"One lesson from the Great Depression is that you should never underestimate the destructive power of bad ideas. And some of the bad ideas that helped cause the Depression have, alas, proved all too durable: in modified form, they continue to influence economic debate today.
What ideas am I talking about? The economic historian Peter Temin has argued that a key cause of the Depression was what he calls the “gold-standard mentality.” By this he means not just belief in the sacred importance of maintaining the gold value of one’s currency, but a set of associated attitudes: obsessive fear of inflation even in the face of deflation; opposition to easy credit, even when the economy desperately needs it, on the grounds that it would be somehow corrupting; assertions that even if the government can create jobs it shouldn’t, because this would only be an “artificial” recovery.
In the early 1930s this mentality led governments to raise interest rates and slash spending, despite mass unemployment, in an attempt to defend their gold reserves. And even when countries went off gold, the prevailing mentality made them reluctant to cut rates and create jobs."
"In recent weeks there have been a number of statements from Fed officials, mainly but not only presidents of regional Federal Reserve banks, calling for an early return to tighter money, including higher interest rates. Now, people in the Federal Reserve system are normally extremely circumspect when making statements about future monetary policy, so as not to step on the efforts of the Fed’s Open Market Committee, which actually sets those rates, to shape expectations. So it’s extraordinary to see all these officials suddenly breaking the implicit rules, in effect lecturing the Open Market Committee about what it should do.
What’s even more extraordinary, however, is the idea that raising rates would make sense any time soon. After all, the unemployment rate is a horrifying 9.8 percent and still rising, while inflation is running well below the Fed’s long-term target. This suggests that the Fed should be in no hurry to tighten — in fact, standard policy rules of thumb suggest that interest rates should be left on hold for the next two years or more, or until the unemployment rate has fallen to around 7 percent.
Yet some Fed officials want to pull the trigger on rates much sooner. To avoid a “Great Inflation,” says Charles Plosser of the Philadelphia Fed, “we will need to act well before unemployment rates and other measures of resource utilization have returned to acceptable levels.” Jeffrey Lacker of the Richmond Fed says that rates may need to rise even if “the unemployment rate hasn’t started falling yet.”
http://www.nytimes.com/2009/10/12/opinion/12krugman.html?hpw
Wednesday, October 14, 2009
Krugman: Falling Dollar
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6 comments:
Sorry, what was the incredible insight Krugman (another reason the Nobel brand is failing) communicated here?
There's an incredible assumption here that unemployment is a function of interest rates that anyone would have much difficulty proving.
Low unemployment is a symptom of a healthy economy, nothing else, so the banks and the government should do what they need to in order to make the economy healthier; to encourage production and investment. They're not doing either.
There's a lack of credit in the US because there's a lack of capital because there's a lack of savings, because there's no incentive to save, because interest rates are too low.
Raising interest rates would cause a sharper recession in the short-term, but it is the long-term we should be concerned about.
Oh, and nowhere in this article did Krugman explain why a falling dollar is good.
There's an incredible assumption here that unemployment is a function of the worth of the dollar that anyone would have much difficulty proving.
"Low unemployment is a symptom of a healthy economy, nothing else, so the banks and the government should do what they need to in order to make the economy healthier; to encourage production and investment. They're not doing either."
Garbage. High wages and the subsequent spending regime is a healthy economy.
"There's a lack of credit in the US because there's a lack of capital because there's a lack of savings, because there's no incentive to save, because interest rates are too low."
There is a lack of credit because the banks made a huge number of fault loans, BECAUSE they were deregulated.
"Oh, and nowhere in this article did Krugman explain why a falling dollar is good."
He said a lower dollar, not a falling dollar, is better for exports, which is true.
"Garbage. High wages and the subsequent spending regime is a healthy economy."
Where do high wages come from? (not nominally, but real high wages)
"There is a lack of credit because the banks made a huge number of fault loans, BECAUSE they were deregulated."
The credit used for these loans was not derived from real capital as credit should be. Because it didn't represent real capital, but simply paper money printed out of thin air and given to them for free, there was a moral hazzard and they took riskier bets than they would have had their credit been derived from a real pool of capital with a real market-determined cost associated.
"He said a lower dollar, not a falling dollar, is better for exports, which is true."
Well fuck, if a weaker currency is basis of a healthy economy, lets all move to Mexico.
Krugman is pro nominally high wages, and pro weak dollar. SO he's pro giving people the delusion they're making lots of money while also supporting the devaluation of this money which makes the people who are earning it more poor. What a fucking tool.
"Where do high wages come from? (not nominally, but real high wages)"
From class struggle and the threat of force.
"The credit used for these loans was not derived from real capital as credit should be. Because it didn't represent real capital, but simply paper money printed out of thin air and given to them for free, there was a moral hazzard and they took riskier bets than they would have had their credit been derived from a real pool of capital with a real market-determined cost associated."
Deregulated.
"Well fuck, if a weaker currency is basis of a healthy economy, lets all move to Mexico."
Canada has had a weaker currency for decades. What are you talking about?
"Krugman is pro nominally high wages, and pro weak dollar. SO he's pro giving people the delusion they're making lots of money while also supporting the devaluation of this money which makes the people who are earning it more poor. What a fucking tool."
You seem to be forgetting the unions.
"From class struggle and the threat of force."
So, the poor class is threatening to use force to gain a larger share of profits, right? Where do the profits come from?
"Deregulated."
Well, kind of. The moral hazzard created by the Fed printing of money essentially removed any natural regulation that had existed in the free market. Because credit was seemingly unlimited, there was no worry of the consequences and people gambled more than they would have if the illusion of unlimited credit didn't exist.
"Canada has had a weaker currency for decades. What are you talking about?"
Since when has Canada had the strongest economy in the world?
The US economy became the strongest in the world because it had the strongest currency; Britain was the same before it; and now China is building a stronger currency as its economy continues to grow.
"You seem to be forgetting the unions."
What do unions have to do with Krugman being a tool?
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