The PEN/New York Review panel discussion on the economy is online. I’ll outsource the discussion of what went down to Brad DeLong. Just this to add: it’s bad enough to have people resurrecting 75-year old fallacies about macroeconomics right in the middle of a crisis in which knowledge is our only defense against catastrophe. What’s really bad, however, is when they do so believing that these fallacies are deep insights that have somehow eluded those of us who have, you know, been studying these issues for a while, and saw some (not all) of this crisis in advance.
But I wasn’t there! I’ve just had it described to me by Bill Janeway of Warbug Pincus, read the transcript, and listened to the audio…
Respectfully, I think your title here is way off base. Ferguson is a conservative; his ignorance is not gratuitous at all, it is integral.
So, why didn’t Brad DeLong win the Nobel prize since he has all the original leftist ideas anyway?
It’s been fascinating watching this. It’s not quite in the same ballpark of silliness as Intelligent Design is to biology and evolution, but it’s pretty bad.
From the entry:
those of us who have, you know, been studying these issues for a while, and saw some (not all) of this crisis in advance. [endquote]
Uh, yes. Now let us talk.
I read the DeLong blog entry, which did indeed clarify this question of what the author of the present blog meant by certain (mysterious) earlier comments about some remarks of one Niall Ferguson (Harvard historian?).
But more obvious than this clarification was the discussion in the DeLong blog entry of the hero, er author, of the present blog. I leave it to readers of this blog to follow the link and see this (assuming the link actually works right–somebody in here somewhere might be missing the “dynamic” nature of Internet datafiles).
From my point of view, any fool could tell that our economy was in for a fall. An eightfold rise in the Dow Jones? More and more arguments proving this is a “new type of situation” in the world and not a bubble? It didn’t take much to “[see] some (not all) of this crisis in advance”.
The problem is how much. And what to do about it. Here is one possible take on the “biggest” picture of what is going on.
DeLong’s blog, linked to a few posts prior to this (erroneously, in a sense) by this blog, contained a sort of classification of types of recoveries from recessions. He classified them into “V-shaped”, “W-shaped”, “L-shaped” and a new ad hoc term which he introduced “check mark-shaped”, which is intermediate between V-shaped and L-shaped.
I would like to introduce a further type: Lightning bold-shaped. This is supposed to be a succession of downs each followed by a smaller up, so that the overall trend is down, but the trend is interrupted by what might be termed “upward fluctuations”.
If the US economy is indeed somehow headed downward by the Standard Conjecture that the US is now a “declining world power” compared to China, one might expect a lightning bolt-shaped (series of) recovery(ies).
For instance, it would appear now that, for the short term, the US government has been able, by technical economic means, to stabilize the recent economic fall. Of course this is a good thing.
But we have not had any fundamental reforms of the problems in the US economy at this point, imho. And we are quite far indeed from coming to grips with the realistic implications of the rise of China for the future of the US in the 21st century.
So, what would it mean to “see this crisis in advance”? Hmmm. It appears to me that the hero of this blog has more work to do. And I propose that he is going to have to do it in a more interdisciplinary fashion. Our economist friends are systematically blind to certain important things. PARTIAL mathematical models are a big part of our problems these days.
Here is a hint about the Standard Conjecture:
//www.nytimes.com/2009/05/23/business/economy/23dollar.html?hpw
You say in this discussion ‘So we have this global savings glut, which is why there is, in fact, no upward pressure on interest rates'; however, the Federal Reserve has stepped in to buy Treasuries for only the second time this century, which would seem to contradict you. Maybe it’s just that they’re trying to keep mortgage rates unnaturally low, but they certainly seem to be feeling some sort of upward pressure…
hahahaha… Niall Ferguson…. what won’t you say next.
History repeats itself.
Niall Ferguson is just a chancer. When I moved to London 11 years ago, he was making a name for himself with his version of “what if” history. Totally pointless stuff really. “What if Paul Krugman didn’t win the Nobel Prize?” Um well then someone else would have won it and Niall would have to make snarky comments to someone else…After that whole counterfactual history thing was discredited, then he became a “bad boy” revisionist staking his reputation on “Gee the Empire was great …” After that went nowhere in the UK, he had to move to the States (following the money he told all the local interviewers), where the neo-cons picked him up. Remember his stuff on how the US having military bases in 160 countries made them the new Empire if only they would be more British in their management style. When that didn’t pan out, he turned to this money gig — ironically he wrote it when the financial world was flying high (and as a consultant for GLG he was part of that world) — but the post-publication world is not what he imagined. So the chancer is running out of luck — and PK has fingered him for what he is —
I always felt that economics, with its battling schools of thoughts and gurus, is more like a religion…
Does Ferguson actually have any economics credentials?
I thought he was a historian, and not an economic historian. What was he doing on the panel anyway?
What is knowledge worth without understanding?
And as history can tell there has been a lot of knowledge and less of understanding.
Yesterday
“Treasury Secretary (2004) Vows to Halve U.S. Budget Deficit by 2009. Treasury Secretary John Snow says the Bush administration is committed to cutting the U.S. budget deficit in half by 2009 to
help address global economic imbalances that may threaten world growth.”
Today
There will be an achievement if US can reach the deficit of 2004 before 2012.
And great with a weaker dollar for US but the economic problem of today is not a US problem but a global. So what is good in on place can be bad in another place. It was simple for Sweden to solve its banking and financial crises in the early 1990ties by crashing the currency with world economies growing in strength. But it will not be so for US. And the effect for the world will be of another magnitude.
And the danger with “save your self” is written in our history. It scary to hear the sink your currency when more of Snows “help address global economic imbalances that may threaten world growth” is needed.
But believe what you can see.
Markets: Look at Gold, Long Term Rates and the Dollar. And please, not intra day charts, but weekly and monthly. If the three key objects behave there will be hope. A dollar going north and breaking the 105-110 level against the yen, long term rates turning south and Gold not going north breaking the magic 1000-level with strength. (Gold one of few objects that is keeping its positive trend from 2001!)
But the graphs are indicating another story, risk. Hope, Bob Hope, a joke. Same story as last time but more serious this time. Yes we can, can become yes we can burn Other Peoples Money. Last time it was the market and the Madoffs. This time it’s the government if the rope doesn’t listen to the music.
And when did you see a rope moving into haven because someone played music?
Dr. Krugman, I’m wondering if you can answer one more question (how many times have you heard that on this trip): what is the end game for the QE (quantitative easing)? How does the FED undo what they’ve done and what effect will that have on interest rates when it happens? Or will the market bake it in ahead of time?
Thanks again for sharing your insights in a simple way to us non-economists.
Niall Ferguson is not an economist. He is an ideological historian. If you don’t believe me, read his last comment he made in the panel discussion.
But Ferguson contradicts himself in the end. Earlier
he had said that the cause of the Great Depression was fourfold: bad monetary policy, outdated fiscal policy, a REAL mortgage crisis and the failure of many banks (i.e., a REAL banking crisis).
Yet two of
the causes Ferguson pointed to were acutally the results of the failure in government policy. In other words, his “vaunted free markets” uninflueced by government policy responses killed housing
and banking. The same thing would be happening right now if the Fed and the U.S. government hadn’t stepped in because–guess what–free market capitalism can be as dangerous as it is productive.
I believe in the free enterprise system–mostly. But those who don’t realize that certain markets (ESPECIALLY financial markets” need to be regulated by now ought to go back and read reality-based
history.
Henry George wrote in “Progress and Poverty” (1879) that economies recover very quickly from disasters, like wars, because true wealth has a short “life span.” The reason was, i believe,
that is such situations economic rent is iow.
So that is the way to recover? Cut off the economc rent, and the true wealth (production of goods and services) comes back quickly.
How often does Huey longs idea that all wealth above a million dollars be redistributed and that tax rates on the economic rolyalists, those that earn more than 1 million dollars a year be set at above 90%, Ask whose economic interest the crackpot ideas are supporting and the reason for this lack of porgress is revealing. Just another economic irrationality of great wealth.
Niall Ferguson has built an entire career on reciting the old and obvious as his own “genius” (when he’s not trying to sell fiction as history). Why was he on that panel in the first place?
But back to economics, I hope you’ll comment on the effect the financial meltdown had on the Friedman-Schwartz view of the Great Depression. As I see it, Bernanke & Co. followed the F-S script closely, and they failed. The fact that the Fed. hit the zero-interest level and the markets continues to collapse seems to disprove the F-S hypothesis.
But I now see that’s why Ferguson was on the panel—it’s time to write that alternate history to save the Chicago school!
Niall Ferguson is coming out with some really strange stuff these days…
Not long ago here in the UK he presented a tv documentary called the ‘the story of money’ – or something like that. As an economist – I had to cringe through most of it. Among other things, he claimed Japan’s liquidity trap of the 90s was directly caused by the state being too large….
You can probably find it on youtube somewhere – buyer beware!!
As a financial and economic historian, you would think Niall Ferguson would know something about, you know, finance and economics.
If I recall correctly, wasn’t combating these resurrected fallacies a concern of Galbraith’s in his later years? Only instead of long-discredited classical fallacies 75 years old, they were then just 40 years old. I would not be surprised to see them resurrected as policy prescriptives when they are 110 years old.
Paul,
Some of these fallacies are the Derivatives that were shoved down our throats by advocating how they can “enhance” the functioning of the free market system….
Here are some facts on the ground for these geniuses…
The BIS has released today its semiannual statistics on positions in the global OTC derivatives market for end-December 2008. The statistics cover the notional amounts and gross market values outstanding of the worldwide consolidated OTC derivatives exposure of major banks and dealers in the G10 countries.
The total notional amount of over-the-counter (OTC) derivatives contracts outstanding was $592.0 trillion at the end of December 2008, 13.4% lower than six months earlier. The decline is the first since collection of the data began in 1998. Credit market turmoil and the multilateral netting of contracts led to a contraction of 26.9% in outstanding credit default swaps (CDS). The second half of 2008 also saw the first significant decline of OTC derivatives contracts outstanding in the interest rate market (8.6%) and in the foreign exchange market (21%).
Despite the drop in amounts outstanding, movements of financial market prices in the second half of 2008 lifted gross market values 66.5%, to $33.9 trillion. Gross market values measure the cost of replacing all existing contracts and are thus a better measure of market risk than notional amounts outstanding.
The statistical release cites the following trends in the second half of 2008:
•CDS volumes continued to contract
•Commodity derivatives markets declined by two thirds
•The market value of interest rate products almost doubled
//www.bis.org/publ/otc_hy0905.pdf?noframes=1
The main difference between the previous recessions and the current one is the constant pressure to settle the now nearly $600 Trillion of derivatives some of which brought down giants such as the AIG…
Of course it would be rediculous to think that inflating the monetary base has limits. 75 years shows not only its infalibility but propensity to smooth business cycles and avoid bubbles.
Your adherence to money printing will be remembered alongside the adherents to tax cuts to fix any situation. Dogmatic and wrongheaded.
These economists are not dumb nor particularly ill-informed, so I can only conclude that the problem is that their analysis is fundamentally based in politics, not in economics.
The consumer is spending less, so Uncle Sam needs to spend more in order to take up the slack. But these “economists” simply cannot bear the thought of increased government spending and control. It’s a political thing, the private sector versus the government sector.
At all costs, they will develop (or reinvent) theories designed to counter an expansion of government influence, even if this effort requires denying historical facts, sacrificing economic knowledge and losing effective control over the economy.
Well, this dumbing down of insight is something you’re not responsible for. Your profession still has value, in other words, and, this is an aspect of it that actually explainable. Rewards nowadays often go to those whose points of view allow error to trumpet truth.Really. We’ve live in a realm of more than a little control over the environment via society. But that’s an opportunity for a realm of tyranny via opinion as people no longer worry about physical needs. They worry instead about psychic needs. And from there truth becomes something to do away with…a means of power.
I read an essay, in fact, just the other day that you’re very familiar with suggesting as much. Orwell’s classic “Politics and the English Language” points to the degradation of thought as evidenced by political speech. Points to degradation of thought actually via political speech.
Just call these “scientists” who refuse to face facts politicians, Doctor. (Yes, they’re other things as well: cowardly, lacking intelligence, maybe even subversive) While your focus on the facts is your challenge, Sir.
Hey, not only does that narrow the field of competitors in one fell swoop. But, if anybody deserves a good challenge, it’s you!
Thanks!
Thank you Professor Krugman for your link to this excellent and informative discussion. The choice of the panel seemed terrific even tho it would also have been great to have included Warren Buffett. I totally agree with yours and also Bill Bradley’s viewpoints. I liked your point of our country not having a social net to protect our citizens unlike the European nations. The discussion of the percentage of debt versus GDP was interesting along with the comparison of us to Argentina and other latin american countries. Another point of interest was the fear of going back to the 70’s and its stagflation to avoid a great depression. As you’ve pointed out in your books, Greenspan’s bubbles and the 80’s S&L problem were precursors to our present ultimate crises
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