

A Critique of Krugman's Economic (not political) Commentary - sridharvembu
http://blogs.zoho.com/in-the-news/coherently-yours-professor-krugmans-track-record-of-economic-commentary/

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bokonist
I am sympathetic to the Austrian critique, but there's a big problem with
refusing to print any money and just letting the debt pyramid collapse. M0,
the actual amount of green dollar bills in the world, is at $750 billion. MZM
( Money Zero Maturity, all the money in bank accounts and money market funds)
is at $8.5 trillion. If the Fed refuses to use the printing press - ie it
refused to print money or give loans to bail out the FDIC, and refused to bail
out the money market funds - there will be a giant bank run as everyone with
dollars in a money market fund rushes to redeem the holdings with actual green
dollar bills. We're not talking about a couple big Wall St. banks going out of
business. We're talking about every startup that has VC funding in a money
market fund losing everything. We're talking about every mortgage in the world
defaulting. Every bank account will vanish.

Of course, this won't happen, but only because Bernanke has guaranteed the
assets of money market funds and the FDIC by promising to print money. Now, I
think it is awful that MZM grew to be 10X the size of M0. The Austrians are
right to condemn the fractional reserve policies that caused MZM to get so
big. But the only thing the Fed can do now is to print money to make the two
match, and then make sure it never happens again.

~~~
sridharvembu
_The Austrians are right to condemn the fractional reserve policies that
caused MZM to get so big. But the only thing the Fed can do now is to printing
money to make the two match, and then make sure it never happens again._

To even have that discussion, there has to be acknowledgment from academia &
the Fed that their policies led to this. Right now, the intellectual climate
is far, far from any such acknowledgment. In fact, the Nobel for Krugman
signals exactly the opposite. It has conferred on him a degree of economic
credibility (and perceived infallibility) that, frankly, he does not deserve -
that was the point of my post.

Without that Nobel prize, he was easy to ignore as just-another-commentator.
Not now. Yet another Keynes quote seems appropriate, why this debate is
important:

 _The ideas of economists and political philosophers, both when they are right
and when they are wrong, are more powerful than is commonly understood. Indeed
the world is ruled by little else. Practical men, who believe themselves to be
quite exempt from any intellectual influence, are usually the slaves of some
defunct economist. Madmen in authority, who hear voices in the air, are
distilling their frenzy from some academic scribbler of a few years back._

~~~
bokonist
I don't expect much intellectual truth and reconciliation from academia. What
will actually happen is the Fed will continue to informally create money ( via
guaranteeing debt MZM rather than actually printing greenbacks) to get through
the crisis, and we'll either end up with prolonged stagnation or a return to
"the great inflation". As non-optimum as this is, I'd rather have Bernanke at
the helm, than say Ron Paul. The Austrians don't realize that you can't just
let MZM collapse and have everything turn out hunky dory after a bit of pain.

------
miloshh
The article has some good points, but Paul Krugman does too. The modern
"keynesian" view that the Great Depression was caused by very bad policy of
the Fed (keeping very high interest rates and desperately clinging to the gold
standard) seems very close to the truth. But, on the other hand, the people
running the Fed now, trying to avoid the mistakes of that era, might be going
to the other extreme of keeping interest rates too low and printing too much
money.While that might make the current recession relatively short and mild,
it will prepare the ground for further bubbles - people, worried about their
cash losing value, will invest like sheep into the next big thing, until it
bursts again. So, maybe the right balance is somewhere between "keynesian" and
"austrian"?

~~~
Prrometheus
Part of the problem is that the central bank only measures inflation by
consumer prices, and not investment asset prices. As long as consumer prices
rise slowly, central bankers feel no hesitation in following loose monetary
policy. This is true even as stocks and real estate prices take off into the
stratosphere, causing potential instability.

~~~
sridharvembu
Recently, Bernanke seems to have come around to accepting that asset prices
are important to monetary policy, breaking a long-held Fed orthodoxy, dating
back to Greenspan. Contrast his speech in 2002, where he outlines the"don't
burst a bubble but clean up the aftermath" philosophy:

[http://www.federalreserve.gov/BoardDocs/Speeches/2002/200210...](http://www.federalreserve.gov/BoardDocs/Speeches/2002/20021015/default.htm)

with this recent speech in October 2008:

[http://business.smh.com.au/business/bernanke-signals-new-
app...](http://business.smh.com.au/business/bernanke-signals-new-approach-to-
bubbles-20081017-52kv.html)

