it possible for banks to go bust – that is, have insufficient money to cover their needs?

            It just doesn’t make any sense. And the explanations being offered aren’t helping.

          18. Kukulkan

            Sorry, the example should read:

            If bank A creates $55 out of thin air, $50 to lend and $5 to deposit in bank B; and bank B creates $55, $50 to lend and $5 to deposit in bank A…

      2. Mansoor H. Khan

        kulkulkan said:

        “they can create ten dollars to keep as the reserve”.

        Only the Federal Reserve Banks can create reserves. Citibank or Chase cannot create reserves. The currency issued by Citibank cannot be used to satisfy liabilities to Chase or Federal Reserve Banks.

        mansoor h. khan

    1. Rodger Malcolm Mitchell

      The limit to bank lending is bank capital, not reserves.

      Krugman doesn’t understand, or refuses to understand, Monetary Sovereignty. His Nobel was a sad joke — a backward step for economics.

      Rodger Malcolm Mitchell

      1. jake chase

        The limit may be capital but the capital rules make it endlessly expandable for major banks. That was part of the problem with securitization. Basel II was a license to print money. Major banks now lend mostly overnight to hedge funds through repos and other slightofhand transactions. That is why we keep having asset bubbles. As always, the devil is in the details.

    2. pebird

      Banks only have to possess reserves, they do not need to own them. So they can borrow the reserves, the cost of which determines the profitability.

    1. Anon

      An note on title :
      “Sveriges Riksbank Prize Winner in Economic Sciences in Memory of Alfred Nobel” Paul Krugman

      is more precise than Nobel Laureate Paul Krugman

      the bank is the prize giver, not Alfred Nobel.

  2. rgcnyc

    Krugman misquoting people to elevate himself is nothing new. I was at a talk where Krugman disingenuously misquoted Milton Friedman, saying, “Milton Friedman said the Fed shouldn’t exist *and* that the Fed did not do enough to prevent the Great Depression”, and PK went on to say that this showed Friedman was delusional. What Friedman said was that *since* the Fed existed, it should have done its job and provided greater liquidity at the beginning of the GD.

  3. snowedin

    As a banker for more than 30 years, I am pretty shocked at how little the economist-intelligentia understand the real world of finance. There seems to be a huge chasm between “theory” and how things really work.
    All the “theory” about reserve requirements, money “creation” (out of thin air? come one!), the Fed’s role (minimal impact), money supply. Money multiplier, On and on.
    Why has it become so?

    This business isn’t rocket science. Sure, there are some complex finance structures devised, but those are details that don’t change the fundamentals.
    Professional macro economists could all use a heavy dose of roll-up-the-sleeves and work in our world to fully grasp how banking and finance not only operates, but it’s impact (good and bad) on the macro side.

    At the same time, I think banking and finance itself has become so compartmentalized with many groups of specialists, that few in the industry can also see their own macro view.

    All in all we have a pretty nasty combination of the blind leading the blind. Not a good situation when there are so many deep economic and finance based problems to deal with.

    1. Lambert Strether

      What I saw in Fullwilers’s piece was a careful exposition of the real operation of the banking system. What I saw in Krugman’s response was a diagram. Sure, I’m not an economist, and form’s not substance, but still…

    2. Anon

      Saw Steve Keen speak tonight at the London School of Economics, he made your point precisely – that banks know nothing these days about investing in real-world innovation, and have little inclination to do so.

      Inflating serial asset bubbles – telecoms, dotcoms, housing – is much easier, and much more lucrative.

      Keen also did a punchy thing with his hands when Krugthulu’s name came up, to show they are involved in a bit of scrap at the moment; Keen, exasperated, says he is quitting, though, while mentioning that Mark Thoma has now also joined in.

      So Twitter is the locus for the war presently being fought for the soul of economics, who’ve thought? (Which made me think, as a long-term disparager of the Twatter medium, what a perfect instrument for the symposium it in fact is.)

      Keen, who has a terrifically dry wit, is threatened to turn his attentions to Hayek next.

  4. Middle Seaman

    Well, we finally got to name calling. I know absolutely nothing about banking or finance. I read this blog for it seriousness, honesty in economic issues, his correct portrayal of our current economy, the thorough report on the dysfunctional of the government and WS and for its great coverage of the housing disaster and atrocity.

    I am no fan of Pilkington. I find his writing unclear, pretentious, not always well grounded and somewhat arbitrary. I do my best to stay away from his posts.

    Krugman is sharp, clear, straight and mostly convincing.

    I have no idea who is right or may be neither or both. I wish the comparison was better done by a neutral party.

    1. Philip Pilkington

      Don’t let your love for me ruin the party. Click on Krugman’s post. It’s still up. Then click on Keen’s and see if Kruggie engaged in a stitch up. My guess is you’ll find that he did.

      Krugman’s perceived clarity often comes at the expense that he buries contrary arguments, ignores critics and has a terrible tendency to oversimplify. I think the Keen debacle has made some of his readers aware of that…

      1. Joe Firestone (LetsGetitDone)

        PK works hard at over-simplification because he thinks false clarity trumps truth. Einstein said “Everything should be made as simple as possible, but not simpler.” Unfortunately Krugman makes it simpler, figuring that his Krugbots will believe him anyway.

      2. JurisV

        I’m one of those readers of Krugman that have been chastened in my trust of Krugman — and have learned a lot from this “debacle” about Krugman.

        However, I don’t think Krugman did it on purpose — more of a problem with our dear friend, hubris, instead:

        What I’ve learned from this incredible story is that we all are susceptible to cognitive liabilities — even people in elite positions. Our brains have the feature of making assumptions to speed up the calculations, but that also means that we are susceptible to “jumping to conclusions” that are wrong. I personally have to work very hard (and develop habits) to stop and think a bit more, especially if something seems very obvious and simple. It’s sad to see Krugman’s inability (lack of courage ?) to admit he’s human.

        The best place to understand the scope of the argument is Steve Keen’s blog — with a panoply of appropriate links:

        I have to thank you Mr Pilkington your interviews and articles here inspired me to dig into economics and allowed me to at least have the beginnings of understanding. Please — more interviews!

        1. JurisV

          OOPS …. I should have included a statement that reads:

          It doesn’t really matter if he didn’t do it on purpose; the result is still a travesty. I have always believed that the purpose of academic intellectuals should be “a search for truth.’ Krugman appears to be very lacking in that characteristic when questioned by colleagues. Very disheartening.

    2. vlade

      You’ll find on this blog that I had a number of problems with various post from PP – but that means zilch in Krugman/Keen argument.

      Krugman is misquoting, bending what he said before, and in general engaging not so much in a discussion as in defense of his world view at all costs (when you see in his post progression from (vague recollections, not direct quotes despite the ” marks) “banks don’t create money” to “I didn’t say banks don’t create money, they do but I said it’s deposit limited” to “it’s really reserve limited” to “it’s CB target rate limited” and similar.

      1. Rodger Malcolm Mitchell

        Bank lending is capital limited, not reserve limited. Krugman has been told that hundreds of times. He is clueless about banking and Monetary Sovereignty, despite all our best efforts.

        August 15, 1971 didn’t happen in Krugman-world.

        Rodger Malcolm Mitchell

        1. Rcoutme

          For those of us who are not uni-trained economists, please clarify:

          Reserve limit would be the amount (at any given time or in the morning of doing business) that the bank has listed in its account at the Federal Reserve?


          Capital Limit would be (more or less) the amount of all the assets the bank has?

          I am guessing that SOMEPLACE this will not include loans receivable, since that would mean that the bank could lend and lend to its heart’s content provided the loans were actually getting paid.

          1. Nathanael

            Correct clarification. Loans Receivable DO count as assets for capital computations, however.

            This is why failing to write down loans can allow banks to pretend to be solvent when they’re not.

  5. snowedin

    gets most of it right, such as:
    “banks create loans based on the demand by borrowers, perceived profitability, and capital they are holding” here he nails it.

    His “digression” into the volume of intraday payments settlement is not entirely relevant. The numbers just represent churn in the system, and yes the central bank needs to ensure liquidity for all the banks to net out their positions. But largely banks do this among themselves without having to go to the central bank window (until lately in liquidity crunches in Europe when banks don’t trust each other to pay back the intraday loans). This further strengthens his arguments about the role of reserves.

    The vault cash and “withdrawals” topic is a non-issue and clutters the overall gist of the arguments. So little of modern finance operates with cash it’s less than a rounding error.

    Lastly, where Fullwiler writes “Banks are not constrained by deposits whatsoever, but the quantity of deposits they can raise after making a loan to replace a withdrawal will affect the profitability of the loan.”
    Not so fast here. I can’t lend money unless its funded BEFOREHAND. As a banker I am most certainly constrained by deposits (i.e., my funding source). If the cost of raising funds (deposits) is prohibitive relative to the price I want to charge on the loan, I can’t make the loan (I’ll lose money). For instance, if I rely on interbank deposits (and not “free” consumer balances) and a AAA-rated company wants to borrow money I might not want to accept to lend regardless if there were plenty of (expensive) deposits available.
    If the supply of deposits is unavailable to match the type of loan I want to make, I surely can’t make the loan (unless I want to run a asset-liability mismatch). For example, if a company wants a 10-year loan but I can only attract short term deposits to fund it, I will certainly decline to lend the money (because the customer will surely not pay me for the funding cost mismatch!).

    1. gyges

      thank you. i had just asked you above if you could explain it, and i hit [submit] only to see this. very interesting.

    2. Philip Pilkington

      I think that is in keeping with what Fulwiller and the endogenous theorists say. They say that the central bank sets the price of reserves by intervening in the interbank lending market.

      You, as a banker, then make your decisions based on — as you’ve said — (a) the creditworthiness of the borrower and (b) the ‘price’ that the funds are ultimately going to cost you relative to the profit you think you might earn.

      1. jonboinAR

        And that is a constraint, no? And that constraint is caused by deposits, whether they are cheap or expensive. So deposits ARE a constraint. The main arguers have spoken too much in absolutes, so what they literally say isn’t completely the case, and they lose their point. There’s some arguing past eachother going on.

        1. Nathanael

          No. Deposits are not a constraint on lending. Federal reserve rates are, but only over the period of many many months, and only because they set the minimum rate the bank can charge and still make a profit.

          The price of deposits is usually set by banks — they are generally “price makers”, not “price takers”. How often do you switch banks to get better interest rates on your savings account? Hardly ever? Exactly.

          The volume of deposits determines whether the loans are highly profitable (backed by 0% deposits for regulatory purposes) or less profitable (backed by Fed and interbank loans at a higher rate).

    3. Nathan Tankus

      Fullwiler of course knows that the expected profitability of the loan is a central part of the loan decision.

    4. vlade

      You don’t have to fund beforehand – all you need to do is have the money when you settle, which is different. You can make a loan and then repo a dead cat to your friendly CB to get the funds the same day (T+0), which satisfies pretty much any loan you might have made that day.

      You’re right on the profitability – which is why the lowest-cost-of-borrow is your boundary condition, and that tends to be the CB repo (although that’s not as often the case as it used to be, since not everyone has access to CB repo facilities. Still true for “unlimited” quantity of funds though).

      Re the asset-mismatch, that’s a way of life, and what the treasuries (as in department in the bank, not the paper issued by UST) are there for. You can lock your funding level long term even using short-term CB repo facility, say by doing an OIS (Overnight Index Swap). The curve on those runs out quite a way, although the most liquid part is (as usual), the shorter end.

      1. snowedin

        Vlade – my point was before a loan is made, the bank needs to understand whether it can fund it (the part of it needed to be raised externally versus the internal free cash) at the cost necessary to make the returns. That is the “beforehand” part. Settlement is separate. Sometimes the bank can’t even raise the money – especially for long term. The swap rate may be prohibitive to pass along, and there might be no counterparties willing to take the risk.

        ALM is never perfect, but the costs of mis-match may prove to be too high preventing me from lending out money (because the customer isn’t willing to cover the swap costs of my gap). Sure, it refers to the longer end, the short end is very liquid.

        Bottom line I still have constraints foremost on the quality of deposits I can get my hands on, and sometimes the quantity. I think overall Fullviler means this.

        1. vlade

          Ok, now I understand where you’re coming from. I believe we’re enough on the same page as not to make it worthwhile arguing over details vs. the larger picture of PK(+NR) vs SK (et al).

          1. Nathanael

            Except that the bank literally doesn’t work that way. Bank loan officers do NOT check the bank’s current access to deposits before deciding whether or not to make loans.

            The banks decide whether or not to make loans based on other factors, and then offer the borrower a rate which is based on the most recent fed funds rate plus a chosen profit margin. The loan officers don’t even check whether they’re issuing too large a volume of loans to be covered by deposits.

        2. Gizzard

          I think you are looking at it in a “too micro” way snowedin. Yes a particular bank within the system may not be able to loan because of the constraints you bring up but the loan can still happen somewhere and the level of loans overall is not determined by the level of deposits overall. Collectively banks can never run out of money to lend nor do they tie their level of loaning activity to the level of saving via depostis in the system.

          Its clear to me that banks simply operate like that commercial for AG Wentworth. If you have an income stream that looks like it will be steady for 20 years, a bank will loan you a lump sum of cash against that stream and take a percentage from it for the next twenty years. It doesnt require anyone else to have any savings only myself to have an income and collateral. They arent lending me anyone else money, they are forwarding me mine.

          1. F. Beard

            They arent lending me anyone else money, they are forwarding me mine. Gizzard

            No. What the banks lend you is your own stolen purchasing power by creating new, temporary money – so-called “credit”.

            If the banks lent out of their own capital, they would be doing as you say they do.

    5. F. Beard

      But largely banks do this among themselves without having to go to the central bank window (until lately in liquidity crunches in Europe when banks don’t trust each other to pay back the intraday loans). snowedin

      I suspected this. Ellen Brown says that the banks often borrow back their net liabilities to other banks. Thus one bank may make the loan but many banks share in the interest SO LONG as the economy is doing well and the expectation of loan repayments is high.

      So the banks act as one giant bank during the boom but then disintegrate into a distrustful pack during the bust.

      1. snowedin

        yes, and the CB picks up the slack as lender of last resort. And when TSHTF they have to print money (QE, ECB LTRO etc) to keep the banks liquid. Whether the banks need the money to lend to customers is irrelevant.

      2. Leverage

        Yep, it works until it doesn’t. Banking systems work wonders and does not need a CB at all to create credit money while asset prices keep going up (or at least not going down). But when balance sheets go ballistic underwater CB’s have to plug in liquidity to stabilize the system.

        Is “designed” to fail when there is no sufficient inflation growth, you don’t even need negative growth (oxymoron) or stagnation for it to fail (no real growth is even worse, as it makes the complete capitalist model to fail, not only financial systems, because falling rates of profits and crashing demand).

    6. Scott Fullwiler

      Hi Snowedin,

      You write, “If the cost of raising funds (deposits) is prohibitive relative to the price I want to charge on the loan, I can’t make the loan (I’ll lose money).”

      In fact, I was explicit on more than once occasion in the paper that this is most definitely the case. I agree completely.

    7. Scott Fullwiler

      “His “digression” into the volume of intraday payments settlement is not entirely relevant.”

      In fact, it’s perhaps the most relevant point for understanding why the central bank necessarily accommodates aggregate reserve demand. It’s well established in literature on the payments system that this is an absolutely fundamental point of central banking–the central bank accommodates the payments system by defending its target rate every day, every hour, every minute. This is not controversial.

      1. snowedin

        Hello Scott.
        I don’t disagree that the function is important to grease the wheels of finance as it were. There are privately run real time gross settlement systems (eventually on a net settlement basis settled at the CB) that do this too. Value wise, the biggest systems don’t touch the CB’s (example, netting FX) until a net settlement. That net settlement in Fedwire are only a few transactions. The velocity of money, despite being multitudes of annual GDP every day does nothing in terms of bank’s abilities to fund their operations or lend out money. It’s just a lot of transactions. Unless of course the machine breaks down. Which is never has. To my knowledge, there has never been a settlement failure.

        But the impact on this function is, in my view, not very material to the ability for me to raise the money I need to satisfy my customer’s borrowing needs. It provides a short term reference rate that goes into the overall cost of funding equation as one of many variables. Thus it is irrelevant to my decision to lend money (a risk/reward decision), or ability to raise money to fund it. That is, as long as my customer is willing to pay the spreads and I have access to the funding.

        Regardless of CB payment settlement or money velocity, the CB can always set a reference rate that discourages lending. They can set short term rates so high that companies can’t afford them (or for the bank’s own internal funding needs).

        1. F. Beard

          But the impact on this function is, in my view, not very material to the ability for me to raise the money I need to satisfy my customer’s borrowing needs. snowedin

          One of the ironies of banking is that a bank can borrow back the money (“credit”) that it has created itself via interbank lending. So from your perspective you are legitimately funding your loans but from an external perspective the banks are a counterfeiting cartel.

          1. snowedin

            Counterfeiting is too strong a word, or the Secret Service will be all over this. The more appropriate description is a Ponzi scheme. Just using someone else’s money. It goes with the fiduciary responsibility.
            I’ve got more true sarcasm if you need it….

          2. F. Beard

            Counterfeiting is too strong a word, or the Secret Service will be all over this. snowedin

            Bank credit is even worse than limited counterfeiting since SOME money creation is beneficial but ever increasing debt isn’t. Also, counterfeiters may produce price inflation but they don’t create the boom-bust cycle like banks do.

          3. Rcoutme

            Dang it! I thought I was finally following this and now you enter this realm! If Bank A creates a loan to Bank B (100W) [where W is whatever currency you like], and then Bank C loans 100W to Bank A, while Bank B pays Bank C 100W for some reason or another…what? 100W is created, but Bank B still has a net liability to Bank C through Bank A, right? So no money has been ‘created’, since there is an outstanding debt to be paid.

            Meanwhile, sooner or later, somebody will have an account adding 100W and the loan will need to get repaid–thus the debit and credit part of the balance sheet, right?

          4. F. Beard

            So no money has been ‘created’, since there is an outstanding debt to be paid. Rcoutme

            “Money” (so-called “credit”) has been created. It spends even better than paper currency. Yes, it is temporary since it must be repaid but in aggregate the level of credit debt must continually increase so that the interest on existing debt can be paid. Eventually, the debt becomes unpayable and the economy crashes. Or, the Federal Government must spend the necessary interest into existence.

          5. Nathanael

            It’s important to understand the relationship between debt and money. The statement “no money has been created because there is a debt to be paid” is as wrong as wrong can be.

            Debt and money are approximately the same thing; closely related. *Creation of debt usually means creation of money*.

      2. Scott Fullwiler

        I don’t disagree too much, except that Fedwire is actually quite a bit more important than you suggest (prior to 2008 when reserve balances skyrocketed, the Fed was making on average $50 billion in Fedwire overdrafts to the banking system each minute), but certainly the sum total of the netted payments is bigger than Fedwire. Note, though, that the big point in this debate is the implication for monetary policy, not so much the implication for an individual banker—Krugman said that several times himself. It’s important to understand the individual banker, but what’s important to the individual banker doesn’t necessarily add up as the sum of the parts when it comes to monetary operations of the central bank.

        1. snowedin

          Maybe. I was looking at this from a collective banking industry point of view, using my generic specific view as a proxy. Don’t get me wrong, monetary policy is worth paying attention to, but overall I don’t think bankers think about it too much since it doesn’t impact their business in any real meaningful way. Of course its good to have a backstop if need be, that is the real value of the CB.

          But does it impact the ability of banks to lend money? not much. Funding sources are very diverse and the reliance on CB money in total is small (unless the CB is acting, like the ECB, as backstop liquidity provider).

          I can only recall once when monetary policy really impacted banking. Back in the early 1980’s when short rates shot up to 18% thereabouts. It was nearly impossible to extend credit since customers couldn’t afford it. But with some clever engineering via offshore petrodollar recycling, it proved very doable (and the Fed “won” the inflation problem, eventually).

          The Fedwire sums you mention are small comparison to the “off the CB system books” flows. About 15% of USD transfers happen via Fedwire. Therefore, the funding mechanism insofar as monetary policy is concerned, plays a minor in the banking system.

          1. Scott Fullwiler

            OK, I have no problem with any of that, and it generally supports my views and my post from yesterday. Regarding Fedwire, yes I understand well its role in the overall payments system; even as it is 15% of daily payments, that 15% is also about 15% of nominal GDP. We aren’t talking about chump change. And note that I did mention in the piece that the Fedwire transactions are in many cases settling transactions that are netted on other payments systems; further, that also means Fedwire is that much significant in the sense that the netting clearinghouses rely on the safety and guaranteed settlement of Fedwire ultimately.

        2. Yves Smith Post author

          With all due respect, I think you have this all backwards as regards Fedwire.

          The private netting systems DEPEND on being settled at the end of day by a central bank backed system. There isn’t any way to innovate around that. The dollar volumes don’t speak to the real significance.

          1. snowedin

            I think the whole topic of payment systems is a bit off topic as to the monetary theory debate. So what has this to do with monetary policy effectiveness, banks being able to fund operations, and capability to lend out money?

            There are three U.S. banks who together settle more payment transactions between themselves and inside their own shops (between customers and internal units) with both transaction volume and value greater than all of Fedwire, and none of them need to go through final settlement at the Fed (there is nothing to settle….), none of this ever sees the daylight of the Fed’s operations. And when you factor in other currencies like EUR and GBP, there is a “shadow” internalized payments system (and of course liquidity/funding source) that never, ever, is settled (finally) via the central banks in question.

            The Fed and ECB only provide funding when needed and act as final backstop. Good idea, but to the few banks that sit on 80% of the world’s money flows, CB operations don’t really matter, since the CB never sees most of the money.
            More than happy to continue discussing this on another thread.

          2. Nathanael

            The significance is this: without the Fed backstop, banks actually WOULD sit on large vaults of cash, gold, etc., for fear of bank runs and bankruptcy. They WOULD count their deposits before making loans.

            But since the Fed backstop was created, they DON’T. The behavioral change is very significant.

        3. Rcoutme

          They could not have been making $50 billion a minute. Did you mean per week, per year?

  6. sissy

    Bernanke and his pals at Wall street are laughing their butts off, so is Timmy Geithner and Obama as he scrapes in the big dough from Goldman Sachs, Jamie Dimon and other such firms. Obama’s got his billion dollar fund to think about and run for relection at all costs, including the people who worked so hard to put him into the White House and of course the formerly know Middle class of our nation. Now these people are wondering who the hell they elected? I am too, I worked to get him elected. Obama still supports Bernnake and Wall street, no doubt about it. Big Pharma too, they are raking in the dough from their drugs filled with poison like Levaquin and other Quinolone drugs. These drugs kill people and there is know know cure. It crosses the blood brain barrier and attacks the Central Nervous Center, the Phipheral system and causes huge sweeling in your feet, knees and also the microskeletal system throughout your body, including your brain. It causes nerological damage that is devasting and confusion that is beyound destription. The reason I know is I took the drug atfter I had a uti that would not go away. All the doctors I saw knew I was taking the drug and ignored me, patting me on the head and pretending they didn’t know anything about the drug. Liars. They know all about this drug, it’s had a black box warning on it for three years from the FDA, and it’s not even on the literature the pharmacies give you anywhere. Who are these doctors and pharmacies working for? You guessed it probably the drug companies. 80 percent of the doctors in our country are on the take, taking huge vacations from the drug companies at our expense and they don’t care, they really don’t care. I was poisoned by Levaquin and it has 50 symptoms that are unbelieviable and paintful including loss of sight, heart attacks and death on the emergency room tables. They fall into a coma never to awaken again. Their poor families, having go bury them with money they don’t have because of you auterity economy. Right, sure, while Wall street parties like it’s 1999 and drinks champayne from the balony watching Occupy Wall street from below marching in protest. What a joke. Obama works for Wall Street and so does Bennake. Remember when Alan Grayson questioned Bernake on Utube: check it out, Bernanke is lying through is tiny little teeth and perfectly trimmed beard looking like he doesn’t know a thing Grayson is talking about. And then there is the big Fake Audit, that never took place, ever and it never will. Gotta to give it up for Grayson he is such a nasty little tall ferret who went after Bernanke with a blow torch because Grayson made all his money on Wall street and he knows hot things work over there. It’s all rigged and now Americans know it’s all rigged. They are bulldozing homes in Detroit in the poorest neighbors like for the blacks and mexicans and anyone else who is unfortunate enough to live in those areas. Now they are probably living on the streets or their cars, if they have a car that is or living on the streets in card board boxes panhandling for a few bucks to survive another burtal evening on the streets of our nation. Forget the former middle class, now the poverty middle glass. They were the ones who elected or volunteered for Obama, our first black trasformational Presidnent. That’s turned into an ugly joke to. With a one party system, like Gore Vidal talked about there is no difference between the parties, they just pass back the power and put their greedy and heartless little hands from money from the Military Complex, Big Pharama and from the Doctors who work at the HMOs.

    I was poinsoned by a drug called Levaquin and other Quinolone drugs such as Cipro and Avelox, the list is endless. Levaquin passed the blood/brain barrier and attacks the central nervous system, the peripeferiral system and the musculur and bone systems in you feet, knees and hips and entire body. I know because I took Levaguin after an infection I got and all the doctors I saw knew that the FDA had put a Black Box warning on it three years ago, and they didn’t give a shit to dole it out to me and tons of other drugs simailar like Avelox and Cipro and lots of theri endless generic drugs that are 3rd and 4th geration drugs.

    Now there are literally thousands of class action suits all over the country to sue the drug company. Good luck with that because Obama doesn’t give a shit he suported the drug companies way before he got elected and Godman Sachs doing gods’ work and Jamie Dimon are giving him thoudands of dollars.

    Google the thousands of class action suits going on right now against the drug company who makes the drug somewhere in New Jersey. My own doctors ignored my symptoms with swollen feet the size of balloons, knees and hips. my brain confusion which nearly killed me while driving in my care because you only get 2 -to 3 hours a sleep at night if that at all. It causes severe insomnia which faituge, you or others can and forget living a normal life anymore for the next 5 years or more. There is no know cure for the drug, period. People are living in their cars or on the streets in cardboard boxes begging for food and I ask myself, how the hell did this happen to the country I live in.

    I worked for Obama as a volunteer and i for one believed all the bullshit he was espousing about helping the poor and the dis enfranchised . What a crock of you know what? I’ve come to the conclusion just as Gore Vida did; we only work for a one party system. Both parties just trade power and grab all the money they can for the Military Industrial Complex, Big Pharama and from the 80 percent of doctors who are bought off and sold too. They get lots and lots of trips to anywhere they want to go in outside the usa for free while they prescribe these drugs like Levaquin that has over 50 symtoms and I was poisoned by the drug. Now there are thousands of class actions suits everywhere in the country. The drug had a BLACK BOX warning on it for 3 years and the doctors ignored it just as the pharmacies have on the literature they print out. there is something call informed concent between Dr. and Patient where the Doctor eleminates all other causes and I did did the tests that showed on Levaquin could have caused the symtoms I have, which I won’t go into details. People die on emergency waiting tables falling into comas and never waking up. They end up homeless or in wheelchairs begging for food in this country of ours. The drug attacks the central nervous system, he peripheral system and you brains and causes severe nerological damages, it also destroys the heart. Read up on all the thousands of class action suits going on now, and you’ll see what I mean. The drug has 50 symptoms and I have over half of them now.

    Please tell all your family and friends about the drug and other quinolone drugs. You could be saving your life and theirs. The FDA put a black box warning on the drug three years ago and the doctors ignored my system and then I looked the drug up and was horrified to see the 1000’s of class action suits everywhere in our contry going on.

    As Gore Vidal said: We work for a one party system, and he’s right. All they do is pass the power and money back and forth and continue to support the endless endless wars in the middle east for the blood money oil. After all American makes more weapons that any other nation on the earth and we sell the arms to our enemies for the cash to coffer Congress’s many many perks and for the Doctors who prescribe this drug Levaquin, Cipro and Avelox anibiotics.

    Spread the word, the life you save may be your own and those you love. Don’t let them anywhere near these drugs ever.


      1. YankeeFrank

        oh shut up gyges. if someone needs to rant, its their right. The internet is free, and we don’t need petty tyrants vomiting the rules on us every 20 seconds. have some compassion for chrissakes.

  7. But What Do I Know?

    I think Krugman showed his true colors when he entitled his post dismissing this whole argument as “Things I should not be wasting time on.” When confronted with a cogent argument as to why his assumptions are wrong, he engages in some hand waving and cheap debating tricks and then, when called on it, decides the whole business is beneath his dignity.

    Just because Krugman can be right at times doesn’t mean that he is intellectually honest.

    1. YankeeFrank

      He pulls the same crap every time he “bothers” to raise MMT as a topic as well. Disingenuous over-simplifications and insults. The man has no intellectual honesty. His “nobel” and posts at Princeton and the NYT have gone to his head. He wants to change things, but only enough to assuage his conscience for his cheerleading of globalization. He sure isn’t interested in any paradigm shifts.

      1. ScottS

        He’s successfully painted himself into a corner. I just hope it’s finally safe to ignore him like the high-dollar troll he is.

        He’s the “Nobel” Laureate Chief Economist of the Veal Pen where people with good ideas and good intentions waste their breath. He’s exposed himself as ignorant and irrelevant, so let’s stop trying to convince him of anything. <insert quote about convincing someone who's being paid not to understand something>

  8. BT

    Nick Rowe admits his mistake:

    Nick Rowe on April 3, 2012 at 4:49 am said:

    Just for the record: I did not email Paul Krugman. That’s not what “Nick Rowe sends me to…” means. Any “communication” between me and Paul Krugman is right there on the blogs.

    Yep, I learned later that Steve Keen had partly qualified what he had written a few paragraphs further down. I should probably have kept reading rather than getting mad at that point, stopped reading, and firing off my comment.

    1. Lambert Strether

      PPE comments:

      Krugman took the time to read through Rowe’s comments thread and then did the dreaded repeat, re-use, recycle (RRnR) without checking the primary source.

      That’s not the first time that Krugman’s gotten in trouble by failing to cite to primary sources on MMT. Call me old-fashioned, but I’ve always preferred “Professor X is a poor scholar” to “Professor X is no scholar” in academic controversy. Scholars are cited to, after all.

    2. sumo

      “hubris” and “incompetence”? Aren’t these pre-requisites for success as a celebrity economist? Paul Krugman, leading by example.

    3. sumo

      “Yep, I learned later that Steve Keen had partly qualified what he had written a few paragraphs further down. I should probably have kept reading rather than getting mad at that point, stopped reading, and firing off my comment.”

      Reminds me of the twitter skirmish between Roubini and Jim Rickards over the latter’s book “Currency Wars”. Roubini tried to trash the book based on what he assumed was Rickard’s position on the Gold Standard.

      It turned out that, not only did he misrepresent Rickards, Roubini misrepresented in a way that showed he hadn’t even read the book.

      Was is it with Celebrity Economists that that can’t even be bothered to read the source material?

      1. Travis

        Had he been a mensch he would have simply acknowledge he made a mistake and apologized to Keen particularly because the nature of the attack had nothing, absolutely nothing to do with the debate between endogenous and exogenous theories of money, central banking and the power of monetary policy. The attack was purely personal from the get go. It was designed to undermine the reputation of an opponent in a debate not the argument. The whole enterprise was shameful from the start. It was made that much more by the fact that they got it wrong. Rowe has apologized for getting it wrong.

  9. joebhed

    The really informative stuff is persona-resistant.
    It doesn’t matter who said what to whom.
    What matters is what IS.

    Either what has been written about money creation under Modern Money Mechanics by the Fed for 50 years is correct, or not.
    Regardless of what the economists think happens, or the bankers think happens.

    What it says is that banks create money when they make a loan ex nihilo – out of nothing – and then obtain the ‘required reserves’ afterward from other banks or the CB.

    If this is actually debatable, then bring in the Fed banker-economist.

  10. erichwwk

    For the record, to put the 65 comment cut off limit applied to the last Keen post (mine was not posted) in perspective, his current redemption post to rally troops via his “House Republicans are both irresponsible and dishonest” post is 715 posts.

    {The last sentence in the post, PinkSlime Economics]:

    “For a lasting budget deal can only work if both parties can be counted on to be both responsible and honest — and House Republicans have just demonstrated, as clearly as anyone could wish, that they are neither.” ]

    1. Chris Sturr

      I’m not sure it makes any difference, but the last Keen post was to his blog, whereas the Pink Slime piece was his column. So he may not be in control of the comments on the latter.

  11. craazyman

    Getting to the Bottom (no pun inteded) of This

    OK. Professor Keen in his paper linked up top that started it all does use the phrase “arse about tit” and gets more than a little snarky about Professor Krugman’s model.

    So if Professor Krugman implies something about the function of the buttocks, in response, I think we have to consider that to be fair game.

    They created the Fed out of nothing too. They also created the Treasury department out of nothing. Everything comes from nothing and goes back to nothing. It’s, like, whoah — weird — when you think about it long enough. :)

    1. Anonymous Jones

      Oh, my dear friend, we must listen to Lear lest we fall into the same madness that plagued him. “Nothing will come of nothing. Speak again.”

      [By the way, this whole thread is *HILARIOUS*. Comment after comment debating back and forth about something that is so “obvious” that PK must be intellectually dishonest to disagree about it. You people are *so* dialed in and so much smarter than the rest of us. I don’t know how you put up with us simpletons who bested you on every objective test there ever was.]

  12. MacCruiskeen

    “I think most people come to think that Nobel Prizewinners are careful, reasoned, scientific types who would never tear a quote out of context to stitch up an intellectual opponent.”

    We expect this if they are reasoned scientific types, since that’s what the Nobel prizes were supposed to honor originally. But the prize for economics is an add-on paid for by a bank in the hope that some of that sciency glow would rub off on economics. This is a pretty good example of why that is a pipe dream.

    1. jake chase

      After all, it’s just dynamite money. Why make such a fuss about it? They gave BHO the Nobel Peace Prize. It should have been the George Orwell Peace Prize. Maybe they’ll change it. Then we could have the Aristotelean Physics Prize, the Old Testament Biology Prize………

      1. MacCruiskeen

        Economics is simply the continuation of political intercourse with the addition of other means.

  13. joecostello

    Krugman is a hack, that’s why he writes for NYT op/ed. He got to his position in life by being a “liberal” shill for the corporate globalization game, and got his Nobel for his attacks on W on the back page, while his publication with Judith Miller and others was helping lead the country into the bloody fiasco in Iraq.

    Krugman has never understood doo doo about money, his job is to keep the “liberals”, especially the ones who think they’re smart for reading the NYT constrained and supporting the processes that make a mess of things, and oh they love him so.

  14. Steve Roberts

    I’m not a fan of anyone that sways their beliefs and ideals to fit those of a political party. It’s what is wrong with so many things. Political parties are supposed to be swaying their actions to meet our beliefs and ideals.

  15. Jim

    Having enthusiastically followed this debate, I am surprised no one has made the following points:

    1. Steven Keen is beginning to receive at least some of the attention he deserves. For he is doing nothing less than destroying mainstream macroeconomics.

    2. Krugman can do no other than defend his stated view of banking. For surely he is smart enough to know that if he admits defeat, then his IS-LM model fails (which predates Keynes and which its author Hicks has utterly disowned as an acceptable macro model), and if his IS-LM model fails, Keynesian macro fails.

    THAT is why this debate is so important.

    1. Glenn Condell

      ‘Steven Keen is beginning to receive at least some of the attention he deserves. For he is doing nothing less than destroying mainstream macroeconomics.’

      Yes, and while I have no problem with David Graeber becoming Time Person of the Year, Keen should get the gong for the last decade. Both are on my Mt Rushmore (alongside Yves and Michael Hudson)

      First they ignored him, then they ridiculed him, then they they argued with him, then they accepted him (we’re about three quarters done)

    2. Anon

      Keen is not just going after macro, he’s going after micro as well.

      His aim is to produce a “meterological” economics, capable of modelling the economic “weather” anywhere. This will include variables such as money, debt and the banking sector, which are currently ignored/deemed irrelevant in mainstream, neoclassical macro.

      This means building models based on sound engineering principles, aka stuff that works in the real world, which necessarily means using up-to-date maths – Mandlebrot rather than 18th century Physiocratic equilibrium.

  16. ftm

    I’ve been following this “discussion” and it demonstrates what happens when egos run wild. Krugman who I love but is frequently arrogant, misunderstood a Keen post due to Nick Rowe’s misunderstanding of Keen. And then Pinklington (who is way too wound up over this) has accused Krugman of a stitch up (which I will point out means nothing to most americans -I assume it means frame up). And all this is unfortunate because the argument was finally getting down to the crucial difference between the two sides.

    Krugman believes the quantity of base money is determined by the FED targeting the fed funds rate. Whereas KEEN et al( I think) see the quantity of base money as independent of the rate set by the fed. Or in other words there is no neat downward sloping demand curve for base money.

    Why is this important? No downward sloping demand curve means the fed has no control via the fed funds rate over bank lending.(i.e. credit bubbles are to be expected)

    Unfortunately, due to out of control egos the conversation seems to have ended there. I happen to think that both sides are talking past each other and that there is a reasonable middle position but we’ll never know.

    1. Leverage

      “Why is this important? No downward sloping demand curve means the fed has no control via the fed funds rate over bank lending.(i.e. credit bubbles are to be expected)”

      Yes, good point, so the regulatory & policy framework would have to change to a more viable thing.

      Central planning of rates FAILS, has been demonstrated again & again. So the target should be lending standards (both interbank, and households/corporate) and controlling shadow banking, global financialization and capital flows, stronger capital requirements, etc.

      Also, indirectly means that central banking is quite useless and fiscal operations are way more important at stabilizing the economy (as the only true way to inject or destroy liquidity from the system).

      Bank overlords, off course, would HATE this as their profits would fall rapidly, making banking & finance boring and less leaning to stealing, big bonus and corruption which is rampant right now (and politician muppets also love).

      1. ftm

        Yes , your view is close to mine. But I think it is important to realize where Krugman is coming from and make a distinction between radical and normal fed policy. There should be no doubt that a radical Central Bank a la Volker can dramatically reduce base money if they are willing to engineer a large jump up in the fed funds rate. The crux of the issue is in normal times is the fed willing to step on the brakes hard enough to rein in unwise lending. And the answer is no. And one big reason is the fed funds rate, when used aggressively, is a crude tool. In an economy, where some sectors are booming and some limping along, pushing up the fed funds rate will push the weak sectors into recession while booming sectors barely notice. Hence, the general uselessness of fed rate policy and need for the more specific regulatory measures you outline above.

        And the first course of action in bank regulation needs to be breaking up the large banks into fail friendly chunks.

        1. Leverage

          Completely agreed, changing rates is a blunt tool. Yes, it can do the work, but it won’t make a fine job at setting the broad economy to the right path without sinking half of it.

          Also at this fiscal operations are much more flexible and fine (as you can increase/decrease taxes or set up fiscal advantages to some business over others, etc). Off course not completely free of trouble, first there has to be political will and that’s an other serious limitation, and one MMT usually forgets.

        2. Rcoutme

          Okay, I get that changing the rates is a blunt tool for a diverse economy. What is your alternative, exactly? Should we, as a society, appoint/elect financial wizards to create/destroy tax loopholes and burdens for different parts of the economy? Surely that can’t be. So…what?

          1. Nathanael

            Actually, you make a reasonable proposal. It’s been done before. Under FDR even. Sectors which were causing trouble had government overseers appointed to give them trouble right back; sectors which needed help were given it.

    2. SM

      Wait, so no one disagrees that this is what the whole argument is about? ftm has it exactly right?

      And so if this is true – “The crux of the issue is in normal times is the fed willing to step on the brakes hard enough to rein in unwise lending. And the answer is no.”

      Does that mean what we’re arguing about here is not that the fed doesn’t have control over the monetary base, but that the fed is run by dumb people who refuse to excercise said control correctly?

      I would take that to mean that krugman is right in theory, that we all agree it works how he says, but everyone just thinks the fed is doing it wrong in practice. Am i missing something here?

      1. Binky Bear

        You’ve mistaken the Judean People’s Front for the People’s Front of Judea, who are of course bourgoise poseurs who don’t understand the meaning of the revolution.

        Keen is an obfuscatory writer and Krugman is the famous rich guy on top at the moment. If Keen wrote arguments like arguments and supported them clearly and if Krugman weren’t doing five things at once it still would have devolved into a sixth form girl’s school pissing match.

  17. Sherwood Parks

    Krugman updated his “Oh My” post again with this hilarious bit:

    “Ah, so Keen didn’t mean DSGE — a term that refers only to New Keynesian models — when he said DSGE;”

    Quick research reveals this is not the case at all and that first-phase DSGE models are associated with the Real Business Cycle school of thought. New Keynesians subsequently built upon these models by including NK features like sticky prices and imperfect competition. The book ‘Global and National Macroeconometric Modelling: A Long-Run Structural Approach’ discusses these developments.

    Krugman appears desperate, and also ignorant of the history of economic thought and modelling. He’s reaching for anything that could possibly allow him to ignore Keen’s arguments. But his grasping at straws is pure comedy, albeit particularly dark comedy.

  18. Brett

    Yes this is sad. Reminds me of something that Brad Delong did a while back on Twitter. Glenn Greenwald posted a long blog post talking about why Ron Paul being in the GOP presidential debate was important, and the reasons he gave were that Ron Paul was the only candidate, in either party, that was talking about the dangers of imperialism and war and how our imperialist adventures overseas encourage terrorism, rather than reduce it.

    Delong went on twitter and retweeted a couple of tweets in effect implying that Greenwald was a racist because he supported Ron Paul’s extreme position of ending the welfare state. The retweets said something to the effect of it must be nice for Greenwald, as a privileged white male, to not have to worry about paying for health care or food as he supports Ron Paul’s mission to destroy these government provided services. Of course, Greenwald no where in Glenn’s blog post did he say he supports those positions, and he even explicitly warned how his words would be taken out of context to say that he did just by virtue of calling attention to the fact that Ron Paul is the only anti-war candidate in either party.

    So Greenwald challenged Delong on his retweets, and Delong would not accept that he was way out of line. Greenwald even applied Delong’s own (in Greenwald’s words) “sleazy reasoning”, saying that Delong must (paraphrasing) “support the murder of countless women and children overseas” since he supports Barack Obama.

    Delong got pissed and said he does not support that and childishly called Greenwald a liar about ten times. He couldn’t understand that Greenwald was using Delong’s faulty logic to make a valid point. If Delong can say that Greenwald, by writing a post about Ron Paul, necessarily supports every position Ron Paul takes, then Greenwald should be able to say that because Delong supports Obama, he necessarily supports every position Obama takes.

    The end result was rather than admit he was wrong and apologize, Delong blocked Greenwald and myself (who was tweeting him pointing out how unreasonable he was) and I’m sure anyone else who was in on that spat.

    Krugman is doing the same tactic here. When publicly shown to be in error, rather than engage in a civil matter, he just shuts down discussion. These high profile economists have such fevered egos that they can’t accept it when anyone challenges them and rather than engage they shut it down. The only type of debate they’ll get in is with other respected people of the profession, because those are the only ones they deem worthy. And since the entire profession is built on an rotten edifice, they just continually recycle their own group-think and wrong-headed ideas rather than search for theories and models that work in the real world and represent reality rather than the imaginary world their models describe.

    1. gyges

      I remember that Greenwald-Delong exchange vividly. It was the day I stopped paying any attention to Delong (quit reading his commentary, unfollowed on twitter, flagged him into the mental spam folder).

      This week I’ve done the same with Krugman.

      1. Samuel Conner

        Yes, I too have grown disillusioned with both BD and PK.

        So, will this happen to Randall Wray or Bill Mitchell if they win widespread acclaim? I hope not.

          1. annie

            a few years ago krugman had a blogpost about how economists (certain economists, that is) got the economic crisis wrong. i nominated brad delong. my comment was put up by the blogs editor. next time i looked, my post had been deleted.

    2. Mcmike

      Why should they (greenwald delong) be any different than what goes on in the comments section of many blogs? Sooner or later, it descends into hitler comparisons, and other childish debate tactics, the largest debate being who threw the first punch below the belt.

      Whats different is delong and krugman in this case have brands to protect. Having a brand to protect invariably leads someday to pathology. One day you are confronted with the choice to back down from a mistake or double down (aka sell out). Its perfectly rational to conclude that doubling down makes more sense for the brand. Witness the modern gop. Saying your sorry or wrong provides zero reward. Acting like you are a victim and getting agressive, on the other hand, thrills the bulk of your fans.

      1. Rcoutme

        Time to get one of those signs from Jon Stewart, “I disagree with you, but I’m pretty sure you’re not Hitler” is suppose?

      2. Nathanael

        Actually, that depends whether you’re a *short-term* thinker or a *long-term* thinker. Short-term, defensiveness about wrong thinking is good for the “brand”.

        Long-term, it’s *deadly*. It will kill the Republican Party, and we’re already watching the death throes. A large, long-lasting institution has long death throes; GM has been in its death throes since then 1970s and will probably continue in them for 20 more years.

        The “short term” can last for decades, but eventually a brand which is defensive about being wrong becomes an untrusted brand. Warren Buffett is famous for admitting his mistakes and it’s one of the things which keeps his brand strong.

  19. Hugh

    Some of us have been critical of Krugman for a long time. He is an Establishment liberal which is to say that what you will get from him is the liberal, Democratic, side of the Conventional Wisdom but it is always going to be conventional, within the cadre of what our elites deem acceptable, just the more liberal end of it.

    A few months after Krugman got his Nobel, a couple of us were taking apart Bernanke on a thread Krugman was on, not one at the NYT. Krugman responded that he owed his job at Princeton to Bernanke, which really made his career, and that he would not criticize him. I pretty much realized at that point it was up with Krugman. Since then Krugman has leveled some mild, occasional shots at the Fed but almost nothing at Bernanke, which is extraordinary when you consider the key role Bernanke played in the financial disasters that have hit so many Americans so hard.

    But it is not just that Krugman places personal loyalty to Bernanke higher than his intellectual integrity. That is really just a symptom. It is that his intellectual thought is conditioned and determined by his loyalty to our Establishment elites. Put more simply, he believes in them. He is one of them. Not only is he never going to challenge them in any fundamental way but when push comes to shove he will defend them.

    So I don’t see Krugman’s actions in the current debate as intellectual sloppiness on his part but rather as a class-conditioned response. We should not be surprised that Krugman has behaved this way. What would have been far more surprising is if he had acted in any other way.

  20. DP

    Krugman is an overrated thinker and a nasty little man who won’t let the facts get in the way of any ideological argument he wants to make. Years ago he wrote about how Toyota had built a plant in Canada and would no longer build any more plants in the U.S. because they couldn’t find enough skilled workers; it was when Bush II was in office and Krugman was pounding on how the Republicans were destroying public education. I sent him an email pointing out that Toyota was in the process of building a plant in Mississippi to produce Highlanders and had recently expanded an engine production operation in Alabama. I got an automated email response that he reads his emails but can’t respond to them, and of course he never posted a correction.

  21. joecostello

    The idea that money is random and this is whether you tie it to gold or have fiat currency is rather a big problem for our economic priesthood, sort of like “there is no god.” Especially since they like to consider themselves a science, after all, if the measuring stick is constantly changing value, what sort of science is that? Which is why almost all the economists try to ignore the money system. In his “Treatise on Money,” Keynes made some attempts to remedy this by tying money directly to the real economy, using a tabular system of commodities and production, still a good idea.

    The real power of the money system is in the creation process. In the present American system, we have given the money creation process to the Fed and the banks. The Fed creates good hard cash out of thin air, which they distribute through the banks. While the banks, in our supposed “fractional reserve” system, though it could be argued complete ponzi at this point, create money with new loans/debt. The fractional reserve being inherent in the new loans created out of the old loans, in that you can’t just create a 100% new loan of an existing loan, you can only use say 90%. That’s it, that’s the twin engine of American money creation, out of thin air.

    Now there’s other rules with the banks keeping a certain amount of money on hand, and at the Fed, and of course there’s the money you need any given day to be liquid, that is transact what must be transacted that day, which you can still loan from the Fed or other banks. Can’t pay off that day, well then you got problems, no one wants to lend to you, you’re insolvent.

    Of course as can be seen, in this process there’s all sorts of accounting, and as accounting at this level, at this point is highly fictional, have a guess to whose insolvent or what money values.

    But the biggest point is, to keep everyone confused to who has the power in creating money, and in American history the last time we had a discussion on the money system, particularly who was allowed to create it was with the Populists. With the creation of the Fed the monopoly was given to the banks, and I’d say its in crisis, however the first line of defense remains pay no attention to the man behind the curtain, that’s one of Mr. Krugman’s role, whether he understands that or not, I’m not really sure, but he does understand if money is random, everything he has done in his life is bs.

    1. joebhed

      Thank you so much, joe costello.

      Getting beyond the personalities and econ-school champions, we find the national money system.

      Too many of the financial intelligencia pass it over in favor of seeming heroic notions for democratizing the benefits of our national economies.

      In the final analysis, there are national economies and national money systems. How the national money system ITSELF serves the needs of the citizens is the first order of debate.

      While Krugman is hopelessly hoisted on his own petard, neither is Keen onto the essence of solving the real debt problems of modern monetary economies.

      That is the problem of the lack of science behind a debt-based national medium of exchange. For all those who say debt doesn’t matter – take a look around and offer a solution.

      It IS about who creates the money, and how.

    2. Nathanael

      The Greenbackers were actually the party fighting over the creation of money. The Populists and Progressives adopted watered-down versions of the Greenbacker views.

  22. steelhead23

    I am unqualified to say this, but will anyway. I have read one of Dr. Krugman’s published papers and several of his books and I have waded through a lecture by Steve Keen. Keen’s is the sharper mind and the more interesting analysis. He basically described macroeconomics in a family of differential equations which must be solved simultaneously. He has demonstrated how his non-equilibrium model could explain the Great Depression. I seriously doubt Krugman could so torture the ISLM equilibrium model as to produce similar results. Bottom line, Keen is more deserving of a Nobel than is Krugman, hands down.

    1. JurisV

      Well said steelhead !

      Keen’s ambition to apply dynamic systems analysis is, I think, at last the next logical step following Irving Fisher’s analysis of the Great Depression — that pointed out that the dynamics of the financial system needed to be analyzed, but it was too complex in 1933. But now that Keen is working that area because he has a grasp of the tools needed — and he deserves our respect, especially for his tough skin.

      If I were young and following my interests, I would work my arse off to be one of his students.

      1. joebhed

        You’re right about Fisher.
        Not sure the connection between Keen’s and Fisher’s solutions.

        Here is Fisher, et al, with their historic effort – the 1939 Program for Monetary Reform.

        They advocated for public money administration and an end to debt-based money issuance (a.k.a. fractional-reserve banking), which enters Keen’s realm as merely ‘endogenous’.

        So to Fisher and company, supported by over 400 economists publicly at the time, it DID matter who created the money, and how. They wanted a public, permanent, non-debt based system of money.

        If the debate is merely about endogenous money, or not, we’re really going nowhere.


        1. Nathanael

          People will create money whether you regulate it or not. Every IOU is money.

          Fisher is correct that we can and should regulate the creation of money. This is NOT under the control of the Fed; it IS however under the control of *regulators* and *lawmakers*.

  23. John Regan

    I love Steve Keen. I don’t mind Krugman as much as I do a lot of other economists. But basically you could skip the whole debate and just read this:

    It’s less than 1,000 words and identifies the current problems with bank lending better than anything any economist has come up with. It’s not that I want so much to tout myself or anything, but people really should at least begin considering the possibility that what we are looking at is a rule of law crisis, not a “financial” crisis, and they should be talking to lawyers, not economists.

    1. gyges

      This post you linked is much more my view. I am confidently in Keen’s corner as to the technical nature of the creation, and where @strikelawyer calls it a rule of law crisis (a conception I quite agree with) I see a confidence crisis. Confidence in the sense of human relations. I see it every day on the streets; in conversation, interactions, business conduct. And while I do agree that the toxin may ultimately reside upstream in a rule of law crisis that discourages honesty and openness in business and civic life, I also believe we all choose whether or not to drink from that tainted stream. For my part, I strive to associate and do business only with the virtuous. Unfortunately, it seems increasingly difficult for me to do so.

      I look at Greece and I see beyond the obviously broken economic situation a less obviously broken social framework, a place of pervasive mistrust where official and substantive changes in policy and rule of law are required upstream to set the tone but that depends on ordinary Greeks to rebuild the foundations of their social house. I think the US needs the same medicine.

  24. Yancey Ward

    This is nothing new with Krugman. What is surprising is the surprise of some that he did this.

  25. Matt

    I would venture a guess that it was the 9,000 +/- word post accusing him of not understanding that banks can create money (totally different than the proposition that banks can create unlimited money) and saying that sticky prices/wages are as fantastical as epicycles that hit a nerve, not a commenter who can’t distinguish between your and you’re.

  26. willyjsimmons

    Most of this is a tad over my head (ha!)

    But I’ve read Mr. Keen’s post and tried to follow along as best I could.

    Mainly though ,I come here to point out that Krugman learned this debating “technique” from Obama.

    Does no one remember it was Krugman himself who was the victim of a “stitch up” during the healthcare debate of the 2008 primaries? (Where Hillary had the upper hand, and Obama was arguing against his own party re the MANDATE)

    Krugman had his words taken out of context by the Obama campaign. Fun Times!!!!

    Oh how the worm turns.

  27. Z

    I find krugman’s behavior utterly unsurprising. I’ve been railing on about his intellectual dishonesty for over 10 years now and found the non-thinking left’s adoration of him stunning … at first … until I realized that they just wanted to hear someone basically blame ronald reagan for all the economic policies that followed him and therefore give bill clinton a huge pass. I’m sorry, idiots on the left: ronald reagan didn’t place every other president after him under some sort of trance … they acted of their volition … and neither did he make demo-zombie hero clinton continue deregulating like a madman that couldn’t do enough to please wall street. reagan deserves his blame, but democrat partisan hacks like krugman lay an illogically large amount on him.

    krugman has his agendas and he has much more loyalty to them than the truth.


  28. craazyman

    I can’t make any sense of why Professor Krugman and Professor Keen can’t see eye to eye.

    This all seems so ludicrous. They are both intelligent men who speak English fluently.

    It’s like at work. There are several people here — highly educated investment professionals — who, when they open their mouths, emit a stream of nonsensical nouns, verbs and adjectives.

    Incoherent, totally meaningless noise. And they think they’ve said something that makes sense. And then they sort of look at you funny. Maybe they’re playing a mind game, but that would take more intelligence than they possess.

    I’m finding this occurs more and more these days. I wonder if it has something to do with where the earth is on the galactic plane. It didn’t used to be this way. I can remember times when people could have coherent conversations. Now everything is scrambled and jumping frequencies.

    1. F. Beard

      I wonder if it has something to do with where the earth is on the galactic plane. It didn’t used to be this way. craazyman

      At the end of the Cretaceous period the Earth moved into an energy dampening field in space. As long as Earth was in this field all conductors became more insulating. As a result almost all of the life on Earth with neurons died off, causing the Cretaceous-Tertiary extinction event. The ones that survived passed on their genes for sufficiently capable neurons to deal with the new circumstance. Now in modern times the Earth suddenly moves out of the field. Within weeks all animal life on earth becomes about 5 times as intelligent. The novel goes through the triumphs and tribulations of various people and non-human animals and groups on earth after this event. from plot summary of “Brainwave” by Poul Anderson from

    2. Depressed And Getting Hungry

      I was hoping they would resolve this issue. I’ve been patiently reading and not spending any money – fearing I wouldn’t do it the proper way – or worse yet, that it isn’t really money and for a burger today, someone may try and make me work at some indefinite time in the future. I’m not falling for that one.

      Now I see they are agreeing to disagree!

      They could keep that up forever and I’m getting hungry!

      Now I worry if I look in my wallet there won’t be any money there. Or a Capital One credit card takes my picture, timestamped and with my GPS coordinates, and sends it to the CIA.

      I could write a check, but maybe it bounces because of insufficient funds in either my account, or I neglected to check my bank’s capital, or I was dumb enough to bank someplace that wasn’t a Federal Reserve Member Bank and find out I floated a check! You know what happens then. That $30 bounce fee.

      I was going to use the checks for my broker account, but I went on line to check my balance and got a webpage that said :

      Server down – Database in rehypothication – Check back later

      If this keeps up I may kill myself!

  29. sgt_doom

    Saaaay…isn’t Paul still with the Group of 30?

    Yup, sure enough, right beside such other “honorable” types as Martin Feldstein, Jean-Claude Trichet, Jacob Frenkel, E. Gerald Corrigan, Mario Draghi, Larry “the Hut” Summers,….

    What is it they say about judging people by the company they keep?

  30. Z

    Let me be clear, my following criticisms of the economics profession don’t apply to ALL American economists, just an appalling large amount of them.

    For a glimpse at krugman’s intellectual dishonesty, I suggest that one read his essay: “How Did Economists Get It So Wrong?”. You’ll notice that in his critique of his profession, he never mentions the fed’s role in why they almost all “got it so wrong”. There is no way that he is not aware of the influence of the fed on the economics academia … no way. He was a professor at princeton. but he deceitfully skips over all that becoz he doesn’t want the american people to know about it.

    Instead he provides innocent reasons as to why the vast majority of his profession were so wrong … romantic reasons tied to numbers and beauty and all kinds of other really nice things that caused them to so innocently miss bubble after bubble after bubble … as wall street got richer and richer and richer. God, he makes you feel so sorry for them, you almost just want to hold one in your arms and protect them and tell them that everything is gonna be all right … just like the vast majority of them had been telling us the whole time as things went to shit.

    Basically, the truth that krugman dare not utter is that his profession in this country is CORRUPTED! They have been for a long time. Who hires these jackasses? wall street, the fed, the federal government … excuse the redundancies … and academia, the factory for these whores who also has its own incentives to play nice with dc coz they’ll play nice back. And that’s how you generally become successful as an American economist: thru wall street, academia, the fed and the u.s. government. And what did all these entities want to hear? Everything is going great … spend, spend, spend and don’t worry about the debt coz better times are just right around the corner.

    And the thing about economics … and it’s a little like psychology in this respect … there is little way to determine, and measure, the effect of variables becoz you can’t isolate them. So you get all these unprovable theories … economic religions … and then these entrenched academia jackasses don’t want the field of study to move outside of their theoretical area of expertise. And the establishment that benefits from these theories gets behind those priests and solidifies their position and their positions at the milty friedmann-bobble head factories (to his credit, krugman is not a milty friedmann-bobble head doll).

    krugman also plays favorites. He loves the clintons. He was up for a position in clinton’s cabinet but … as he tells his favorite story … he was too blunt to get it. Whatever … he still worships bill clinton … anything clinton. he loves benny bernanke too and raved about the great job he did in printing up money and hoovering up wall street’s junk securities at top dollar until wall street stopped making him cry uncle. big accomplishment … it takes about as much talent as it does to fill up a pitcher of beer. But no wonder he loves bernanke so much: bernanke got him his job at princeton.

    krugman continually blames ronald reagan for everything … and I’m getting so tired of this bullshit from the liberals. This is similar to the idiot republicans blaming jimmy carter for the housing crash due to some bill he signed for low income housing. (Hell, why not just blame it on james polk. He’s the one that acquired california, nevada and arizona and the housing crash never would have gotten this bad if those states weren’t around.) But the liberals are often just as illogical as the republicans and just as blind to it. Anyway, reagan has been gone for a long time, any of the presidents that followed him could have changed course but they did not. reagan did not put them under some hypnotic trance, they made their own decisions and you can’t lay their decisions … and sell-outs … on a man that hasn’t been president in over 20 years.

    krugman is a sell-out albeit a quirky one. He won’t go against the people that helped him get into the system. He’s been corrupted by the process that it often takes to become “successful” and wealthy in that field of filth.

    And for any folks that are reflexively starstruck by krugman’s establishment award, remember this: henry kissinger got a nobel peace prize for not bringing peace to Vietnam, obama got fronted one as a down payment for a more humane u.s. foreign policy and he never paid them back, and tommy friedmann’s mantle is littered with pulitzer prizes. Establishment awards don’t necessarily mean jackshit. They are often a way for the establishment to tell us that, “Hey, this guy is really smart, you ought to listen to him” becoz the awarded tells us what the establishment wants us to believe.


  31. emptyfull

    Ok Folks. I’m a non-economist liberal here. I’m a humanities guy whose eyes glaze over at Krugman’s “wonkish” posts because I never even took Econ 101. I totally get the academic venom that can result from battles over “acceptable” ideaological assumptions, and Krugman may be a jerk on academic issues for all I know, keeping MMTers from getting deseved jobs through intellectual dishonesty. But he is an establishment figure (however marginalized) who continues to argue that the establishment should care about all the people of the United States and not just the wealthiest. That needs to count for something. If things are as bad as many people here suggest (and Krugman seems to constantly imply) then we need to remember not to let academic or even policy differences drive us to forget that we care, in common, about things like equal justice under the law, the existence of the American middle class, and a genuinely functioning democracy — because if things are as bad as they seem then these are all under intense threat. Let’s remember our priorities and keep this discussion from getting uglier in tone, huh?

    1. Z

      I don’t think anyone here is saying that krugman is always wrong … he’s not. But what many are saying or implying is that his work has been way overrated by those on the liberal-democrat side of the fence and that he is very prone to intellectual dishonesty. Sure, he points out that the rich have gotten over on the middle class and the poor, but too often he is also entirely unwilling to truly get to the crux of matters that lead to the rich getting their way (see: free trade, his backing of bernanke to another fed head term, the free pass he too often gave the clinton administration on their ultimately damaging economic policies). He is also very protective of his profession and his place within it and that appears to mean more to him than anything.

      Character does matter.


      1. gyges

        “He is also very protective of his profession and his place within it and that appears to mean more to him than anything.”

        How conservative of him.

        Perhaps the conscience of a liberal, isn’t.

      2. darms

        “I don’t think anyone here is saying that krugman is always wrong … he’s not.”
        I’m a reasonably intelligent person but not an economist and this whole “Keen-Krugman” bit has made my eyes glaze over and yes, I’ve read all the articles on same both here & at Mr. Krugman’s site. Perchance are we dealing with an evolutionary change in economic theory? In other words, while Mr. Krugman was a lot more accurate in prediciting the current economic debacle than Feldstein, Greenspan, Bernake & their buds in the Chicago school, perhaps MMT, a new theory, can better describe & predict what is happening in the economic world of today? I get why he turned off comments, a lot of the comments above are downright ugly & a pain to read. Just because someone doesn’t seem to get a subtle point does not make them a bad person. No, if you want bad people, look to the Chicago School of eek! a gnomix! as what they tell us is what their corporate overlords want them to say, reality be damned. Mr. Krugman & others are at least searching for truth…

    2. Binky Bear

      No! It is more important to purify the (non) Party than it is to actually help people or try to convince the government to enforce the laws before the criminals can pay to have them changed.
      People’s Front of Judea!

  32. Charles

    Krugman shows his colors: basically a nasty little bastard whose ego is far more important than truth. A monument to intellectual dishonesty.

  33. Susan the other

    It either is or it isn’t. Can’t understand all the leeway in the discussion. I like Keen’s understanding of private debt (devastating to the economy) vs. public debt (helpful to the economy). And I just plain do not like the banks. They should be public utilities, and there should be no discussion at all. It is a puzzle that the economy is starting (just barely) to function without any clear direction except using the banks to ponzi the taxpayers.

    1. F. Beard

      They [banks] should be public utilities, and there should be no discussion at all. STO

      NO ONE is “credit-worthy” when credit is properly understood as a form of new money creation. Instead of making banking a public utility we should be seeking ways to eliminate or greatly reduce usury and credit creation.

      And combined with reform we need a one-time cash bailout of the entire population.

      1. Rcoutme

        Umm…if we eliminate credit creation, where in hell do we get capital for investment?

        1. F. Beard

          First, one should not conflate money or “credit” with real capital. Real capital is such things as talent, skills, resources, technology, land, etc.

          Second, we should have a universal and equal bailout, including non-debtors, with new fiat in addition to the ban on new credit creation till ALL private debt is paid off. That would provide plenty of what you call “capital” for genuine lending or real capital formation.

          Third, common stock is a private money form that could easily provide the necessary consolidation of real capital for economies of scale without borrowing or lending at interest.

          Fourth, the US Government, being monetarily sovereign, should finance a generous infrastructure program with new fiat and a Minimum Income too. There’s more “capital” for investment and consumption.

          1. Rcoutme

            I understand the IPO system of getting money for business. The difficulty I have understanding is–what about the so-called small businesses? We are always being told that small businesses compose a huge portion of our economy. How would they get started up? A potential new restaurant owner is not going to immediately incorporate and float an IPO; that would be absurd.

          2. F. Beard

            A potential new restaurant owner is not going to immediately incorporate and float an IPO; that would be absurd. Rcoutme

            The universal bailout would provide plenty of real money (new fiat) for genuine (100% reserve) lending and for that matter new IPOs. The universal bailout would create a debt-free US and savers with plenty of cash to invest or lend.

    2. steelhead23

      I have suggested the same thing. In fact, I go the last mile and suggest that the enemy here is profit. I have little qualm with folks who make something making a nice profit. But finance is a service to the economy. When that service includes a profit, banks go from services to parasites. And like a tapeworm, this parasite is killing its host. Further, profit allows the banksters to manipulate government. After all, finance is some 20% of US GDP, they offer regulators a revolving door and support political campaigns. They own our government. Its time we turned that around. All banks should be owned by their depositors as credit unions are currently. I’ve no doubt that if Yves Smith ran a for-profit bank, it would be ethically run, highly efficient, and remarkably innovative. But, would she maximize value to shareholders? Maybe, but I’d bet that the likes of Jamie Dimon and Lloyd Blankfein would outdo her. But would they operate the system in the public interest? Hell no.

  34. Schofield

    What’s bizarre about Krugman is that for someone who claims to be on the side of the 99% he can’t be bothered to accurately understand the oppressive nature of the current money creation system all the better to attack it. This smacks of an intellect that’s surrounded itself with mirrors.

  35. pelham

    I’m not an economist by any means, but I am numerate. And it seems to me that both sides here very quickly get deeply into the weeds while denying anything of the sort and — quite cleverly — pre-emptively bashing anyone who might be inclined to raise a simple and obvious question as a dummy. Keen in particular does this with his big, thick, book “Debunking Economics.”

    This isn’t to say that Keen doesn’t make good points. Maybe he does, maybe he doesn’t. But I have to agree with Krugman (whom I also suspect of a measure of dodginess) that there seems to be a good deal of “implicit theorizing” here. I encounter the same thing with some of the more sophisticated gold bugs out there who offer elaborate arguments about the financial and monetary systems that, by various elaborate twists and turns, always end up leading down the yellow brick road.

    In the end, complexification is the enemy of transparency and accountability. And no matter how conceptually wonderful any kind of system is, complexity means that all it will ultimately amount to is just another dark, moldering labyrinth in which corruption and malfeasance breed and grow, no matter the regulations or regulators. Banking and the economy should and can be dead simple, even in a hyper-advanced industrialized economy like ours, so everyone can keep an eye on it. Anything short of that and we may as well just turn the keys over to the vampire squids.

    The whole tangled debate reminds me of the endless, pointless disputes among the endless varieties and hues of Marxists. But at least the Marxists were clear about what should ultimately be done. I’ll give them that.

    So I’m swearing off these monetary debates, at least until the MMT people and the debunkers emerge from the weeds and tell us in simple, clear unmistakable terms what the heck it is they want and why. Same goes for whole lot of obfuscators. They may be veritable angels of good intention, but I’m just not seeing it right now.

    1. Nathanael

      Democratically controlled government-run printing of Greenbacks (US Notes) as the primary currency and the “funding” of the US Treasury, progressive taxation (high rates on the filthy rich), direct transfers to the poor, and a CCC-type program offering jobs to anyone unemployed who wants one.

      That’s what we WANT.

  36. VietnamVet

    Sorry, this argument is the same as the medieval argument on how many angels can dance on the head of a pin. Paul Krugman is one of the few economists whose predictions are generally correct and who still manages to be on corporate media.

    The arguments obscure the reality that the whole system is corrupt. The market seized up when financiers did not know who to trust. If you are wealthy, you are above the rule of law. There was a brief period from 1917 to 1991 when some of the Elite restrained themselves and did what was in the public’s best interest out of fear of loosing their heads.

    The Shakespearean tragedy is that since nothing really changes, the economic boom and burst cycles will play out, over and over again. Our offspring will be serfs and gated communities, castles.

    1. John Regan

      I think you say it more succinctly than I do; but still, if you like verbose affirmation you can visit my blog and look around, you’ll find lots of it.

    2. Nathanael

      No, heads roll quicker now than they did in the religiously-controlled, low-communication medieval period.

      The current elite are not afraid for their heads. But they should be. Attempts to restore feudalism will end with heads being chopped off, sooner rather than later.

      Better communications make revolutions happen faster.

  37. Jim

    Re gyges and John Regan comments above:

    My guess is that the gradual realization (particularly by academics in the fields of economics,finance, political science and sociology) that our collective behavior is no longer (or only minimally) regulated by traditional moral codes– is about to move the debate about economic and political constraints to such issues as the role of guilt and shame in norm creation.

    Some opening questions?

    Are people always, already rooted in living traditions that constitute them as moral agents even if they choose to ignore or deny these traditions?

    Is cultural disintegration logically prior to the manipulation of consciousness assumed by Marx and many progressive/left scholars?

    Is our entire culture gradually shifting into an outlaw zone where communities are primarily distinguished only be degrees of ruthlessness?

    Do we presently have norms sufficiently strong and binding to anchor a viable project of social reconstruction?

    1. John Regan

      My answer to all your questions is “I don’t know”, pretty much.

      If your point is that it’s a much faster trip from civilization to barbarism than the other way around, I’ll certainly agree. Much harder to build than to destroy. Destruction only seems like a display of “power” to the feeble minded.

  38. Shyster Sister

    I’m not sure this is a case of selective quoting by Krugman, as much as unclear writing. If the premise is untrue (or PK thinks it’s untrue), then pointing out the premise is wrong is enough, because if the premise is wrong then what’s derived from the premise is also wrong. In other words:

    Keen argues that the base is equilibrium.
    Krugman says no, equilibrium is not the base (“NK models are all about sticky prices”). From PK’s point of view he has now explained why he thinks the premise is wrong.
    Further down Keen acknowledges stickiness, but relegates it to secondary status, a kludge added to make equilibrium work.
    But Krugman already said NK is not about equilibrium, so why repeat himself?

    1. Nell

      ‘But Krugman already said NK is not about equilibrium, so why repeat himself?’
      Because Keen argues that NK is about equilibrium, as the NK model is at its core an NC model. NK’s have just fiddled around the edges to make it fit the data.
      Krugman is being deliberately obtuse on this point.

  39. Jose

    A couple of weeks ago Krugman visited Portugal to receive an award. He arrived there with the halo of being anti-austerity. The left had put quite some hope on him. A guy of his stature, if he came out publicly against austerity would certainly have great repercussion on the country’s public opinion – and embarass the current government.

    Well it so happened that the Portuguese Prime Minister invited Krugman for lunch, accompanied by his Minister of Finance (an outspoken austerity champion). By the end of the dinner Krugman had mellowed towards the government’s position. He told a puzzled press corps that the present policies were inevitable though harsh and even reccommended a 20% cut in wages to gain competitiveness.

    The left was thus bitterly disappointed while the government rejoiced in having a prominent American liberal endorsing their policies.

    And some of the victims of said policies probably concluded that with friends like this better that the Americans send us some Republican fellow for he might at least reccommend a tax cut!

    1. Z

      Ha ha ha. What a ho! Notice he tries to have it both ways too: agreeing with the Portugal’s government austerity drive while also being critical of austerity measures in Portugal and in Europe overall. Ah, it’s still enough to keep the demo-zombie “left” in his corner, they’re just looking for an excuse to support their heroes anyway.

      AGAIN: krugman is extremely intellectually dishonest.

      Portugal Daily View

      Krugman: Nobel Prize Economist in line with Portugal’s government

      “According to the newspaper, the Portuguese opposition was displeased with Krugman’s comments on the Portuguese government’s austerity drive. The US economist said publicly that he “would do nothing differently from the Portuguese government“. Krugman revealed, however, he was very critical of the austerity measures imposed not only in Portugal, but in most of the European countries as well.”


    2. joebhed

      The problem in all those Euro-debt countries is that each of them, nobody had a Plan B.
      Without a Plan B (restore sovereignty in money) nations SERVE the will of the “creditor class”.
      This group would never tolerate a leftist-led debt-default.
      There would CERTAINLY be many years of mass suffering.
      Krugman had not the rigor of suggesting abandoning the Euro.
      It ain’t in his biz-school training.

      But ultimately, if the Portugese left cannot structure an orderly withdrawal from the Euro currency union (not the EU itself), they will be also without any route to govern their country.

      It’s the lack of monetary sovereignty that prevents a ‘somewhat-softer-landing’. Monetary sovereignty is the only way forward.

      1. Rcoutme

        It is not the monetary sovereignty (or lack thereof actually) that is the problem. There is monetary sovereignty, that is located at the ECB. The problem that has occurred in Portugal (if I am understanding most of the posts at this blog) is that nobody told the GIIPS that they needed to immediately implement a balanced-budget requirement (similar to nearly all the states in the USA).

        The GIIPS assumed that they could keep borrowing as they had when they had their own currency. This was a colossal mistake, to say the least.

        1. j.grmwd

          Spain’s budget was in surplus before the crisis. A balanced government budget does not a balanced current account make.

          1. Rcoutme

            Yes, I will grant that. I am only pointing out that if there was any outstanding debt (carried by a sovereign into the union) that would likely come to bite them in the a**. It did (apparently). Meanwhile, they have no easy means of becoming competitive with their neighbors (and there is no easy means of moving from one country to another, as in the US).

            I believe that most of these countries were sold a bill of goods by somebody (cough–banksters–cough cough) in order to give up their sovereign currency.

        2. joebhed

          Perhaps monetary sovereignty is like taste.
          Especially if the EU has monetary sovereignty.
          As, they are not a sovereign.
          They are a union of sovereigns who have given up their monetary powers to the union.
          In discussing Portugal or any of the EMU countries, their ability to advance their economies is hampered by having debts denominated in a non-sovereign currency, and no ability to issue currency for their own economy.
          Each of those countries is sovereign and they have forfeited their monetary rights to the union.
          Several EU countries are not part of the EMU and these will be capable of faring better, each obviously being hampered by their chosen economic remedies.

          1. Nathanael

            At this point, looking at economic numbers is largely a waste of time; look at the unemployment rate in the military-age population, the access to weaponry, and the level of free media access (to measure brainwashing resistance) and work out when the revolution will happen in each country.

            My bet’s on Spain going first among the so-called developed countries. Though Russia is a possibility. The US will go late.

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