Krugman, Following Summers, Endorses Asset Bubbles

We have now passed the event horizon into a world run by Dr. Pangloss. In a Sunday afternoon post, Paul Krugman enthusiastically endorses an IMF presentation by Larry Summers which depicts asset bubbles as necessary and desirable. And that means they both agree they should not only continue, they should be encouraged.

I am not making this up. Here are the key bits of Krugman’s post. He starts by saying that the economy is in a liquidity trap, and Summers pretty much agrees even though he does not use that turn of phrase. Krugman continues:

We now know that the economic expansion of 2003-2007 was driven by a bubble. You can say the same about the latter part of the 90s expansion; and you can in fact say the same about the later years of the Reagan expansion, which was driven at that point by runaway thrift institutions and a large bubble in commercial real estate…

So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest…

So with all that household borrowing, you might have expected the period 1985-2007 to be one of strong inflationary pressure, high interest rates, or both. In fact, you see neither – this was the era of the Great Moderation, a time of low inflation and generally low interest rates. Without all that increase in household debt, interest rates would presumably have to have been considerably lower – maybe negative…

Currently, even policymakers who are willing to concede that the liquidity trap makes nonsense of conventional notions of policy prudence are busy preparing for the time when normality returns. This means that they are preoccupied with the idea that they must act now to head off future crises. Yet this crisis isn’t over – and as Larry says, “Most of what would be done under the aegis of preventing a future crisis would be counterproductive.”…

Of course, the underlying problem in all of this is simply that real interest rates are too high. But, you say, they’re negative – zero nominal rates minus at least some expected inflation. To which the answer is, so? If the market wants a strongly negative real interest rate, we’ll have persistent problems until we find a way to deliver such a rate.

One way to get there would be to reconstruct our whole monetary system – say, eliminate paper money and pay negative interest rates on deposits. Another way would be to take advantage of the next boom – whether it’s a bubble or driven by expansionary fiscal policy – to push inflation substantially higher, and keep it there. Or maybe, possibly, we could go the Krugman 1998/Abe 2013 route of pushing up inflation through the sheer power of self-fulfilling expectations.

The insanity of all this is that it finesses the elephants in the room: government spending (as in deficits) and business investment. In this topsy-turvy account, Krugman treats the rise in household debt as a good thing, when economic studies have concluded that rising levels of household debt fund generally unproductive activities (as in they are not pro-growth).

So why haven’t businesses invested more? In a section I’ve skipped over, Krugman contends that investment is correlated with household growth, and it has slowed since the baby boom era, but not as dramatically as Krugman suggests. A fall in average household size has offset slowing population growth rates. Per Census data, the increase in the number of households from 1960 to 1970 was a compounded annual growth rate of 1.65% versus 1.47% from 1980 to 1990 and 1.3%. And for a trade economist, he curiously omits the role of persistent trade deficits from the Reagan era onward, which is tantamount to America exporting jobs. As Dean Baker points out:

Summers and Krugman seem to be leaving net exports out of the picture. In the old textbooks, rich countries like the United States were supposed to be net exporters of capital to developing countries. This implies that instead of running trade deficits we should be running surpluses This would both mean a higher return on capital in rich countries and more rapid growth in developing countries, which would be able to use imported goods and services to build up their capital stock even as they sustained a decent level of consumption for their populations.

The real world never followed the textbook story very closely, but it followed especially badly in the years following the 1997 East Asian financial crisis. The harsh terms of the bailout (led in part by Larry Summers) led to a situation in which developing countries began to accumulate massive amounts of reserves to protect themselves from ever being dictated to by the IMF in the same way. Instead of being importers of capital from rich countries developing countries became huge exporters of capital. This meant that the United States in particular had a huge trade deficit that created a huge drag on demand.

But the really crazy part of this analysis is the primary role it gives to interest rate policy. This is the loanable funds fallacy. As we wrote in 2011:

In really simple terms, there is a “loanable funds” market in which borrowers and savers meet to determine the price of lending. Keynes argued that investors could have a change in liquidity preferences, which is econ-speak for they get freaked out and run for safe havens, which in his day was to pull it out of the banking system entirely. [John] Hicks endeavored to show that the loanable funds and liquidity preferences theories were complementary, since he contended that Keynes ignored the bond market (loanable funds) while his predecessors ignored money markets.

But that’s a deliberate misreading. Keynes saw the driver as the change in the mood of capitalists; the shift in liquidity preferences was an effect. (In addition, Keynes held that changes with respect to existing portfolio positions, meaning stocks of held assets, would tend to swamp flow effects captured by loanable funds models.)

Making money cheaper is not going to make anyone want to take risk if they think the fundamental outlook is poor. Except for finance-intensive firms (which for the most part is limited to financial services industry incumbents), the cost of money is usually not the driver in business decisions, Market potential, the absolute level of commitment required, competitor dynamics and so on are what drive the decision; funding cost might be a brake. So the idea that making financing cheaper in and of itself is going to spur business activity is dubious, and it has been borne out in this crisis, where banks complain that the reason they are not lending is lack of demand from qualified borrowers. Surveys of small businesses, for instance, show that most have been pessimistic for quite some time.

If you want to put it in more technical terms, what is happening is a large and sustained fall in what Keynes called the marginal efficiency of capital. Companies are not reinvesting at a rate sufficient rate to sustain growth, let alone reduce unemployment. Rob Parenteau and I discussed the drivers of this phenomenon in a New York Times op-ed on the corporate savings glut last year: that managers and investors have short term incentives, and financial reform has done nothing to reverse them. Add to that that in a balance sheet recession, the private sector (both households and businesses) want to reduce debt, which is tantamount to saving. Lowering interest rates is not going to change that behavior. And if you try to generate inflation in this scenario, when individuals and companies are feeling stresses, all you do is reduce their real spending (and savings power) and further reduce demand (and hence economic activity).

Why are big companies not investing? It’s not because they need negative interest rates as a kick in the pants. Why should that induce them to invest, as opposed to buy even more stock back, or buy other companies’ stocks (as in make acquisitions)? They are not investing because they have become hopelessly short term. Even in the last expansion, they were net saving. And the reason was executive incentives. I was hearing repeatedly from McKinsey that it was pretty much impossible to get clients to approve any investment or new product idea, no matter how fast the payback. They were absolutely intolerant of any hit to their income statement, and investments inevitably also entail spending (hiring staff, investing in advertising) before the revenues kick in. No amount of dorking with interest rates will solve that problem.

By e-mail, Marshall Auerback of INET also described the other yawning problem: that the real problem is demand, and that can only be solved by fiscal policy, not by monetary policy. Summers apparently did mention fiscal policy, but it’s not clear how much emphasis he gave it; Krugman treats it as a mere aside in his post. From Auerback:

The “liquidity trap” argument is a bit of a sideshow. While it is true that the very low interest rates also mean that the opportunity cost of cash (against storing the speculative balances in interest-bearing assets) is very low and so there is no difference between having a government bond or cash. Yet the mainstream view – for those who believe that liquidity traps “switch off” monetary policy effectiveness and “turn on” fiscal policy effectiveness – is that once the economy recovers, there is a massive inflation threat sitting in the system in the form of the build up of the monetary base.

The fact is that a recession occurs when spending persistently falls short of the sales expectations of firms, which conditioned their decisions to employ and produce. Not wanting to accumulate inventories, firms reduce production and lay off workers.

The reasons why private spending collapses are many as are the reasons why it might not recover quickly. They can mostly be summarised by the term “lack of confidence” which is exacerbated by rising unemployment and the loss of income that accompanies it.

And the incentive structure is all wrong because you have a financialised economy where using surplus cash to prop up stock prices facilitates higher compensation for CEOs (and higher bonuses for Wall Street brokers and fund managers). Add to that sluggish demand and why would a company invest in additional plant or other forms of investment? Especially when the consequences for control fraud are so meaningless. JPM or Steve Cohen get the equivalent of a speeding ticket, as Judge Rakoff noted.

At any rate, the key is fiscal policy, not the level of interest rates per se. Irrespective of the level of interest rates and the state of private desire to hold cash balances the way forward when private spending collapses is for public spending to take its place.

Of course, when you don’t believe in using fiscal policy to plug a hole in collective spending power (as appears to be the case all across the globe right now), then it follows that one might find some perverse logic in encouraging bubbles, in the hopes that private portfolio risk preferences will shift and drive economic activity. That is the real rationale behind QE, as NY Fed Executive Vice President, Brian Sack, noted when the policy was first introduced.

And, as Bill Janeway has noted:

[W]hen the damage of the speculation is limited to the market for equity and debt securities, the adverse economic consequences of the bubble’s popping may be muted. Further, when the object of speculation is a transformational technology, a new economy can emerge from the wreckage. That is why, for example, the consequences of the tech bubble in 2001 were radically different from those of the housing bubble in 2008.

The problem is that speculation has infected the credit system to a large degree and that problem has not been rectified, so encouraging bubble-like behaviour at this juncture is systemically dangerous, as Dean Baker notes:

In the case of the housing bubble in particular we saw millions of people lose much or all of their wealth from buying homes at bubble-inflated prices. The loss of housing wealth is especially devastating because housing is a highly leveraged asset even in normal times and it is an asset often held by middle and moderate income households. It was great that the bubble was able to spur growth and get the economy close to full employment, however the subsequent crash was pretty awful. It would be incredibly irresponsible to go through another round like this.

The second qualification is that it is reasonable to believe that aggregate consumption levels will depend at least in part on the distribution of income. The upward redistribution in the last three decades, from middle and lower end wage earners to the high end wage earners in the 80s and 90s, and to corporate profits in the last decade, likely had an effect in depressing consumption. The question here is whether the marginal propensity to consume out of income is higher for a retail clerk or factory worker than a doctor or CEO. I would be willing to argue that it is, which means that the upward redistribution of income over this period had a depressing effect on consumption. (As a practical matter, this depressing effect was offset by the asset bubbles in the 1990s and 2000s.)

The mainstream economists were totally wrong several years ago when they predicted the business cycle was dead (even though these very same economists continue to receive Nobel Prizes for their bogus scholarship). Once the crisis emerged they have consistently made predictions about inflation, interest rates and debt default that have been false (I am excluding the EMU nations here for obvious reasons).

As each year passes and the empirical reality further negates their story they continue unabashed. Krugman has been right on so much, and has emphasised the importance of pro-active fiscal policy, so it’s hard to see why he has to go back to the bankrupt theory of the liquidity trap to rationalise what is essentially a problem of political dysfunction..The slow recovery has nothing to do with a liquidity trap. It has all to do with a lack of overall spending which means if private individuals are reluctant to spend (for whatever reason) then governments have to fill the gap. There is nothing more simple than that proposition.

And if you want to add to political dysfunction, you can’t find better grist for generational warfare than keeping housing prices high, which puts young people who already face the impediments of a lousy job market and in many cases, student debt burdens, at a further disadvantage.

The bottom line is that it’s remarkable to see the lengths to which Krugman will go to defend a broken status quo, both in Washington and the economics profession.

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139 comments

  1. Conscience of a Conservative

    It’s like saying we feel better when getting drunk or stoned, ignoring what happens during the hang-over or worse when we need to detox.

    1. from Mexico

      We ignore “what happens in the hangover” or that “we need to detox”?

      The only people who ignore what happens in the hangover are those who live in the grotesquely insular higher orders of the Anglo-European world, people who still can’t get their heads around the fact that we live in a class obsessed global economy and not a parochial one.

      What we have is, beginning in the 1970s, the transnatonal finance industry blowing a series of credit bubbles, each successively bigger than the one that came before. And as each successive bubble bursts, there is detox. Trust me, for rank and file Mexicans, Brazilians and Argentinians there was detox during and after the 1982-1992 crisis in those countries. Likewise there was detox in the wake of the 1987 crisis in Asia. And the detox was extreme. It came in the form of austerity. But it was selective austerity, because it was suffered only by the proles, and in these early phases of the phenonomenon in the 1980s and 1990s only by the proles in developing nations. For those who live in their highly insular Anglo-European ivory towers, what this means is that the detox never happened.

      Also there was no austerity for the transnatonal finance sector. In the immediate aftermath of the bursting of each successive credit bubble, they were bailed out by governments. In the medium and longer terms, they were thrown a lifeline. The lifeline came in the form of the blowing of the next even bigger bubble.

      In Bad Money Kevin Phillips identifies 12 different “hangovers” in the 1982-2007 period. These began with the 1982-1992 Mexico, Argentina and Brazil debt crisis. In every single case the policy response was the following:

      1) Short term: regulatory forebearance and direct bailouts for the finance industry for its imprudent lending, this derelict lending being the proximate cause of each credit bubble,

      2) Short, medium and long term: inflict austerity on the domestic working and petty middle classes of the country suffering the credit crisis (notice how in this highly debauched transnatonal credit system the credit crisis is only a crisis for the debtor nation, because in healthy cirucumsances a credit crisis for the debtor would also be a credit crisis for the creditor), and

      3) Medium and long term, inflate the next even larger bubble so the banks can clean up their balance sheets with “earnings” and asset inflation caused by the next, even bigger credit bubble.

      It’s all very imperialistic. And as long as the poeple doing the “detox” were Mexicans or Indonesians, people in the the Anglosphere and Europe were indifferent to the problem.

      But the much-feared boomerang effect is a real bitch when it comes home to roost. As Henry Steele Commager warned over a century ago: “If we subvert world order and destroy world peace we must inevitably subvert and destroy our own political institutions first.”

      What an understatement!

      Now, as Steve Keen is want to point out, The Anglosphere and Europe have blown the mother of all private credit bubbles, and are currently, as we speak, in the process of trying to blow them even bigger.

      The result looks something like this for Australia and the US:

      http://www.incrediblecharts.com/images/png_images/keen1.gif

      But we see a similar trend in almost all the European nations as well:

      http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tipspd10

      As Michael Hudson is fond of saying: “Credit that can’t be repaid, won’t be repaid.”

      And when all these private credit bubbles burst, it’s gonna be Katy bar the door.

      But as Steve Keen and Michael Hudson have explained, in Paul Krugman’s fact-free world private credit is not important, because it is merely “money we owe ourselves.”

      1. fresno dan

        Its funny (no, its an outrage) that all those people who borrow and paid way too much for houses (because they were told by EVERYBODY to buy a house) get kicked out onto the street, lose all the money (and all those fees for buying a house…so many fees) that went into buying a house, but the banks can’t be kicked out onto the street. And the FED will buy their MBSs. And the people who ran the banks can’t be prosecuted…cause Angelo Mozilo was just a hard working guy earning his hundreds of millions just trying to make the American dream come true…

        http://jacobinmag.com/2013/11/wall-street-isnt-worth-it/?src=longreads

        What is our oh so clever financial system doing for MOST people? But our “TOP MEN” believe that more banking is needed…

      2. Cynthia

        Isn’t it amazing how the “new normal” has taken what was a good economy at 4.5% unemployment in the 80’s and 90’s and has now regressed to 7.9%? Forget the dumbing down of the education system, we have a concerted effort to dumb down the economy. Yes, you could say there’s no REAL indications of a recovery!

        And the recovery is nowhere in sight. Once the banksters’ ultra-leveraged 7-year run ended with the predictable meltdown, unlike the first time in the 1920s, when countervailing forces enacted pushback with the New Deal, and ended secularizations in 1933 (along with the dark pools of Prohibition), they immediately restarted another ultra-leveraged run — which can only lead to disaster for the 99%, with that upper 1/10th of 1% raking in their ill-gotten gains!

        The system cannot take even one more shock. And it can come from ANYWHERE. A butterfly flapping its wings in South America could knock over the house of cards in EU/US.

        This is what global plutocracy looks like!

  2. Sebastian

    Thanks for an excellent post. Krugman would probably reply that in the absence of expansionary fiscal policy, the monetary levers are all we have left to pull.

    But since pulling these levers has so far done f-all for the real economy, and is in fact exacerbating inequality and financialization, we have to wonder when Krugman himself is going to admit he’s wrong, as he so often admonishes others to do.

    Also, expansionary monetary policy without the concomitant fiscal expansion creates powerful incentives for financial lobbies to perpetuate the situation. Which is exactly what Summers is advocating. I’m not surprised.

    1. Yves Smith Post author

      Krugman’s position is tantamount to saying since we don’t have the right anti-virals, we should treat the common cold with antibiotics. Except:

      1. We do have the right anti-virals, but people like Krugman saying it’s OK to try antibiotics validates their misuse

      2. The consequences of ineffective treatment are a hell of a lot higher and

      3. We have good reason to fear that there are very nasty side effects

    2. Cynthia

      Unless monetary policy changes expectations, it will have no effect. When you have a stock split it doesn’t increase the value of the company, likewise in a macroeconomic context.

      Economists need to wake up and realize that real things in the real world are needed to change it. Simply engaging in ‘magic tricks’ are illusory and easily seen through when the audience is sophisticated like the asset managers who are selling their bond holdings.

      What is the most likely outcome with all this monetary policy is the usual boom and bust. The only difference I can see this time is we may have the consumer bust before we’ve experience its boom. We will also see less of a trickle down effect with regards to the benefits of asset appreciation.

      1. James Levy

        As I said a few weeks ago, under capitalism they will try anything, any half-assed, harebrained scheme, anything, except paying workers more and increasing demand. Krugman et al. can’t even imagine it, and I can concede this to them: whatever they say, they know that capitalism is an unequal system of power relations, and that under it you can fire people and cut their salaries and yank their healthcare and pensions, but you can’t redirect the profits the owners make. There is no mechanism under our political and economic system for forcing business owners to foreswear profits and put that money into wages. The opposite is easy and lawful.

        Our only avenue around this is having the government tax the profits directly or indirectly as they come out in owner income and then hire people for high wages on the federal payroll. Krugman can imagine this, barely, but he sees that nobody he wishes to influence and/or impress believes in this approach or thinks it is a political possibility. So he whistles past it and jumps on a bandwagon he thinks will have some traction in the uphill battle to do something rather than cede the field completely to the privatizers and debt hawks. It’s a stupid way to do things, but it’s the only way to stay in the “game” of governing this captured republic.

        1. Cynthia

          One of the great ironies of Fed policy is that wage inflation is viewed as self-reinforcing, but other types of price rises are not. So if gas, food, energy, housing and stock prices rise (as they did pretty rapidly in 2002-5 for example), the Fed is fairly complacent or comfortable with that. But if wages began rising rapidly they’d likely raise rates for fear of an inflationary spiral.

          The Little Guy is the last to see the benefits of Fed policy and the first to see the cost.

          1. swendr

            Once I came to the realization that when the elites speak, the word “inflation” is interchangeable with “rising wages”, it became much easier to understand what they’re rambling about. The stuff we consider inflation doesn’t concern them a bit, except of course as a device to scare us into submission when it comes time to set policy.

        2. from Mexico

          The problem is that Krugman just continues the drumbeat of distortions, half-truths and outright lies to the proles.

          Wouldn’t it be better if the helots heard the truth?

          1. fresno dan

            It seems to me that we have had 40 years now of FED worship by our “TOP” economists.
            Maybe there are other factors as well, but the experiment with both democratic and republican administrations seems to show both parties are corrupt, that the rich keep getting richer (and of course, we have to put up with this as ours is a perfect country and perfect meritocracy – can’t be fraud…because no one in our government can FIND ANY!!!), and the FED can’t figure out that it has regulatory responsibilities (Madison – men are not angels – although apparently the FED believes market driven men are…)
            The fact that the rich have all the money (and don’t spend even a fraction of it), and therefore, other than loans to people who cannot afford to pay the loans back is the only way to induce demand….well, the illogic of that seems to escape our Nobelists….

            http://www.utrend.tv/v/9-out-of-10-americans-are-completely-wrong-about-this-mind-blowing-fact/

    3. dcb

      krugman is saying this. we need to make the rich even really really richer as a matter of policy so some trickels down. Jesus.

      he is an idealoge, and can’t stomach or fathom that his solution isn’t working, and all can clearly see it after all these years, so he know has to bend it to try and mke it fit instead of abandon the premise. it’s classic economcist behvior and why economists aren’t scientists.

    1. Michael

      Aaron – thanks for the link to Malone’s article which explains so clearly the difference between State and Nation and why that is important to understand.

      Yves – thanks for explaining the difference between fiscal and monetary policy and why that disctinction is important.

  3. Russ

    “Paul Krugman enthusiastically endorses an IMF presentation by Larry Summers which depicts asset bubbles as necessary and desirable”

    I watched Larry’s entire presentation. Where exactly does he state that asset bubbles are desirable?

    1. Yves Smith Post author

      From the talk:

      “Even a great bubble wasn’t enough to produce any excess of aggregate demand…Even with artificial stimulus to demand, coming from all this financial imprudence, you wouldn’t see any excess.

      Translation: Bubbles stimulate demand and even massive bubbles don’t generate inflation, so they are no big deal! Apparently NO attention to the massive cost in global GDP of the bust.

      Per Krugman (emphasis mine):

      Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest.

      1. Russ

        Yves,

        Look, I recognize that slagging Krugman is a good way to get interest in your posts (it got me to click). But let’s not get too far from accuracy.

        “Even a great bubble wasn’t enough to produce any excess of aggregate demand…Even with artificial stimulus to demand, coming from all this financial imprudence, you wouldn’t see any excess.

        That’s the quote you pulled? Thanks – I think you made my point. Summers regards that particular bubble as an example of “financial imprudence”, not as something desirable.

        Your characterisation of Krugman is way off, even with a limited reading of his oeuvre:

        “We might try to figure out why we seem to need leverage and bubbles to have full employment, and try to fix it. More thoughts on that on another day. But what if that isn’t an option?” (http://krugman.blogs.nytimes.com/2013/09/25/bubbles-regulation-and-secular-stagnation/)

        Why fix it, if it is desirable?

        1. Yves Smith Post author

          I’m not beating up on Krugman to attract eyeballs, and your insinuation that I am is an ad hominem attack. I had a post I could have written instead on Obamacare that would probably have attracted more readers.

          I’m writing this post because what he and Summers are saying is utterly irresponsible. I’ve been on a thread with a half dozen economists and investors since yesterday and they read the post the same way I do.

          First, going back to an older post is a stretch when Krugman at the top of his current post says how much he admires what Larry said, that it not only reflects his own views but carries them forward to implications he wish he had stated. This is as ringing an endorsement as possible and effectively says that the current post supercedes his previous views. And in this post he does not express concerns about asset bubbles.

          Moreover, in the excerpt you cited, his concerns were weakly stated. He took the view that we “need” asset bubbles absent other approaches. That’s a very strong word, and he even there he is leaning towards TINA. This from America’s highest profile economist? He was perfectly willing to rail against Iraq when that was a bold and not well shared position. Why such timidity on his own beat? And he’s retreated further with this post.

          Second, did you actually get past the headline of the post? Marshall Auerback reads Krugman the same way. And Dean Baker is similarly unhappy, although he is careful to moderate his tone when taking on Big Name Economists. Let me repeat this section:

          The problem is that speculation has infected the credit system to a large degree and that problem has not been rectified, so encouraging bubble-like behaviour at this juncture is systemically dangerous, as Dean Baker notes:

          In the case of the housing bubble in particular we saw millions of people lose much or all of their wealth from buying homes at bubble-inflated prices. The loss of housing wealth is especially devastating because housing is a highly leveraged asset even in normal times and it is an asset often held by middle and moderate income households. It was great that the bubble was able to spur growth and get the economy close to full employment, however the subsequent crash was pretty awful. It would be incredibly irresponsible to go through another round like this.

          1. Russ

            Peace. I have a lot of respect for you for allowing an alternate view to be presented.

            If it was my blog, I’d probably be deleting things I didn’t agree at a high rate of speed.

            >>…is an ad hominem attack…
            You say that like it’s a bad thing :-)

          2. susan the other

            And as Judge Rakoff pointed out, if we don’t take care of the fraud bubble nothing is going to work. One good shovel-ready fiscal project (pun intended) would be a establishing a massive Public Justice system. This could put to work millions of college grads and starving lawyers; it could last for at least a decade.

          3. Mark Robertson

            Yves, I think that we actually do need bubbles and leverage if we are to have any employment at all. Reason: we are in an age of perpetual austerity (i.e. deficit reduction). If politicians won’t let the federal government spend on things that juice the real economy (as opposed to the financial economy) then bubbles and leverage are all we can hope for.

            Krugman himself wants more austerity, just not right now. He thinks that future austerity will somehow be less onerous than present austerity. In my opinion he is a moron.

            Anyway it seems to me that Krugman’s entire discussion ignores the fiscal side of the equation. What we really need is not more bubbles, but more government spending.

            The US govewrnment, of course, has infinite money, and literally creates it out of thin air, simply by crediting bank accounts. The US government does not need or use tax revenue, and in fact destroys tax revenue upon receipt (i.e. removes it from the money supply). Fed chairman Bernanke admitted this in a “60 Minutes” installment that aired in March 2009.

            SCOTT PELLY: Is that tax money the Fed is spending (to prop up Wall Street)?

            BERNANKE: It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account at a commercial bank. So to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than to borrowing.”

            Here’s a link to that “60 Minutes” show. Skip to the 07:57 mark…
            https://www.youtube.com/watch?v=odPfHY4ekHA

      2. BondsOfSteel

        IMHO, I think Krugman’s problem is that he’s only focusing on the macro flow of assets/cash. In his “liquidity trap” ZIRP scenario, any spending is good.

        It’s not. There is a world of difference between burying cash to dig is up vs. building bridges. One simply creates a temporary boost to employment. The other creates multiplier effect as the bridge is used to expand commerce and future earnings.

        Sure… assets bubbles, loose regulation (OMG, I can’t believe he said that), or digging up cash may help raise future may help raise future interest rates… but they do nothing long term. Plus, the first two have negative social costs.

        The real solution is fiscal spending on longer term infrastructure…. including non-shovel ready projects. (Of course, this would require governance. Bubbles require lack of governance. Maybe Krugman just finally gave up “Hope”.)

        1. Cynthia

          The FED is not so much in the support the economy business as it is in the monetary business. They function as the direct supplier of un-economic money provided almost free of charge to the government, foreign governments through their central banks and to the 25+ TBTF worldwide banksters.

          That is its purpose and its reason for being. They have transcended the economy and believe they can provide continuous money supply without it being earned in the real economy.

    2. Dan Kervick

      I think it’s true that Krugman really ran with the pro-bubble theme further than Summers.

      What bugs me is the idea that these guys have, as Yves emphasizes, that everything comes down to interest rates. They really believe that social and economic progress and prosperity can be assured as long as The Market can get the interest rate it “wants” to allocate capital in the most efficient way. Krugman has turned the technocratic transgression of the nominal zero bound into a holy quest for the grail of the the true, natural rate of interest, the achievement of which will solve all problems. For him, the solution lies entirely in tricks such as “credibly irresponsible” Fed inflation targets and negative rate technologies.

      The neoliberals are desperately trying to hang onto the late 20th century formula of limited government, decentralization, deregulation and frothy finance. The “liberal” side of this debate sometimes accepts a few gestures in the direction of government intervention, but only as tactics for kick-starting the private sector, and in service of the long-run aim of keeping people and democratic government from seizing control of their own social destiny.

      1. fresno dan

        I think that is a very good insight.
        I wonder why – is it math/physics envy??? – we have a formula…see, economics is a science!!!
        As “Cynthia” essentially said in quoting Judge Rakoff, if you don’t take care of the fraud bubble, your magic interest formula can produce enough for everyone to be rich, but if the super-duper rich steal it All, you wind up poor…

        1. Dan Kervick

          I think it’s the triumph of an irrational desire for control and simplicity. People want to believe that the entire social system can be reduced to the interaction of a dozen or so macroeconomic parameters, whose values are connected to one another in knowable, lawlike ways. Some of these parameters are under our direct control, and all the others are under our indirect control as a result of adjustments in the ones that are under our direct control. It’s just a matter of knowing which knobs to turn, and how far.

          Economists as a profession in the contemporary “end of history” age also want to insulate themselves from socially and politically controversial positions, believe that all of the deep social questions have been answered, and so think that all the arguments left are about technical ways and means. Or, they think the controversial stuff is outside their territory, and that “the economy” can be addressed from a neutral standpoint.

      2. from Mexico

        Dan Kervick said:

        The “liberal” side of this debate [is in the] service of the long-run aim of keeping people and democratic government from seizing control of their own social destiny.

        That sure is my reading of the situation.

        Proust did a great job of disecting, in artistic fashion, the MO used by guys like Krugman. Proust’s character Mme Verdurin in A la recherche enigineers a plan to destroy her rival, Charlus. As J.E. Rivers explains in Proust and the Art of Love:

        And the plan works exactly as she hopes….

        Mme Verdurin’s remarks contain just enough truth to be versisimilar and just enough suggestive falsehood to trigger the cosntruction of elaborate fantasies about Charlus.

        [….]

        The quarrel between Charlus and Mme Verdurin illustrates a central idea of A la recherche, the idea that “just as there are enormous organized collections of animals, collecitons of humans…in the same way there are enormous organized accumulations of individuals which we call nations; their life only represents on a larger scale the life fo the cells which compose them.”

        So what we find with Krugman is that his polemics have just enough truth to them to give them some credibility, to make them versimilar, to make him seem as if he’s aligned with the proles. But when it comes to the important stuff, he is completely predictable. He always, invariably and without fail is on the side of transnational capital.

  4. R Foreman

    I think these jokers just can’t reconcile the fact that our goldilocks economy is imploding into a smouldering pile of shit, so they’re inadvertently turning into Goebbels protege propagandists supporting a failed state through adult fantasy stories.

    It will serve them right if BTC soars to $100,000 their dollar fortunes become worthless while computer geeks become masters of the universe. I would love to see DC once again filled with poor public servants.

    1. Ignim Brites

      Actually, in the end, DC will be purchased by Disney and turned into a theme park. Political power will disperse to the multitude of new nations that emerge from the wreckage.

    2. Jim Haygood

      ‘The key is fiscal policy. The way forward when private spending collapses is for public spending to take its place.’ — Marshall Auerback

      Just as one can’t mindlessly purchase shares without regard to valuation (unless you want lose money), one can’t mindlessly indulge in fiscal policy if large swathes of public spending are wasteful and counterproductive.

      For seven decades, U.S. fiscal deficits been sustaining a hypertrophied global garrison regime that doesn’t remotely pay for itself. Cumulated and compounded, this vast volume of value-subtraction spending has pauperized the former middle class.

      Unplug the gov-lovers. Smash the state!

      1. James Levy

        Smash the state? And when the N18 flu pandemic hits, what do you do, burn some witches? When the Koch brothers and Mr. Adelson hire their own private armies and take over the grain belt, what to you do then? When an unregulated nuke plant melts down, what then? Or what about all those nuclear weapons sitting in unguarded stockpiles? Or our bioweapons, which we supposedly don’t have but do? Or the next Katrina or Sandy hits? Or the San Andreas fault cracks?

        Are you libertarians imbeciles? Can’t you see what would happen if the US federal government disintegrated? Have you forgotten what it was like while Sherman marched to the sea and Lee and Grant wasted away a generation in the Overland Campaign and at Petersburg? You think that shit’s a joke? You people are insane.

        1. susan the other

          And Summers and Krugman seem to think that perpetual bubbles will safeguard the free marketeers and thus keep the economy going. But neither addresses, here, the need for planning. One of the things that killed the privateers in the GFC was their lack of a coherent social plan – their only plan has always been to slit each other’s throats and make off with all the profit. Not good for the future unless the money is literally given away to “consumers” to create demand. And what kind of consumption? If we create growth based on cheap shit, opportunistic trade in capitalist trinketry, for example things like totally ineffective drugs backed by corporate science, how will this wonderful freedom of trade help us progress? We’ll just eat up the world’s resources faster and die sooner from global climate catastrophe.

        2. Jim Haygood

          Have you forgotten what it was like while Sherman marched to the sea …

          Dude … he was WORKIN’ for the U.S. fedgov.

          Thanks for the adverse admission. I rest my case!

          1. James Levy

            Sherman was marching because the country had fallen apart, idiot, and I love how you addressed the other vital issues I raised. You really are a depraved imbecile, you know that.

            And Banger, below I defended you, but here you are just flailing.

            1. Banger

              You have a better idea?

              I don’t see the state has the capacity to reform itself unless something pretty dramatic happens. We are a time when global entities dominate, nation-states are dissolving and localities are fragmenting from the central state. That looks like the trend. When trying to describe potential futures one an only flail and think in new ways particularly at this historical moment.

        3. Banger

          I sort of agree with both of you. I see no way to proceed under the current regime. Not only is it illegitimate but it is also weak and under the domination of an increasingly narrow bunch of oligarchs so the sentiment of “smash the state” may be understandable. Still, we do need the state to intervene on some level on matters like public health and the environment.

          How do we accomplish a dissolution of the modern state and at the same time maintain some degree of conviviality? By maintaining structures that work, like public health as part of some kind of proto-state or as part of an international neo-state with public and private funding. Not sure how this would operate but we have to acknowledge the twin needs for a new order, which will take time to be born out of the debris of this one, and to maintains some minimum of order such that societal disintegration is avoided. I think we have the structures, the expertise and the technology to do so but and I believe the structures will emerge out of the ruins of the current absurd, wasteful, and unresponsive regime.

      2. Cynthia

        I would have more respect for Congress if they just came right out and said, “If we give you this job, do you PROMISE to make our portfolios go up?”

      3. Dan Kervick

        Not mindless spending. Just think for 10 or 15 minutes about all of the things we should be doing as a society to transform our way of life, educate our people, re-organize our institutions and develop the infrastructure and new forms of capital that the 21st century demands. Consider how much human labor will be required to make these historic changes. Consider how few of them are likely to emerge from the inchoate bumbling and profit-seeking of private sector entrepreneurs hustling after quick bucks and the main chance without any strategic vision to guide them. Reflect on the fact that while all of those needs remain unmet, millions of people around the developed world are languishing in unemployment.

        We’re way beyond the need for mere “stimulus” or undifferentiated demand-boosting.

    3. Elizabeth

      haha. great quote. Krugman is a “medicaid for all” millionaire elitist who deserves to be taken down.But the pop up ads on this site are damn annoying. I wish I had the funds to contribute so perhaps you wouldn’t have to rely on this capitalist tool to raise money? I’m part of that new, bubble economy and currently unemployed.

  5. DakotabornKansan

    Paul Krugman has been sucked like spaghetti into the black hole of Rubinomics…

    Today’s Krugman, “A Permanent Slump?”

    “…the case for “secular stagnation” — a persistent state in which a depressed economy is the norm, with episodes of full employment few and far between — was made forcefully by … none other than Larry Summers. Yes, that Larry Summers…

    “…if our economy has a persistent tendency toward depression, we’re going to be living under the looking-glass rules of depression economics — in which virtue is vice and prudence is folly, in which attempts to save more (including attempts to reduce budget deficits) make everyone worse off — for a long time.

    “I know that many people just hate this kind of talk. It offends their sense of rightness, indeed their sense of morality. Economics is supposed to be about making hard choices (at other people’s expense, naturally). It’s not supposed to be about persuading people to spend more.

    “But as Mr. Summers said, the crisis “is not over until it is over” — and economic reality is what it is. And what that reality appears to be right now is one in which depression rules will apply for a very long time.”

    http://www.nytimes.com/2013/11/18/opinion/krugman-a-permanent-slump.html

    Michael Hudson once wrote:

    “The effect of [Krugman’s] narrow set of recommendations is to defend the status quo – and for my money, despite his reputation as a liberal, that makes Mr. Krugman a conservative. I see little in his logic that would oppose Rubinomics, which has remained the Democratic Party’s program under the Obama administration.

    “Many of Mr. Krugman’s readers find him the leading hope of opposing even worse Republican politics. But what can be worse than the Rubinomics that Larry Summers, Tim Geithner, Rahm Emanuel and other Wall Street holdovers from the Democratic Leadership Committee have embraced?”

    http://michael-hudson.com/2012/05/paul-krugmans-economic-blinders/

    1. fresno dan

      Love the link to Hudson
      “In fact, how can wage earners even afford to buy what they produce? The problem interfering with the circular flow between producers and consumers (“Say’s Law”) is not “saving” as such. It is debt payment. And unless debts are written down, the U.S. economy will shrink just as will the economies of Greece, Spain, Portugal, Italy, Ireland, Iceland and other countries subjected to the Washington Consensus of neoliberal austerity.”

      Its funny (no, it not) that when you or I buy a house, and we can’t make the debt payment, we end up bankrupt (and without a place to live). All the money and fees that went into the house are gone (for us). The fact that to buy a house was due to a pretty big conspiracy that also caused the house to be overpriced is also ignored. The money we have to pay the bankruptcy lawyers is ignored. We are much, much worse off moneywise….
      But somehow, it is the number one priority of the government (at the insistence of our TOP men….Rubin, Summers, Geitherner…) that the debt owned by banks must be backed by the full faith and credit of the US government…
      And after this unmitigated disaster, Dr. Krugman apparently believes it should continue as it has…
      Debt is funny – when I don’t pay my credit card I go to jail, even if I was buying bread for orphans…
      But if Blankfein is making weasely Maiden financial scams…the FED bails him out. DEBT…so mysterious…who goes to jail and who doesn’t…

  6. The Dork of Cork

    Here is a classic line

    “Private spending that is wholly or partially wasteful is also a good thing, unless it somehow stores up trouble for the future”
    But trouble for who ?

    You can clearly see the trajectory of Keynesian thought…..the war mobilizations and in the modern neo liberal world the destruction of capital chiefly via car and house bubbles serve the same purpose – but each is tailored to the needs of a specific economy at a particular moment in time.

    Catholic reactionary thought of the interwar years has been proven correct – case closed in my opinion.

    What a pox.

    If a bunch of Irish guys who identified themselves as Irish because they believed in the holy trinity consistently came up with these destructive ideas they would be hell to pay.

    Economic sabotage[edit]
    “Closely associated with the concept of cultural inheritance as a factor of production is the social credit theory of economic sabotage. While Douglas believed the cultural heritage factor of production is primary in increasing wealth, he also believed that economic sabotage is the primary factor decreasing it. The word wealth derives from the Old English word wela, or “well-being”, and Douglas believed that all production should increase personal well-being. Therefore, production that does not directly increase personal well-being is waste, or economic sabotage.
    The economic effect of charging all the waste in industry to the consumer so curtails his purchasing power that an increasing percentage of the product of industry must be exported. The effect of this on the worker is that he has to do many times the amount of work which should be necessary to keep him in the highest standard of living, as a result of an artificial inducement to produce things he does not want, which he cannot buy, and which are of no use to the attainment of his internal standard of well-being.[10]
    By modern methods of accounting, the consumer is forced to pay for all the costs of production, including waste. The economic effect of charging the consumer with all waste in industry is that the consumer is forced to do much more work than is necessary. Douglas believed that wasted effort could be directly linked to confusion in regards to the purpose of the economic system, and the belief that the economic system exists to provide employment in order to distribute goods and services.
    But it may be advisable to glance at some of the proximate causes operating to reduce the return for effort ; and to realise the origin of most of the specific instances, it must be borne in mind that the existing economic system distributes goods and services through the same agency which induces goods and services, i.e., payment for work in progress. In other words, if production stops, distribution stops, and, as a consequence, a clear incentive exists to produce useless or superfluous articles in order that useful commodities already existing may be distributed. This perfectly simple reason is the explanation of the increasing necessity of what has come to be called economic sabotage ; the colossal waste of effort which goes on in every walk of life quite unobserved by the majority of people because they are so familiar with it ; a waste which yet so over-taxed the ingenuity of society to extend it that the climax of war only occurred in the moment when a culminating exhibition of organised sabotage was necessary to preserve the system from spontaneous combustion.[11]”

    C. H. Douglas (1879–1952),

  7. craazyboy

    I’m convinced the only way towards some real understanding of the economy, followed by some effective policy, is to round up all our living economists, saw the tops of their skulls off, extract their brains, but their brains in formaldehyde jars, put the jars in the Smithsonian Institute, and Wi-Fi connect the jars together so the economists can all talk to each other. There would be no internet connection, of course, ensuring these conversations do not leak out into the public space.

    We should call this “The Stupid Wing” of the Smithsonian Institute.

    1. fresno dan

      I like it!
      But is should be called the “genius” wing…or perhaps “holy” wing
      Of course, no one outside of the wing would ever have any contact or knowledge of the thoughts of the geniuses, because we mere mortals are too earthbound to realize, as Blankfein said of his labors, and echoed by the acolytes of finance, as well as the angels Rubin and Geithner, that they are doing “God’s work.”

      1. craazyboy

        You just reminded me. We need a banker wing at the Smithsonian too.

        We can let them call it whatever they want – Heaven, The Vatican, Control, or whatever strikes their fancy.

        But the sign over the visitor entrance will just say “The Cone of Silence”.

  8. Z

    “The bottom line is that it’s remarkable to see the lengths to which Krugman will go to defend a broken status quo, both in Washington and the economics profession.”

    I don’t find it remarkable at all.

    Z

    1. Banger

      He writes for the NYT and is a respected member of the economics profession. The NYT is nothing more than a government/corporate propaganda outlet. The economics profession lacks any credibility since it claims that economic activity is discrete from politics whereas it is, in fact, an expression of power-politics.

    2. Chauncey Gardiner

      Paul Krugman … “One way to get there would be to reconstruct our whole monetary system”…

      Getting closer?

  9. Jackrabbit

    Great analysis Yves!

    But isn’t the fundamental flaw with Krugman’s argument his distain for confiscating investment gains via negative real rates?

    He readily advocates for PERVERSE policies (bubbles, fake alien menace, etc.) but confiscating savings is a bridge too far!?!

    It seems to me that a negative real interest rate is an important economic signal, not an encumbrance that requires finessing. Just as with CEO pay, there should be a mechanism for clawing back bogus gains. That money should then be given to ordinary people (there are many ways to do so: increased unemployment benefits; tax credits, etc).

    = =
    Note: Krugman uses fungibilty of money as a strawman, saying that we would have to go to a completely electronic currency. I don’t buy that.

    1. Jackrabbit

      Instead of clawbacks on bogus gains, we get a QE-induced stock bubble because many of the wealthiest Americans run hedge funds that benefit from a ‘carried interest’ tax subsidy.

      Rather than take on the hedge fund honco’s (and the financial industry that practically worships them) need for a rising market and utter contempt for the general welfare, Krugman entertains fantasies of aliens and bubble bath economics (the rich get fascinating bubbles, everyone else takes a bath).

  10. middle seaman

    There may be a misunderstanding in the works. Researchers identifying the AIDS syndrome, just an example, are not to be blamed for AIDS. Observing bubble at work doesn’t imply love of bubbles.

    1. Yves Smith Post author

      No, he went further than that. Summers and Krugman depict asset bubbles as necessary in the absence of adequate demand. Look at the full Krugman post. He actually shows the increase in household debt and says without it, interest rates would have been lower.

      His first section header is

      When prudence is folly

      His second is

      An economy that needs bubbles?

      And in that section, he concludes with this statement:

      n other words, you can argue that our economy has been trying to get into the liquidity trap for a number of years, and that it only avoided the trap for a while thanks to successive bubbles.

      And if that’s how you see things, when looking forward you have to regard the liquidity trap not as an exceptional state of affairs but as the new normal.

      He keeps using the word “need” to describe the role of asset bubbles. That’s a shocking characterization. It implies that there was (and is!) no policy alternative.

      1. The Dork of Cork

        There is a policy alternative but it would involve a reduction or destruction of the banking powers centralizing dynamic.

        A introduction of treasury non interest bearing notes and a elimination of free banking.

        Instead we get these endless Schrödinger’s cat like debates.
        I.e. anything but…..

        Why is there always a push towards this level of complexity ? when it is obviously totally catastrophic.

        Why have normal village mortals taken a interest in the vast forces of globalization to the detriment of local issues.
        Why indeed.
        Because our survival depends on what happens on a different continent rather then at the bottom of the road ….what a absurd non human scale environment we live in.

        Where the speed and pressure of daily existence requires these quantum explanations when Newtonian results once sufficed.
        We live in a world without redundancy.

    2. Patricia

      “Researchers identifying the AIDS syndrome, just an example, are not to be blamed for AIDS….”

      Well, it would have been ridiculous if those AIDS researchers had also said, “Yeah, too bad about this. We can’t search for treatment or cure because that requires too much money, but hey, we can make sure we have more and better hospice care. And that’s more jobs! Also, too, there’ll be fewer people around who need employment.”

  11. Stephen Gardner

    Liquidity trap? Yeah, we know what that is. That’s one one player has hotels on all the key properties on the MMonopoly board and all the money.

  12. NotSoSure

    As usual, The Onion has the best perspective on this:

    “Every American family deserves a false sense of security,” said Chris Reppto, a risk analyst for Citigroup in New York. “Once we have a bubble to provide a fragile foundation, we can begin building pyramid scheme on top of pyramid scheme, and before we know it, the financial situation will return to normal.” Despite the overwhelming support for a new bubble among investors, some in Washington are critical of the idea, calling continued reliance on bubble-based economics a mistake. Regardless of the outcome of this week’s congressional hearings, however, one thing will remain certain: The calls for a new bubble are only going to get louder. “America needs another bubble,” said Chicago investor Bob Taiken. “At this point, bubbles are the only thing keeping us afloat.”

  13. plantman

    I think Krugman’s “bubble rationalization theory” (BRT)
    is going to be more damaging to his career than anything he has written in the past. It is an admission that he is undeserving of the nobel prize, just as it is an admission that he is a closet monetarist who thinks rates can balance supply and demand.

    True, Krugman always pays lip service to Keynes, but then he shunts off fiscal stimulus as politically impossible and moves on to his mainstay, radical monetary policy.

    Monetarists are always looking for a way the economy can be run by adjusting knobs and dials at the Eccles building.
    It’s an elitist view to which Krugman ascribes…which explains his absurd obsession with the liquidity trap.

    Enough of the liquidity trap already! How about looking at wages for a change.

    1. craazyboy

      And progressive taxes. Then tell the WTO to go to hell and put in import duties to reverse the jobs exodus. Stop H1B visas. Luxury tax on gas guzzlers and yachts. Cut defense spending. Then maybe we have the cash flow to fund federal infrastructure spending.

      And if he wants interest rates to go up, tell the central banks around the world that they shouldn’t buy trillions and trillions of bonds. Not that small savers should pay their meager savings to banks to make the economy better?!?

    2. Jim Haygood

      Speaking of Bubble Rationalization Theory (BRT), today the Dow topped 16,000 and the S&P reached over 1,800.

      Since blowing serial Bubbles is de facto Federal Reserve policy, the unacknowledged goal of hitting S&P 2,000 by spring (SP2K, when the T-shirts come out) is only 11 percent away.

      Buy the Bernanke Bubble, as Ben strives to bang the SP2K gong before his last day in office! Stocks for short term, comrades!

      1. Cynthia

        Stocks will continue to rise until all the little people are sucked back in, and then it will crash. More of the same. Ben must be frustrated as heck that he just can’t seem to get that money on the sidelines to come back in.

  14. Alejandro

    “in the absence of bubbles the economy has a negative natural rate of interest…”-Larry Summers

    One can argue that the natural rate of interest is zero, unless REAL scientists can prove that the earth is larger than it was 1, 10, 100, 1000, or 10,000 yrs ago.

    I know that 60 minutes has some credibility issues as of late (reporting is much more difficult when a mirror is required) but I found the following interesting and somewhat related (12m clip);
    http://www.cbsnews.com/video/watch/?id=50142079n

  15. Banger

    Regardless of how anyone feels about Krugman, the reality of our situation is that: first, that all economic arrangements are political; second, that what seems to be driving markets and perhaps economic activity are bubbles–instead of one big bubble we have a series of small and relatively harmless bubbles.

    I think there is some magic to bubbles in that they act to excite the economy into activity by arousing interest and activity. If it appears that something is happening in the financial markets I will be more likely to invest in my business. I believe it is only bubbles that are keeping things in a steady state and I agree with Summers that without them we not have any economic growth since the main focus of our elites is on stability and lack of movement/austerity because growth would imply change.

    1. Alejandro

      “instead of one big bubble we have a series of small and relatively harmless bubbles.”

      That reads like recycled Greenspanisms, when he was quoted as saying “there are no bubbles, only a little froth”.

      1. Banger

        The RE bubble was one big con-game based on criminal fraud. Small bubbles not based on fraud that deep and clearly criminal that should have had hundreds if not thousands of people going to prison is probably not happening–but I could be wrong.

        1. Alejandro

          Your presupposition is that greed is pragmatic and accepts limits. Bubbles by definition ARE frauds and unregulated tend to “grow”. Lets not forget that Larry Summers was one of the more zealous of the de-regulation evangelists.

          1. Banger

            Bubbles are not fraud–they can be generated through non-illegal means. You just catch a rise in certain stocks and you keep buying because it is going up–after awhile it becomes a bubble and you wait for the right time to bail–nothing illegal there. In the case of the RE bubble the laws were being routinely broken.

            1. Alejandro

              Merriam-Webster
              Fraud; 1a: DECEIT, TRICKERY; specifically: intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right b: an act of deceiving or misrepresenting: TRICK 2b:one that is not what it seems or is represented to be

              Legality is irrelevant to the super citizen corporate “persons”. At best they keep the “gains”, at worst they “pay” a symbolic “fine”.

              P.S.; I don’t always agree with your writings but I always appreciate reading them.

        2. Yves Smith Post author

          I don’t like tooting my horn, but you need to read ECONNED. Ch. 9 and Appendix II.

          This “the bad housing loans caused the GFC” is 100% wrong. Repeated after me: 100% wrong.

          The subprime loans would have created a S&L level crisis, not a “bring the markets and the global economy to their knees” crisis.

          What made this into a global crisis was that credit default swaps (sold via heavily synthetic and synthetic CDOs) created exposures to those bad loans that were and additional 5x or so in value AND concentrated those exposures at fragile, leveraged institutions (the monolines, the parent company at AIG, the Eurobanks, Citigroup, the major US investment banks).

          And that part was legal, thanks to deregulation. Predatory as hell, but legal.

          1. peace

            I agree.

            I have wanted to share this JP Morgan risk analyst (and CDS co-inventor/developer and seller). She paints a wonderful picture of the insanity and malfeasance regarding mortgage derivatives CDS (re: risk obfuscation, willful ignorance, and fiduciary irresponsibility). She is an ethical role model who describes how difficult it is to be rational and honest when huge profits are at stake.

            My favorite quote concerns the request for a post hoc (!) risk evaluation of a $1 billion derivatives deal! After the deal was done! “What were they thinking?” Answer: commissions (incentivized malfeasance).

            http://www.pbs.org/wgbh/pages/frontline/oral-history/financial-crisis/terri-duhon/

            “We could only see positives…”
            but due to her risk analyses “JP Morgan stopped doing these deals…”
            “I think the world’s gone a bit mad!”
            “Irrational exuberance”
            “a bet on a bet on a bet on a bet”
            “repackaged repackaged repackaged… such a risky product… leveraged and leveraged and leveraged”

            1. JEHR

              The interview with Terri Duhon is an excellent review of the introduction of CDOs and CDSs in early 2000s. Here is an honest person’s viewpoint of what went wrong when subprime mortgages were securitized. Well worth reading.

      2. jrs

        Only even these bubbles aren’t harmless. Investors buying up massive amounts of housing (driving the housing market some places) and hoping to turn them into rentals with high projected profits. That’s not going to end well …

    2. Jackrabbit

      Banger, you are all over the map. Seemigly supporting progressive reform and social justice – then trying to derail it.

      In earlier comments you claimed, essentially, that Americans don’t need to worry about politics because so many own guns (thereby possessing an inherit ability to resist). Yves has shredded this notion.

      Now you tell us that you support the quislings and their bubblicious BS with the strained logic that bubbles help to change the status quo.

      1. James Levy

        My perception is that Banger is a decent man, but despair breeds confusion, and it’s hard not to despair if you have a fair idea of what is going on. Saying that without the bubbles we’d be in even worse shape is not the same as saying that the bubbles are a good idea, although I would disagree with Banger and say that the stock market is one BIG bubble right now. There are no fundamentals supporting such high stock prices–none. The profits in the financial sector are a pure fiction, cooked up by ZIRP and a rewriting of the rules to give financial companies a license to print money (literally and figuratively).

        I know I am not as cock-sure as I once was, and I know that if you combine real concern for people with a real grasp of what is happening, the results cloud the mind and weary the spirit. I fear for my future and the future of my children. This is all going to end badly.

        1. anon y'mouse

          and then there’s giving the oligarchs a free pass and blaming the little people for their lot (being raped by the oligarchs) and calling it ‘realism’.

          aka “it’s just Business. nothing personal.”

          1. Banger

            First who am I to give anyone a free pass. Second, I don’t think it’s a good thing that our societies are run by amoral oligarchs without much sense of responsibility to anyone other than their own egos and families. I also, however, believe they achieved their position through the public giving them increasing power–they seized some of that power but the public, obsessed with trinkets, toys and entertainment deserve some of the blame. That is where we part company–I believe the oligarchs are 60% to blame and the average “consumer” (who exchanged citizenship for cheap prices) has 40% of the blame. You believe the oligarchs are 100% to blame.

            1. Jackrabbit

              Banger, you are the Westboro Baptist Church of NC.

              I can almost imagine you showing up at foreclosures with signs reading:

              “Its 40% YOUR fault”

              and

              “Repent ye sinners… the end is near”
              The system will fall when the good Lord ordains that it should be so. Until then, sit tight and ride the bubbles.

              1. EmilianoZ

                I’m with Banger here. He has received a lot flak from NC readers (including myself) and I hope he wont be discouraged but will stay here voicing his opinion.

                No matter how powerful they are, the 1% did not achieve their stunning all-encompassing victory without (massive) complicity from our part (active or passive). They’re not gods.

                Of course there’s a whole fine-grained spectrum from outright collaboration to those who can just about credibly plead stupidity or ignorance.

                The fact is that the unfathomable greed of the 1% fed itself from the innumerable small greeds of the 99%. I know a lot of people who bought a house at the height of the bubble not because they desperately needed a place to live but because they wanted to speculate just like everybody else.

                The system is so designed that nobody can stay innocent, except maybe if you live like a self-sufficient hermit in the wildest remotest parts of the Rockies (the libertarian dream). Just by living in an advanced industrial country, you’re already profiting from abject third-world misery (see Russell Brand and his story of visiting a rubbish dump in Kenya).

                I don’t see the point in wrapping ourselves in some self-righteous sense of victimhood. There’s no empowerment in that.

                1. Jackrabbit

                  I’m with Banger here. He has received a lot flak from NC readers (including myself) and I hope he wont be discouraged but will stay here voicing his opinion.
                  There some things he says that make sense and other things that just don’t. Then he gets defensive (You don’t know me!) and backtracks later. NC is not a therapy session.

                  No matter how powerful they are, the 1% did not achieve their stunning all-encompassing victory without (massive) complicity from our part (active or passive). They’re not gods.
                  Not true. They achieved it by active subversion, which is NOT excused by blaming the dups for being too dumb to catch on to the con.

                  Of course there’s a whole fine-grained spectrum from outright collaboration to those who can just about credibly plead stupidity or ignorance.
                  Well we are now in 2013. What do you think about people TODAY who are excusing what happened, or like Obanger (my new pet name for him) who promises HOPE and CHANGE at some point in the future – but for now, just let TPTB have what they want.

                  The fact is that the unfathomable greed of the 1% fed itself from the innumerable small greeds of the 99%. I know a lot of people who bought a house at the height of the bubble not because they desperately needed a place to live but because they wanted to speculate just like everybody else.
                  Isn’t that why banks are REGULATED to begin with? To prevent disasters like 2008? Did regulation just disappear because Glass-Steagle was repealed? No. And the first step is internal regulation: credit limits and prudent loan-making. What you are suggesting is, essentially, that people failed the banks.

                  The system is so designed that nobody can stay innocent, except maybe if you live like a self-sufficient hermit in the wildest remotest parts of the Rockies (the libertarian dream). Just by living in an advanced industrial country, you’re already profiting from abject third-world misery (see Russell Brand and his story of visiting a rubbish dump in Kenya).
                  So you are advocating that we all just join the party.

                  I don’t see the point in wrapping ourselves in some self-righteous sense of victimhood. There’s no empowerment in that.
                  Wow. The victims should FEEL victimized. Lay back and enjoy the rape – and don’t complain afterwoods, there’s no empowerment in THAT.

              2. Banger

                Hmm–pretty strong. I don’t know the precise percentage but social science has shown us that people often take a hand int pulling the wool over their own eyes as Bob Dobbs has taught us.

        2. Banger

          You certainly understand me–but I’m not confused, rather, I’m open to new information and to many possibilities. I avoid ideology when I can.

          My general vision though is fairly clear. We are in transition moment the current version of capitalism has failed because it demands real long-term growth and, at present, political realities make that impossible. The oligarchs around the world have seized most of the levers of power and are mainly interested in stability and stasis on all levels. At the same time most opposition on the left is almost exclusively rhetorical and more real opposition is all over the place and largely confused because the information age has confused us rather than galvanized and enlightened us.

          The current version of capitalism is disintegrating gradually and within its ruins we have the opportunity to build something new–and that’s what we ought to be focusing on. There is no chance that we can go back to the old system the markets are saturated and only a dramatic shift like retooling to use advanced technology to limit carbon emissions have any chance of actually growing the world economy–but at the moment this can’t happen because those in power don’t want it and, frankly, most people don’t want it because change scares them more than stagnation.

          1. Jackrabbit

            You certainly understand me–but I’m not confused, rather, I’m open to new information and to many possibilities. I avoid ideology when I can.
            You have no principles, your just here for the lulz.

            My general vision though is fairly clear (clear as mud – see first paragraph). We are in transition moment the current version of capitalism has failed because it demands real long-term growth and, at present, political realities make that impossible. (strawman bullsh!t: those ‘political realities’ are contrived) The oligarchs around the world have seized most of the levers of power and are mainly interested in stability and stasis on all levels. At the same time most opposition on the left is almost exclusively rhetorical and more real opposition is all over the place and largely confused because the information age has confused us rather than galvanized and enlightened us.
            “stability and stasis”??? by most rational accounts, they appear to be interested in total control and hegemony. And who is “us”? You seem to be projecting your own confusion and uncertainty.

            The current version of capitalism is disintegrating gradually and within its ruins we have the opportunity to build something new–and that’s what we ought to be focusing on.
            With oligarchs in control, many believe that ‘something new’ will be WORSE. Something like neo-feudalism. And the gradual disintegration that makes you so hopeful likely means continued massive carbon emissions.

            There is no chance that we can go back to the old system (who is calling for THAT? Go back the system same system that got us here? That would be crazy) the markets are saturated (WTF? making up your own terms of art?)and only a dramatic shift like retooling to use advanced technology to limit carbon emissions have any chance of actually growing the world economy–but at the moment this can’t happen because those in power don’t want it and, frankly, most people don’t want it because change scares them more than stagnation. (because our enlightened leaders have explained the choices that we face in somber detail so that people can freely chose no change?)

            = = =

            Banger, I admire your enthusiasm and your the effort that you put into your writing but it is often circular and has a defeatist message. I find about half of what you write to be interesting and useful and then you write some stuff that just seems contradictory. Maybe its because, as you say above, you have no strong principle that is guiding you.

            If you don’t think anything can be changed until the great, inevitable reset then why do you spend time writing comments on NC?

            1. Banger

              I think I am not defeatist at all–what’s would be the point of that. What most people object to is that I say that the victims of capitalism are complicit in their victimhood–this is not a radical statement and as a student of social-science to me it is obvious. I am stunned, at the ignorance here of social-science and moral philosophy. Most of you have this simplistic view shared by most Americans on the right and left that the world is divided between “good guys” and “bad guys” and we are the good guys and it is our job to point the finger at the bads and what? Crush them? You and what f!cking army?

              Yes, the oligarchs are what they are but they can be manipulated through public opinion even Machiavelli was aware of the power of opinion and democracy was not common in his time.

              The other meme that people don’t like is that I believe that culture and values must change before politics and therefore our economy can change. It is hardly defeatist to argue for this sort of change–i.e., to cultivate cooperation, compassion and what Thich Nhat Hahn called radical listening. Whether someone is a finance oligarch, a right wing populist who believes if we arm ourselves we’ll keep tyranny at bay or we just want to focus on Jesus or expand our consciousness with Ayuhuasca all these people have something to offer if they are genuine in their journeys.

              What I find on the internet (and I started on discussion groups in the mid-90s is that it is a place where birds of a feather come together to reassure themselves that they’re not crazy for believing in unofficial reality and people here do not believe in official reality but let’s grow up a little and realize that no one will listen to us if we can’t listen to diverse views. And here I’m characterized as an apologist for the oligarchs because I say they are human and they are pursuing their goals because, essentially, the left abandoned the field and the mass of people like capitalism and the goodies it provides–this is bloody obvious and none of you have given any coherent argument to the contrary and I submit are, like people over at DailyKos unable to tolerate true intellectual diversity. This is the great tragedy of the internet that some of us hoped would turn out differently.

              I have been exposed to insult, profanity and threats in discussions and I’m ok with that. I will resolve to make my comments briefer. I welcome the chance to bring a different perspective and a free-flowing discussion but I will look in the mirror and gauge whether or not it is appropriate for me to say anything here at NC–it is not my goal to upset people just to stimulate. I write here because it seems to attract interesting viewpoints–but I’m getting the message.

              1. Jackrabbit

                Banger,

                I AGREE with you that there has to be a cultural change. But your thinking on how it happens seems flawed, and well, defeatist.

                You seem to think that once the ‘system’ get really desperate it will make outrageous demands that will bring everyone together. And they can resist these demands because they have guns. So bubbles are OK with you, I guess, because it hastens this process.

                then you have this ‘let by-gones be by-gones’ philosophy of goodness toward all. Which, I suppose stems from your thinking that the great reset is inevitable.

                But TPTB are not interested in allowing any reset that shakes their control. And bubbles help them to vacuum up resources to maintain and strengthen that control.

                So your thinking just leads to a dead end. It amounts to more HOPE and CHANGE nonsense.

                Things get changed because people of conscience speak out.

                = = =

                And this whole notion that the victim is complicit in the crime is nonsense and insulting.

                Banks are _regulated institutions_. Their obligation to make prudent loan decisions didn’t end with when Glass-Steagall was repealed. They KNEW that credit was way too loose. They KNEW housing was in a bubble. They KNEW that they were giving loans to people who couldn’t pay or were speculating.

                Credit card and housing loan offers ENTICED people into taking too much credit. It as though you want to blame child addicts for their drug habit as much as the pushers that hang around schools.

                You really need to rethink what HAS happened and what IS happening. Half the time you sound like a kind-hearted soul that wants to help and the other half like an apologist for the 1%, or the new Obama (Obanger?)

              2. jonboinAR

                I agree with Banger that in order to find a solution to the problem it may be correct to put blame wherever it properly belongs, even if at some point we appear to be “blaming the victim.” The American public as I have known them my whole life are nearly completely and cynically lazy and careless when it comes to informing themselves about public affairs. I’m sorry. It’s the way I see it, the way I’ve observed it to be. I don’t know if “blame” is the correct term to use. It may be too loaded. But we have made it ridiculously easy for them to take everything from us. Indeed, we have often collaborated by buying into the “free market for real Americans!” and “real Americans for free markets!” BS.

                The “system” can be changed to serve the greater good if WE will wake up.

              3. anon y'mouse

                identifying who is ‘to blame’ means identifying causation of this difficulty we are in, in the vain hope that we can avoid the same in future (if we have one).

                undeniably, you can’t sell something to someone who does not secretly, in some small way, want to be sold. just as you can’t sucker someone who wants to be suckered.

                the main problem with your Intelligent View of Social Science is this: the rubes didn’t even KNOW what they didn’t know. we’ve had over 50 years of meddling with the educational system in this country—ever since school integration (if you read some people, ever since the invention of mass schooling to create a deliberately dumbed-down populace). there has been mass consolidation of the news media and it has totally lost its purpose. was that because the people wanted it, or because it was easy to buy up newspapers with ever-diminishing local advertising revenues due to ever-diminishing locally owned businesses, due to corporate conglomeration. was this what the rubes chose?

                you peg a lot of things as the conned conning themselves. these processes have been so gradual, and so multi-dimensional that suddenly we don’t know what the heck happened, but we’re all in the sh!t. and yet WE are to be blamed? with poor schooling, failure of the media, thinktankery in high places, etc.? you really want an individual, who is reliant upon his daily news and his own social circle to bounce ideas off of, to be held responsible for this?

                we haven’t even discussed yet the mass specialization that has gone on. we’ve gone from a country were almost any man (and half the women, if you’d asked) could go out and rebuild their own car in their own garage, to taking it to an expert who wants to charge 400 bucks to run a diagnostic and change some spark plugs, and speaks a language that we don’t even understand anymore when explaining what went wrong with the darn thing. and this is just ONE example out of many. how many other things in life have become this way? many jobs have become all-consuming projects in themselves. no time to learn how to fix my dishwasher—I’ve got to get the next certification in my speciality and so on. and yet, in those few moments when i’m not overworked (this is the universal “me”, not me specifically) I zone out to some nonsense on the TV and have really no time to figure out the complexities of my newly computerized toaster oven, much less climate change. we are all reliant upon experts, many of whose bread is buttered through corporate research, and you want to blame US?

                just look at the issue of climate change–regardless of what the oligarchs say, the public IS AWARE and wants to do something, and yet nothing but stalling by nearly every government, due to their being beholden to corporate interests. ok, you can say that we don’t really understand the full ramifications, and that many of us, if shown what it would ‘cost’ us to address this issue, might balk. but at least we are aware of and wanting action on this issue, and yet denialists (funded by corporate thinktankery) are still stalling the show on this.

                I just don’t get where you can make the blame claims you do. did we WANT to remain ignorant, or simply lacked the time and resources to be made un-ignorant. were we too reliant upon a multitude of ‘experts’ (really, talking heads paraded on the TV that we were supposed to believe knew something about what they were spewing forth on_).

                you claim a lot of empathy, but I don’t really see it in evidence. you should try wondering why YOU see these things, and so few around you do. hint: it isn’t because they’re all just selfish boobs with one finger in their nose and one up their bum. it’s because they’ve been miseducated, lied to, outright mislead, and been outnumbered in every important way imaginable (scientific research, propaganda, “news” media, education, “experts, etcetcetc.)

                why are so few ‘tuned into’ alternative forms of media? do you think it might be that they are like the colorblind trying to differentiate between green and red? and yet, you’d hold the colorblind responsible for picking out that Rudolph sweater still?

                I give up!!!

            2. JTFaraday

              “There is no chance that we can go back to the old system (who is calling for THAT? Go back the system same system that got us here? That would be crazy)”

              Lots of people want to put it back the way it wuz.

              Every single time a Lord Keynesian opens their mouth a big white cartoon bubble opens up over their head that says “Put it back the way it wuz.”

              Even around here, where there are a number of people who look forward and advance different ideas, the smog of 1950s nostalgia is enough to choke a small horse.

      2. Banger

        I find it boring and, sorry, a little stupid to expect us to all line up and march to some narrow bit of ideological purity of being on one side or the other. You have no idea where I stand that’s obvious. I don’t believe bubbles are a good idea–I’m just describing that there is no real juice in the neoliberal consumer capitalist system. It’s, effectively over. I can say it’s a good or bad thing but it’s over so get over it. We are under a new dispensation which is a political attempt to maintain security and stability–that is the focus, not economic growth. There is no reserve demand for goods and services on any scale that can produce the sorts of profits investors demand so the only place for them to go is in speculation and crime for big profits. By “crime” is mean the effort by governments and financiers to extract blood out of veins of the weak. They are easy pickings at a time when public morality is virtually non-existent and I think this will continue until it is not sustainable and then a new set of rules will emerge out of the culture–people will begin to realize thery are, in fact, connected, and making the weak suffer actually doesn’t help anyone not even the strong–but we’re not there yet.

        1. Jackrabbit

          First, you didn’t SAY that you didn’t believe in bubbles. Second, I mentioned your belief in guns in connection with your bubble comments because your overall message is very defeatist.

          What you appear to be advocating is that people make no effort to change from a disasterous course. Like Obama you offer HOPE that at some future date, there will be a reset that will allow the disenfranchised and afflicted people of the world to join together.

          What you fail to realize is that the noose is tightening. And the direction seems clear: manage through the chaos (or bubbles or climate change) with increasing control. To hell with those who will suffer and die as a result.

          Isn’t is MUCH more rational to educate and promote (nonviolent) change now than to calmly accede to tyranny? People CAN make a difference when they have strong principles and vision.

      3. Banger

        Well I don’t get it. How do I support quislings and so on? What did I say to say that I thought the bubble economy was just fine and dandy? I’m only saying that this version of capitalism is over and only smoke and mirrors (bubbles or froth) can keep some minimal growth going. It is unsustainable and that should be obvious and will eventually reach the law of diminishing returns.

        I hope for that small bit of growth to continue so we have time to build a new set of arrangements out of the ruins of the old–the first step is to face reality and stop worrying about ideology and blaming this or that group. Yes, oligarchs run the world as they believe they ought to and the one important reason for their power is that the populace of the capitalist states have acquiesced to the situation. And I hope that part, at least, will change.

          1. Banger

            “not candid or sincere, typically by pretending that one knows less about something than one really does.”

            That is what I am? I am being candid–in fact usually people criticize me for being too candid. Now, I may wrong, misinformed or even whacked out but I don’t think that’s a good description.

  16. NotTimothyGeithner

    Confidence Fairy Part II! Its times like this I wish I still had a NYT’s subscription, so I could cancel it again.

    I love the disgusting way the Democratic tribalists are still trying to push the recovery is right around the corner by promising trickle down economics will pay off.

  17. Clive

    Quote:

    “Why are big companies not investing? It’s not because they need negative interest rates as a kick in the pants. Why should that induce them to invest, as opposed to buy even more stock back, or buy other companies’ stocks (as in make acquisitions)? They are not investing because they have become hopelessly short term. Even in the last expansion, they were net saving. And the reason was executive incentives. I was hearing repeatedly from McKinsey that it was pretty much impossible to get clients to approve any investment or new product idea, no matter how fast the payback. They were absolutely intolerant of any hit to their income statement, and investments inevitably also entail spending (hiring staff, investing in advertising) before the revenues kick in.”

    This is true. It would be bad enough if it was only that. Unfortunately, it’s worse. Failing to invest in productive capability is one thing, but what is also happening is that perverse incentives are so prevalent that capital and/or demand *destruction* is being perpetrated by corporations.

    Let’s cite some examples:

    + Junk fees on delinquent borrowers. Or even junk fees on non-delinquent borrowers. These either distress debt worse than it would normally be or reduce consumption. Skimming machines to do this are already built by the banks so it’s not like they even have to invest in this dubious capacity, they simply using the existing milking suction cups.
    + Failure to do loan mods. If the servicer isn’t incentivised to do mods and the owner of bucket the loan ended up in can’t/won’t influence this, you get needless capital destruction.
    + Resisting environmental protection. A lot of the time, improved environmental regulations are a spur to capital investment. Most of the public want better environmental regulation so politicians may well get a mandate to implement it. But corporations resist because it would require that capital investment which would hit the bottom line. They successfully lobby to water down or nullify any regulation. So a win-win (better environmental standards and capital investment) becomes a lose-lose (the same or worse environmental standards and sweating ancient capital assets reducing investment rather than increasing it).
    + Tax evasion. Obvious this one, but I’ll spell it out. Without a tax base, city, state and federal governments cannot spend (well, they can deficit spend but that carries a high political price). Some public spending is on revenue (hiring, consumables, supplies — just the sorts of things that the quote rightly says are going to occur in investment by corporations if they expand) but some can also be capital. Corporations who don’t pay tax but pay dividends to shareholders tend to give money to those who hoard it. Or spend it on niche consumption at the top-end or invoking asset bubbles. Even if the return to shareholders goes into a benefiting a 401k retirement fund, that is still hoarding of a sort and certainly deferred consumption, when we need more consumption today.

    I’m pretty convinced we’re beyond the point of simply accepting the need for more public spending. Without reigning in unaccountable short-sighted corporations or at least enhancing their sense of social responsibility, it will be like we’re allowing the Morlocks to stay alive, devouring the general population.

    1. James Levy

      Mexico quoted an historian of the ancient world the other day to the effect that crappy pottery is not just crappy pottery–it shows a society losing skills and failing to care (or at least doing nothing about) that it no longer is using good pottery. Failure to invest means fewer people garnering necessary skills for future growth and development, even if that “growth” is in the area of adjusting to a low-carbon, less industrialized world. Substituting computers and robots for people adds to this problem, as does chronic unemployment and underemployment. Our world is in trouble, and it is going to take dedicated and skillful people who can use their hands and their wits, not just MBAs and Ph.D.’s in economics, polisci, and “strategic studies” to pull our asses out of this mess.

      Despotism breeds inertia. The sense that the investor class are the only ones who count and that the government has passed out of the hands of the people is creating a diffident, shoulder-shrugging population, or an enraged one that will likely turn that rage against convenient targets served up to them by a compliant media. It is, as Chris Hedges and others have pointed out, breeding despair, which is about the worst mental state humans can find themselves in. We’ve got to fight those feelings of rage and despair if we are going to salvage anything from the wreckage of the next burst bubble that Summers and Krugman seem to shrug off (why not, they survived the last rupture quite happily). Because the next one may scupper the system for generations.

      1. Clive

        All too true James. And I’m afraid to say that I also put of certain “investment” because (in home refurbishment etc.) the quality of what you can buy today is so far inferior to what you are replacing, you’re loathed to do it. It’s not even down to cost — for some items, no matter how much you pay, the quality is abysmal.

        Here is, literally, a “my mother in law…” anecdote.

        My mother in law has a corded pull switch in the bathroom. It was put in when the house was built, a good 40 years ago. After a lifetime of use, it finally broke. It was built to last, you could tell from the high grade plastic, the gauge of the metal components and the weight / general solidity of the old switch.

        So off I went to the hardware store to replace it.

        What I had to choose from was dire. Shoddy, cheap, almost falling apart even when new rubbish.

        I had no choice, I bought the replacement and fitted it. The new switch is flimsy, erratic in operation and I don’t think it will last ’til next year.

        Not, unfortunately, an isolated incident.

        So yes, we’re living through the modern-day “trashy pottery” dynamic.

          1. from Mexico

            The doctrine of asceticism – the principles and practices of self-denial and austerity — runs through Western civilization like a thread, and it has become a distortional mainstay of New Left thought. Here’s how Bryan Ward-Perkins describes it:

            My conception of Roman civilization, and its demise, is a very material one, which in itself probably renders it unfashionable. The capacity to mass-produce high-quality goods and spread comfort makes the Roman world rather too similar to our own society, with its rampant and rapacious materialism. Instead of studying the complex economic systems that sustained another sophisticated world, and their eventual demise, we seem to prefer to read about things that are wholly different from out own experience, like the ascetic saints of the late and post-Roman worlds, who are very fashionable in late-antique studies. In their lifetimes, the attraction of these saints was their rejection of the material values of their own societies, and our world, which is yet more materialistic and ‘corrupt’, seems to find them equally compelling…. This is a much more beguiling vision of the past than mine, with its distribution maps of peasant settlements, and its discussion of good- and bad-quality pottery.

            –BRYAN WARD-PERKINS, The Fall of Rome and the End of Civilization

            1. Clive

              Thanks ! I think I should send it to Krugman.

              After reading it myself of course. I too can fall into the trap of what I’ll call “economic literature escapism”. As Bryan rightly says, we in our culture (okay, me too !) have a tendency to romanticise the failings of our current paradigm — especially when we benefit from it through our affluence and are spared the most harmful effects of it. In the end, most of the population of the UK are rentiers in some way or other, at least if one takes a world-view rather than a narrow national view.

              I wonder how we in western Europe — and perhaps the US too, I don’t know enough about the culture there to criticise — will react if/when the problems exhibited in countries like Greece spread and start encroaching nearer to home. I wonder too if Krugman has really postulated how societies will have to change if the FIRE sector was to have to go the way of horse and carriage ? If it happened slowly, that would be one thing. But the slower it happens, the more damage in the long term will ensue. If it happened in that space of a year or two… goodness only knows.

              Maybe that’s why all he wants for Christmas is a new bubble. The alternative is too shocking for him to allow to permeate his consciousness.

    2. from Mexico

      Clive:

      I’m pretty convinced we’re beyond the point of simply accepting the need for more public spending. Without reigning in unaccountable short-sighted corporations or at least enhancing their sense of social responsibility, it will be like we’re allowing the Morlocks to stay alive, devouring the general population.

      I share your skepticism.

      If more public spending is the siren call, then what’s to prevent more public spending from going the same way as, for instance, the public spending in Iraq? The vast majority of the public spending in Iraq which was given to contractors was essentially stolen. We’re talking fraud and embezzlement of government funds on a scale the world has seldom witnessed before.

      How did that help anyone other than the corporate theives?

  18. Yancey Ward

    Two wrongs are not going to make it right. The fiscal and monetary camps are basically the same though they try hard to not agree with this.

    What is always missed is that people pursue easy profits- easy in terms of work and time. The entire real economy is being slowly bled to death by its financialization.

    Imagine if you will a productive city. The people of the city produce their own consumption, and, year after year, produce more and more per capita by ever increasing the real capital stock of the city through savings and investment. One day a casino opens downtown called Centralbankaragio, and it is a strange casino in that it can promise easy profits to every player because it can simply print up a never ending supply of currency to pay out. One by one, the townspeople are lured in, start making profits and immediately start recycling these profits in order to make more profits and so on- and why wouldn’t they? The profits are seemingly guaranteed without risk and, by golly, it is just a lot more fun than the tedious hard work at building a profitable factory or investment portfolio.

    On paper, the town gets wealthier and wealthier. At first, the remaining producers of goods and services in the town see a boom in consumption, and they run the factories and the farms flat out, but they learn something very quickly- when they go to get the goods and services they need for capital maintenance and expansion, they find such goods and services no longer available since those producers are also running flat out to supply the consumers, or have decided it was easier to profit at the casino, too. Eventually, the producers throw up their hands and start outsourcing a portion of the production to another town, or join the deluge at the casino. A second town takes up the process of providing the goods and services the first town gave up on as it turned to the casino. This second town is still in the real capital building mindset, and at first it saves and invests on a larger and larger scale to reap the profits from selling to the first town. Indeed, the profits are seemingly so vast it starts buying bonds of the casino and so forth.

    At the end of the day, the first town has a seemingly prosperous GDP that involves a lot of money shuffling between the citizens and the casino, and between the casino and the second town (the export of financial services). The second town also looks prosperous- it produces the consumption goods and services of the first town, it produces its own consumption goods and services, and it produces the real capital for both towns, but it does this because its own population holds its consumption down to a ridiculously low level because of the recycling of profits into casino bonds.

    Yves asked why Krugman seems to bounce between policy prescriptions. He does so because they aren’t different. Krugman has told you this repeatedly, though some never listen. It is what he means when he writes things about a sovereign in control of the currency in which it borrows. In other words, he isn’t buying into the supposed independence of central banks at the end of the day.

    1. James Levy

      A fascinating thought experiment, and an ingenious one. I’m sure many people will insist that it is a misleading one, like the idea that the government is “just like a family that has to balance its budget” (which is nuts, as families that are not amazingly wealthy must borrow money for cars, houses, and educating their children all the time and are therefore very often “in the red”, but I digress). Kudos to you for such a brilliant act of imagination.

    2. from Mexico

      The problem with your story is that it is based on an assumpiton: the loanable funds theory of money.

      It’s all part and parcel of neoclassical economic theory, and Krugman evangelizes it to the best of his ability.

      But here’s the rub: It is, at best, a partial truth. Completely missing from this story is an endogenous theory of commercial bank money creation, and how this can indeed enhance production if the bank-created money is not squandered on non-productive, speculative investment. When a majority of bank-created money is malinvested, the end result is what is known as Ponzi finance.

      Some of us, unlike Krugman, prefer theories which do not depart so drastically from reality.

      1. from Mexico

        And that is just one of the problems with your story. There are others, including:

        1) When Centralbankaragio opens its doors and begins to “print up a never ending supply of currency to pay out,” why does this not result in inflation? Have you never heard of the quantity theory of money? “This holds,” as John Kenneth Galbraith explains, “in its most elementary form, that, other things equal, prices vary directly with the quantity of money in circulation.”

        2) If a political entity runs a trade deficit, such as the first town, then the deficit has to be paid for by either financing or savings. The second city extends credit to the first city. What are its motives for doing this? Have you ever heard of control fraud?

        3) You say the second town “holds its consumption down to a ridiculously low level because of the recycling of profits into casino bonds.” But this has been a feature of capitalism ever since the Dutch began the practice in the 16th century. Have you ever heard of mercantilism?

  19. pero no

    Not so remarkable if you can remember back to the 1990s when Krugman espoused a very regressive and agressive anti-third world economic policy, or back to the 1980s when he worked as an economic advisor to Reagan.

    The Swedish Riski-bank doesn’t give their prize to do-gooders.

  20. susan the other

    Speaking of bubbles, we have an interesting example in India today. It’s a population bubble. Similar to the world’s population ponzi of the previous century that drove all that growth. On France24 last nite there was an interview of India’s new Media Magnate who very nervously expounded on his own economic theory of India Rising to superpower economic status. Because India has an enormous young and breeding population and its inflation/growth will not be stopped. As opposed to China who is facing the problems from their one-child policy and is now easing it somewhat in combination with an easing of market regulations to allow for China’s bubbles to float more of their domestic market. This really sounds insane to me. This is the antithesis of progress. We should be unwinding all the old capitalist growth ponzi with central planning based on environmental cleanup and other socially/environmentally beneficial economies. I think Summers and Krugman should apply for jobs at the Indian Ministry of Economics. That would be good riddance.

    1. James Levy

      Krugman and those like him have been riding the Orient Express all their adult lives. At every stop the lovely vegetables and beautiful roasts and fresh oysters have gotten loaded aboard, their dirty linens sent off to the cleaners, and then the train rolls on. They enjoy luxurious accommodations and get to partake in witty and interesting repartee with people like themselves. Problem is, a bridge up ahead has been washed away in a cataclysmic flood. Everyone onboard vaguely or consciously understands that truth, but the alternative is to stop the train, gather what belongings you can, get out, and walk. Since nobody wants to do that, in fact they have no experience of it, are afraid of what will happen to them if they do, and can’t bear to give up the good life they are enjoying, the train pounds inexorably towards its destination.

      1. Banger

        Sort of sums it up. That’s why we are like the blind men and the elephant–we all have a different perspective and ought to be listening to each other particularly those who have a genuinely different view. This one of the main perils of the age even beyond the current rule of the oligarchs–we aren’t listening to each other very well or we just try to hang out in echo-chambers where we feel validated. This is weak in my view.

        We need a new vision but it must be strong and it can’t be strong unless we take in even the information and viewpoints we don’t like. At first this is painful but it has the twin benefit of opening the heart and the mind.

        We can get off the train and enjoy the very different cultures we encounter as some of us who have traveled off the beaten trail have experienced (i.e., outside tourist hotels etc.)

  21. washunate

    “…this was the era of the Great Moderation, a time of low inflation and generally low interest rates…”

    For those who think Krugman is too neoliberal or rightist or whatever, I would encourage taking some time to consider that quote. This seems to be the underlying attitude that dominates most leftist political economy thinking, too.

    The era of Great Crime better describes this time period than Great Moderation. The cost of a middle class standard of living has risen dramatically from the 1980’s to today. Not because of war or famine or disease or natural disaster or foreigners, but rather due to the systematic concentration of wealth and power through the various mechanisms of domestic public policy, from the monetary system to the criminal justice system to the tax system (ie, Yay Bubbles!).

  22. yancey

    Speculative bubbles as a “new normal?” Hardly true at all. Speculative bubbles have been occurring since 1990’s in currency markets, commodities markets, bond markets, stock markets, and real estate markets. They have occurred in various countries where liberalization of financial markets has allowed deregulated speculation. I see it as a form of blitzkrieg imperialism—foreign investors arrive, apply their precise speculative schemes, create a sector bubble, and then divest, extract a substantial profit, leave the targeted local market in disarray with the burden of recovery on the indigenous population who must “tighten their belts,” and then flee to another appealing profitable locale.

    This type of financial investment is to economics what rape is to sexuality.

  23. tdraicer

    I think Krugman’s reaction here is for the the same reasons as his support of Obamacare: he is convinced that our political system is broken beyond repair, that Obama Democrats are as progressive as the system will allow, and that given that, he is trying to make lemonade with those lemons. It is essentially a policy of despair, and such policies if followed are inherently self-fulfilling prophecies. What Paul really needs are some mood-altering drugs. Or perhaps a kick in the pants, such as YS just delivered.

    1. b2020

      As long as we are trafficking in armchair psychology: I think the Summers envy he confesses is genuine. Krugman does not realize that Summers can toss out radical (and radically destructive) BS because Summers does not care about the roadkill. Krugman wants to be a nice guy, and he also wants to be radical for the footnotes in the intellectual history of mankind’s best-of-season moments of paradigm horsehoes. Summers is just looking for the best way to advance an agenda that benefits the networks of inbred wealth, and he has to sell himself as a retainer – hence the late night TV teleprompter appeal of his “radical” thinking. Krugman does not get that Summers is inside the network (and Krugman is not) because Summers does not take anything serious except the profit made by his tenure as hired gun.

      Summers repackages the status quo as a revolution. Krugman neither gets why, nor does he get that there is really nothing revolutionary here, in any sense of the word.

    2. James Levy

      For what it is worth, I share your belief. Krugman’s intellectual apparatus will not take him where his political sense tells him he should not go.

  24. b2020

    Is it adequate to call Krugman’s defense of bubbles an example of “supply-side monetarism”? We appear to proceed from helicopters to Antonov planes, and the money palettes are no longer spread, but dropped as daisy-cutters, with the impact of thusly concentrated “wealth” obliterating bystanders and pedestrians.

  25. b2020

    One observation: Krugman mentions population, but not productivity. He also does not mention cheap surplus energy.

    Meta Of The Day: We live in a Bubble Bubble!

      1. The Dork of Cork

        A large crisis requires a large plan….or does it ?

        http://www.youtube.com/watch?v=QnSDDXtd5qI

        Its in the very nature of the compound interest system which causes a extreme concentration of capital over time.
        This results in a breakdown of the local production /distribution / consumption system.

        They as keepers of the gate must invent bubbles that the people cannot consume if they are to preserve the relative wealth of those whom they serve.

        Ireland must export stuff it cannot consume to pay off the debt to people who do consume.
        Eventually these people accumulate excess capital and reexport junk we do not need and cannot afford back to us.

        Its a wonderful world don’t you think ?

  26. denim

    YS: “The bottom line is that it’s remarkable to see the lengths to which Krugman will go to defend a broken status quo, both in Washington and the economics profession.” No, the bottom line is Krugman that he does not defend the status quo. He wrote a whole book attacking it.

    How to End This Depression
    Paul Krugman:
    “For the fact is that we have both the knowledge and the tools to get out of this depression. Indeed, by applying time-honored economic principles whose validity has only been reinforced by recent events, we could be back to more or less full employment very fast, probably in less than two years. All that is blocking recovery is a lack of intellectual clarity and political will.

    But one question remains. I have argued that in a deeply depressed economy, in which the interest rates that the monetary authorities can control are near zero, we need more, not less, government spending. A burst of federal spending is what ended the Great Depression, and we desperately need something similar today.”

    http://www.nybooks.com/articles/archives/2012/may/24/how-end-depression/?pagination=false

    1. Hugh

      Again typical Krugman. He mentions depression and spending, establishes a little liberal cred, and then he goes back to the same old same old for a year. What you don’t see him doing is making these issues the centerpiece of his analysis. You don’t see him take on the powers that be because, of course, it is those powers who have given him his career, position, recognition, and privileges.

      1. from Mexico

        Krugman runs a one-man disinformation campaign, with the help of the NYT of course.

        Steve Keen takes a wrecking ball to some of the more outrageous ignorance and stupidity being peddled by Krugman.

        http://www.youtube.com/watch?v=YKDicjsiHrY

        Is it posible for Krugman to be that ignorant?

        I don’t think so. Krugman’s ignorance is willful, deliberate and malicious.

        1. Hugh

          I think it is an effect of class. That’s not an excuse, but an explanation. As Niebuhr observed, elites identify their interests with, or to be blunter substitute their interests for, the common good. This is inherently hypocritical since elite status is supposedly predicated on knowing the difference between the two, and precisely why I argue the system of privileges which define the elites should be abolished.

  27. Hugh

    As I keep pointing out, Krugman is an Establishment liberal. That is he is a member in good standing of the same class of rich and elites who are looting us. Krugman is a liberal in the sense that he will occasionally use progressive wording in his writing. It doesn’t mean anything. Last week, there was some piece up about how Krugman finally seemed to be showing some understanding of how a fiat currency works. I predicted then that Krugman’s epiphany would not last and that he would revert to his standard claptrap.

    Krugman is supposed to be an opinion leader, but it is more than a little incongruous, if Krugman were actually on the level, that we are waiting on him to make associations and connections that the rest of us made years ago. What Krugman really is is a propagandist for kleptocracy targetted at a liberal audience. As I said last week, the reason why the rich prefer monetary approaches to fiscal ones is that monetary policy allows for more direct transfer of wealth to the rich whereas fiscal policy no matter how well looted results in more leakage of wealth to the non-rich. Small wonder then that Krugman would find some rationale to back such action.

    What is important to understand is that Krugman is not on our side. He has never been on our side. He never will be on our side. If he were on our side, he would be fighting a kleptocratic hack like Summers, not sucking up to him. And he would reject his class, the elite managers of kleptocracy, and the Democratic party, one of its Trojan horses. But he won’t. Krugman is not a good guy with some bad ideas. He is a bad man who knows how to drop a few good sounding phrases here and there. There is a difference between the two.

  28. stasko

    If one watches Summer’s speech and reads Krugman and even Auerback, and this article here by Naked Capitalism. They are all saying the same thing. Current Monetary policy can no longer do any good. It only next step is to go into “negative interest” The Liquidity trap, like hair in the sink drain, sits there not being invested. Why, because there are no investment frontiers. The call is for Fiscal policy now. For our leaders to “create projects that will help our country and bring wealth to the working middle class….ie Keynes model. Problem to do design projects fopr our country, state, or locality. In VA we need improvement big time to Interstate 81. We could all use a railroad system that embraces 21st century technology instead of the same from 1850’s. Design it and build it.

    1. Jackrabbit

      stasko,

      You have several comments on Krugman’s blog that support his blubbles-are-good position.

      So it seems a bit suspicious, to say the least, that you make a comment here that attempts to confuse the issues of WHAT is wrong, as well as HOW to fix it.

  29. ChrisPacific

    So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures?

    Easy – because the profits from said bubbles accrued largely to the 1%, the 99% never received any real benefit from them. Since it’s the consumer spending of the population as a whole that drives inflation, and the 99% are worse off than they were, inflation remains low. Next question.

    (Krugman would find plenty of evidence of this if he bothered to look. He might look at price changes in the ultra-luxury real estate sector relative to other sectors, for example).

    Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest…

    Summers is a twit.

  30. Tim Gawne

    Let’s make this clear.

    KRUGMAN IS A SHIT.

    KRUGMAN IS A SHIT.

    A man who pushes for race-to-the-bottom ‘free’ trade agreements.

    A man who pushes for cheap-labor-uber alles immigration policies.

    A man who in general pushes for massive population growth so that the average person can be crushed into misery and the rich can get even richer.

    A man who flacks for the welfare-for-insurance-companies that is Obamacare.

    Krugman is a shit. A whore, a liar, a carpetbagger. He is like Obama, in that after a totally vile administration we are so desperate that we will fall in love with mere words – but they are just words, after all, and we’ve been scammed.

    Krugman is a shit.

  31. dcb


    The bottom line is that it’s remarkable to see the lengths to which Krugman will go to defend a broken status quo, both in Washington and the economics profession.”

    Are you kidding me, that’s all he ever does. sadly all to many of his followers don’t see it. the man disgusts me.

  32. Knute Rife

    Right diagnosis, wrong prescription. We now have an economy that can not approach full employment without a bubble; bubbles, though, are not the answer. The prescription is to recreate an economy that produces something other than paper, hot air, and econo-Quatsch. But that would return power to the average Joe, and we can’t have that.

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