The horizon is not so far as we can see, but as far as we can imagine

Krugman is trivially right and essentially wrong

When he says:

In fact, we know what a system in which banks are allowed to fail looks like: that’s how the US banking system worked before the creation of the Fed. And you know what? It wasn’t a smoothly functioning system, with sound banking enforced by market discipline; it was a system periodically wracked by “panics” that destroyed peoples’ savings and plunged the economy into recession.

Finally, because that’s what really happens when banks are allowed to fail freely, promises not to bail out banks in the future aren’t credible. Fail to reform finance now, and there will be two, three, many TARPs in our future.

Again, small banks have been allowed to fail.  Today.  In large numbers.  So it is credible that small banks will be allowed to fail in the future.  It’s not the only thing which has to be done, but it is a necessary step.

The idea is that if every bank is small, no bank knows it specifically is “too big to fail”, and no bank thinks that it might not be one of the banks allowed to fail.

Finance is not going to be reformed enough, in any case. You know it, I know it, Krugman knows it.

TARP is a distraction.  It wasn’t necessary.  What happened, that mattered, was done mostly by the Fed with Treasury’s collusion, but that 700 billion was never needed, since the Fed can pull money out of its bum (and did.)

This is misleading:

Now, in 2008-2009 the shareholders were not cleaned out, and the bondholders left untouched; in part this was a policy decision, but it was also influenced by the lack of “resolution authority”: there was no clean, well-established route for seizing complex financial institutions. We can fix that, and deal with future Citigroups (one of which, given history, is likely to be … Citigroup) the way the FDIC deals with smaller banks: protect the depositors, clean out the shareholders.

This was entirely a policy decision.  While, no, the FDIC hadn’t closed down anything as big as Citigroup before (because before Glass-Steagall was repealed it was illegal to be as large as Citigroup), it had all the authority it needed and could have taken over Citigroup any time it wanted to.

This is a Bush response.  “I fucked up and didn’t do the right thing, so I need more authority, even though I had all the necessary authority.”

Granted, better regulation is needed, but the parts of regulation which failed were prior to the financial collapse.  The necessary authority to wipe out shareholders was in place.  That was a policy decisions—a political decision.  Neither Bush nor Obama was willing to greenlight the FDIC to do its damn job.

This is perhaps the stupidest disagreement I’ve seen in some time: no one who thinks breaking up banks is necessary thinks it is sufficient.  Why is Krugman acting as if they do?  Why does he want to protect large banks from breakup?  Why are we even talking about this?


Fighting Back Against the Drive to Slash Entitlements


The Tao of Experts: Credentialism and Paul Krugman


  1. A Cooper

    I’ve often wondered what Obama had spoken with Krugman about when they had their little closed door session some months back.

    I have no doubt Krugman was one of the important dissenters during the Bush years, and it was absolutely necessary to defang him.

    I don’t pay K. any mind anymore. I put him in the pool of poisoned by access like Kos.

  2. I think Krugman will attack whatever straw-men he can to help position Obama in the imaginary center of any given policy debate.

    Since Obama’s policies are verifiably and objectively incorrect, that means Krugman has to paint Obama’s critics as less reasonable people, farther from the truth, overly emotional fanatics, so that Obama is the golden happy kumbaya land between Republican reactionaries and some imaginary leftist revolution-in-waiting.

  3. Does anyone know anyone who has “access” and is not “poisoned” by it?

  4. Ian Welsh

    I have not uniformly attacked people as “access bloggers”, in fact I’ve never used the phrase. Sometimes it can corrupt, sometimes it doesn’t. More to the point, it tends to compromise…

  5. I was actually replying to A Cooper—but still, the whole “access blogger” term is kind of, um, well, I won’t use the word I’m thinking of. How exactly do you get things done in government unless you have, at some point, access to it?

    As for Krugman, he’s a standard issue neoliberal, or at least a standard issue neoliberal circa 2000. If breaking up the banks is necessary but not sufficient, then what is sufficient upon breaking up the banks? You and I know some of the answers but they are neoliberally inadmissible. Therefore, breaking up banks is not admissible either.

    Nevertheless on balance I think Krugman now does more good than harm. He’s not the lesser of two evils, but he’s not the greater of two goods either.

  6. Bolo

    Ian: A bit OT, but have you read this yet (.pdf file)?

    “The 7 Deadly Innocent Frauds of Economic Policy” by Warren Mosler. Just curious if you have an opinion on it and/or if you think he’s wrong (and how wrong).

  7. Jonatan

    Hi Ian

    You write:
    “Again, small banks have been allowed to fail. Today. In large numbers.”

    Are you talking about the banks that FDIC have taken over? They have not been allowed to fail, they have been nationalized. This happens automatically, right? Correct me if I am wrong.

    – Jonatan

  8. Like Jonatan, I wanted to mention that being taken over by the FDIC is not the same as failing, in the real sense of the word. In the latter case, depositors would lose all their money. The FDIC, ie taxpayers, pay the depositors up to the guaranteed amount if the bank doesn’t have enough funds. It really would not be credible if anyone suggested letting any and all depositors lose their savings if banks failed.

  9. Jonatan – The FDIC typically sells the bank’s worthwhile assets, ie their customer base, to another bank which takes over providing them services. Sometimes they have to take over the dead bank themselves, but most of the time they’re just the people who transfer assets over to the new bank while covering the depositors.

    So, in that sense, small banks are allowed to fail, and yet not taken over by the government either. The shareholders and such for a bank the FDIC takes over aren’t protected, and they don’t get infinity free dollars from the Fed to generate ‘profit’ either. The poor schmucks who had checking accounts there are shielded from the bank’s incompetence though.

  10. Ian Welsh

    What John Sears said. What I’m concerned about is the shareholders being wiped out, bondholders taking a haircut and executives losing their jobs. Depositors keeping their guaranteed money is fine.

    Nobody is suggesting letting depositors not keep their guaranteed FDIC money.

  11. I love it when banks complain about paying too much to be covered by the FDIC and what not, acting as if they don’t also receive an absolutely vital service when their depositors are insured. Thanks to the FDIC, bank panics are mostly a thing of the past. What’s the worst that could happen, realistically, if your bank goes under? Not much, if you’re talking about guaranteed deposits. Eventually you might have a different branch to go to, and your next debit card has another name on it.

    For what it costs the FDIC is an enormous benefit, not just to society but to the banksters themselves. It’s a real measure of their own greed and idiocy that they can’t see that.

  12. A Cooper

    Mardos, to be clear on what I wrote: I did not say all access poisons. I said Krug. belongs in the poisoned by access pool, say group if you like, like Kos.

    I still read Krugman’s blog posts on economics, especially the wonky stuff. But I tend to skip his op eds these days.

  13. A Cooper

    Pardon 🙁 I meant Mandos. Almost called you Markos, and caught at least that much.

  14. I’m bummed about Krugman. I’d (stupidly) ignored “the grim science” most of my life mostly because money appalls me, and despite the last decade or so of cramming some serious study, I leaned on Krugman as a beacon that I could sort of trust when grappling with these questions (as a lay sociologist, I had to relent and give economics some serious attention when I realized how much it is an expression of our inner life and its relationship with the Other). However, these days, I agree with Mandos’s “neoliberal” characterization.

    Just still glad you’re still putting your 2 cents in, Ian. I find your posts, past and present, quite edifying (and I fact check!) :))

  15. Realist

    Petro – first, I think it’s great that you raise that question as soon as you encounter such a story! It wouldn’t take even a small majority of people doing that to improve our circumstances.

    As to your question, while I’m no insider, there are indications that there’s less here than meets the eye. First, this is a civil complaint – even though the charges are quite serious, there is no sign of criminal charges. Second, as far as I can tell, they are focused on lowly VPs (yes, in case you don’t know, in Finance, VPs are the minions – the title is intended to impress clients.)

    Now, even if the intention is to give the false impression that they’re going after the “fat-cat” bankers, I still think this is good news because it can create momentum in the right (heh) direction. There’s no guarantee that they (yes, they – you know who) can control the process beyond a certain point. Here’s hoping…

  16. The SEC complaint smells of kabuki. They tend to either lose these kind of cases or seek ‘penalties’ that are small enough to be shrugged off as rounding errors let alone being dismissed as the cost of doing business.

    The weakness in the SEC complaint is that it’s not actually illegal to design and market a security that’s designed to explode. GS legal liability would appear to be limited to failing to disclose conflicts of interest rather than for (allegedly) manufacturing the financial equivalent of an IED.

    We need a financial terrorism statute so bankers who cause severe damage to the world economy can be detained as terrorists without the need for a trial.

  17. Marks

    Well, I only took one economics class in college. Macro. While I aced the course, I have never tried to claim any expertise in the field – one which I find generally baffling. I leave it to trusted experts such as the Nobel prize winning economist Paul Krugman. This may seem unfair, because I already know the answer, but when you go after Krugman, a hero of mine and someone you have already stated was basically the gold standard, you better have the credentials to back it up.

  18. Ian Welsh

    Credentials, prizes and heroes, eh? You get what you deserve if that’s how you judge things. You wouldn’t like what many economists who have won the Nobel prize think.

    And I have disagreed with Krugman in the past, for example on the oil price run-up in 2008. Not to put too fine a point on it, but he was wrong and I was right.

    No one is infallible, that includes both Krugman and myself.

  19. Formerly T-Bear

    @ Marks

    When returning to university (late 60’s) after military service in the 60’s, my estimate was about 70% of the students were in some manner “cheating” in their studies to get graded; anything from plagiarism, obtaining copies of exams beforehand, claiming work not actually done, etc. etc. Less than 30% were actually obtained grades to greater than 70% fraud. On obtaining their Bachelors many went on in academia, understandable since the Vietnam “War” was raging and the draft was being avoided. That generation produced more than 70% fraud, and set the bar for acceptability of fraud in academic degrees awarded. I don’t suppose it is much different today, what with the economic pressures. Put your trust in academic degrees at your own peril, me, I’d use substantial “salt”.

    @ Bolo

    Interesting product, it parallels or matches much of my early introduction to economics in the 60’s although at the time I do not recall reading confirming writings or finding the written sources. Two subjects appear to be missing though: 1.) How the economic model is viewed if inflation is not taken as the increase in prices but rather that inflation is the erosion in the exchange value of the economic medium of exchange from monetary or fiscal policy taken by governments. 2.) Viewing taxation as enforced spending of income to ensure efficient cycling of income; savings being demand inefficient and investment insignificant; e.g. income tax below the income necessary to save is counterproductive, income tax on incomes greater than that required to produce savings at a level the savings become self-sustaining is essential for demand efficiency.

  20. Formerly T-Bear

    @ Marks

    When I returned to university in the late 60’s after serving in the military, I estimate that more than 70% of the students then were involved in cheating to get or maintain their grade point average, motivated to avoid the draft. Translated, more than 70% of Bachelors degrees had some level of fraudulence involved. This set the bar for all those that followed. Trust the validity of academic degrees accordingly, and at your own risk. For myself, letters after one’s name are to be taken with substantial “salt”, particularly MBA’s and economists. Your milage may vary.

    @ Bolo

    The project you linked to was interesting, it parallels a lot of my early exposure to economics although I never came across the source since, the arguments for were about the same. Two items might be included in the seven offered. First, inflation, instead of being seen as price movement in response to cost, provides an interesting perspective on economic models when seen as erosion of value of the economic exchange medium brought on by governmental manipulation of monetary or fiscal policy creating changes in demand efficiency.
    Second point, the taxation of income, might be seen as enforced spending of income to effect efficiency for economic demand. Such tax is counterproductive at income levels below those necessary to generate savings, and deleterious to effective demand if not applied to incomes that generate savings that become self sustaining, and progressively applied to incomes between those two conditions.

    Ian, my comment # 6546 which this is a pale reproduction seems to have disappeared when submitted. Can it be retrieved and replace this?

  21. Ian Welsh

    T-Bear, I’m afraid I don’t have 6546, but only the two you sere here.

    Bolo: he makes some very good points. The problems with what he says aren’t that he’s wrong, but that he’s not dealing enough or at all with things like capital formation, skill sets (he touches on this with his comments on education) and with resource/technology purchases from other countries. The role of having the world’s reserve currency is very important, the point that the US consumes far more than its share of raw resources is important (he touches on this, but doesn’t deal with it, exactly) and so on.

    I may write on it at some point, I’ve been meaning to deal with MMT for a long time. It gets a lot of things right, but by focusing too much on accounting identities it also ignores some very important things. The important things China and Japan get in exchange for their exports to the US aren’t money.

    For a hint of what’s wrong with it, I recommend “it’s not your money“.

  22. Formerly T-Bear

    Ian sorry for the duplication above, the first disappeared even on refreshing several times, I “duplicated” from memory the second draft and submitted and both show up in comments. Henceforth I will have better faith in your system. 8)

  23. Marks

    Well guys. First of all, I don’t think Krugman cheated his way to a Ph. D. at MIT. It doesn’t work that way. Second, when I want economic analysis, I have to tend to look to people who have thebest credentials. It’s like when I need an electrician to work on the wiring of my house. If I have to choose between a licensed electrician and my buddy who read a book about wiring he bought at Home Depot, well…

    I read this blog because Ian has some interesting things to say that I don’t find in other places. I often don’t agree with them, but it stimulates thought and helps me think more critically about my own views. I’ll stick with Krugman on economic analysis.

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