
Krugman - Life Without Bubbles - Anon84
http://www.nytimes.com/2008/12/22/opinion/22krugman.html?_r=1&em
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mhartl
Krugman proves that you can be a NY Times columnist, Princeton professor, and
Nobel laureate, all without (apparently) understanding some very basic
economics. Repeat after me:

    
    
      * Going into debt to buy foreign goods is bad.
      * Going into debt to buy domestic goods is bad.
      * Not going into debt to buy foreign goods is fine.
      * Not going into debt to buy domestic goods is fine. Hence
      * The "trade deficit" is entirely beside the point.  Moreover,
      * Consumer spending is not the cause of prosperity.
      * The collapse in consumer demand reflects people realizing they were spending beyond their means.
      * Having the government "stimulate" the economy with demand only postpones the inevitable, because
      * There are too many companies making too many consumer goods, and
      * This has to change.
    

Recession is the cure, not the disease. Why can't people understand that?

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mattobrien
Because the "cure" threatens to kill the patient. The current recession is
deflationary - something we have not seen in the US since the Great
Depression. Whereas monetary policy can rather easily counteract a typical
recession - and be used to bring a recession on as in 1982 to "cure" the
economy of persistent inflation - in a deflationary environment monetary
policy has little or no traction. And today, without fiscal stimulus, we could
realistically find ourselves in a deflationary spiral. Businesses and assets
that are otherwise sound can get pushed down in a vicious circle of
deleveraging and shrinking demand resulting from lower prices and lower wages.

This has already begun. We've effectively seen a run on the shadow banking
system of investment banks, prime brokers, hedge funds, etc., as initial
losses in subprime have forced firesales of other assets to meet margin calls.
To be sure, the credit bubble extended far beyond subprime, and the
deteriorating economic fundamentals support continuing write-downs and losses
on Alt-As, option ARMs, prime mortgages, auto loans, credit card debt, student
loans, etc. But the credit market's subsequent freezing has put everyone at
risk, so that the recession could potentially far overshoot the "disease" of
over-indebtedness and overconsumption. Absent the government stepping in and
trying to make use of the wasted capacity in the economy, making up for lost
private and business investment, this process could spiral on well beyond what
the economic fundamentals justify, and past anyone's ability to predict as
well.

Yes, this recession is the result of previous bad choices, but that doesn't
mean we shouldn't try to ameliorate the worst consequences and prevent a
negative feedback loop. Telling people that this is the "cure" without trying
to end the cycle of loss smacks of neo-Hooverism.

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yummyfajitas
No, it isn't deflationary. We had bubbles in housing, oil, food, and other
commodities. Anyone remember the news articles saying "food prices are rising
to levels not seen since 1998, gas prices too, the end is nigh?"

Those bubbles have burst, and prices are returning to their normal level. Over
the short term, that looks like deflation (just as the bubble looked like
inflation), but it's really very different from actual Japan-style deflation.

By the way, "shadow banking system" is just a scary term invented by Paul
Krugman to describe non-S&L investors.

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mattobrien
How is it actually very different from Japan-style deflation? The problem is
that as the credit bubble has popped, prices across the board are falling, and
consumers are so scared that even relatively well-off people are cutting back
on consumption.

And once deflationary expectations set in, it's very difficult to rid the
economy of them. For example, if you expect housing prices to fall even more,
it makes sense to wait a few months for them to do so. If enough people act
this way, deflationary expectations become self-justifying, and prices could
keep falling even beyond the fundamentals. And while individuals benefit from
their dollars having increasing buying power, this is more than offset by the
fact that in the face of falling demand, companies will have to slash
payrolls, either through benefit reduction or layoffs. This is in turn lowers
demand, deteriorating the business environment even more. And this is to say
nothing of the fact that people's debts become larger in real terms during
deflation, likely causing more defaults of all sorts.

The shadow banking system refers to financial institutions that act like banks
- ie borrow short, and lend long, oftentimes in illiquid assets - but don't
have the protections that banks do, most importantly depositor insurance.
Consequently, institutions like investment banks or hedge funds can still
experience the equivalent of bank runs. Bear Stearns was a perfect example of
this.

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shantirao
It's like the triangle inequality: N(opinions) > N(economists)

