Krugman: If our financial system is so high-strung, so manic-depressive...

[Kurt_and_Hunter]

This is a challenging blog entry... full of food for thought. The topic is how these crazy economic events happen when what seem to be the narrow economic causes are not big enough to cause the effect.

Paul Krugman
January 13, 2010, 7:16 am
Percents And Sensibility

Brad DeLong makes a very good point:

If you believe that the Fed kept the fed funds rate 2% below its proper Taylor-rule value for 3 years, that has a 6% impact on the price of a long-duration asset like housing. Even with a lot of positive-feedback trading built in, that’s not enough to create a big bubble. And it wasn’t the bubble’s collapse that caused the current depression–2000-2001 saw a bigger bubble collapse, and no depression.

This is actually a very broad problem with all accounts of the crisis that try to exonerate the private sector and place the blame on the government and/or the Fed: none of the proposed evil deeds of policy makers were remotely large enough to cause problems of this magnitude unless markets vastly overreacted. That is, you have to start by assuming wildly dysfunctional financial markets before you can blame the government for the crisis; and if markets are that dysfunctional, who needs the government to create a mess?

This logic applies, as Brad suggests, to all attempts to explain the crisis in terms of excessively low Fed funds rates for a few years. It applies to John Cochrane’s story that financial markets are efficient, but were terrorized by George W. Bush’s scary speech, and John Taylor’s basically similar claim that policy uncertainty in the couple of weeks after Lehman fell did it. It applies to claims that the Community Reinvestment Act and/or Fannie Freddie somehow led to massive bubbles in high-end housing and commercial real estate.

Put it this way: if our financial system is so high-strung, so manic-depressive, that low rates for a few years can inflate a monstrous bubble, while a few discouraging words from high officials can send them into a tailspin*, this doesn’t make the case that policy must walk on eggshells, forgoing any attempt to fight prolonged unemployment. Instead, it makes the case for much, much stronger financial regulation.

*I find myself thinking of the old comedy routine in which a doctor tells his patient, “You’re a very sick man; the least shock could kill you” — whereupon the patient lets out a strangled cry and drops dead.

http://krugman.blogs.nytimes.com/2010/01/13/percents-and-sensibility/

[phantom power]

1. Somebody just un-recced a call for more financial regulation?

pourquoi?

:shrug:

[uponit7771]

3. The number of gopers who post here has been rising based of some of the RW TP's that have been

...given against Obama.

One person 3 weeks ago asked me if rhetorically if Obama was from Chicago.

[villager]

4. there seem to be some phantom pro-bankster unreccers on the board...

n/t

[uponit7771]

2. Sounds like Krugman see's a STRUCTUAL issues with our M1 and M2 not just a passing

...one and I pray the Obama admin takes the time to listen to the people warning for the worst and not do a Bush and ignore it.

[Democrats_win]

5. Because of the FDIC, we must regulate or pay the costs of the casinos.

The FDIC gives the banksters the freedom to gamble without risks. Regulation is essential. Of course the FED and the government also helped banks that they were not required to help. That is a shame. Instead they need to start putting them all in jail.

[Gman2]

6. The way we, particularly rethugs treat our economy

as an angry, tempramental, entity, that cannot be urged or cajoled, is to elevate it to akin to an early mans GOD. This econ, with its horribly predictable dips and rises, is what the rich use, to position themselves to buy up all our asetts, at firesale prices. That is why we are told we HAVE TO live with the volitility. It is built in.

[TheKentuckian]

7. K&R Mr Krugman emerges from my undercarriage again

[Kurt_and_Hunter]

9. Under-the-bus is a revolving-door... how's that for a mixed-metaphor?

[bullwinkle428]

8. Some bastard commentator on NPR's financial report segment was STILL

trying to lay the lion's share of the blame for the mess at the feet of Fannie Mae/Freddie Mac!

The douchenozzle actually does bring up the establishment of Glass-Steagall in 1934, but doesn't say a word about its abolition in 1999!

Dude, you would have had more credibility with me if you were trying to sell the idea that Saddam hid the WMDs in the trunks of cars and moved them out the country that way!


http://marketplace.publicradio.org/display/web/2010/01/12/pm-gordon-commentary/

[Yavin4]

10. Krugman Is Doing A Very, Very Important Job Here

There is intellectual conservatism. Yes, it does exist, and it's far more dangerous than the idiot conservatism on Fox News. Intellectual conservatism is working overtime to pin the blame of the collapse on governmental policies, knowing that there's a built-in audience that wants to blame the government for everything. (See idiot conservatism mentioned above.)

The responsibility of this collapse falls squarely on the private sector, and the financial sector in particular. These folks lobbied hard for financial de-regulation, and they were successful. And now that a financial collapse has occured, they must accept the blame, not pass it on to government.