Debt Does Matter | 80 comments (80 topical, editorial, 0 hidden)

And the next one:

As I (and I think many other economists) see it, banks are a clever but somewhat dangerous form of financial intermediary, one that exploits the law of large numbers to offer a better tradeoff between liquidity and returns, but does so at the cost of taking on very high leverage, with all the risks that entails.The super-high leverage of banks, and the role of bank deposits as a key form of liquid assets, means that banks broadly defined are usually central players in financial crises. But that's a quantitative thing, not a qualitative thing.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Wed Mar 28th, 2012 at 04:31:02 AM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

The problem is the interconnectedness of the financial sector, but Krugman not understanding collective phenomena in statistical physics he can't see the qualitative difference.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 28th, 2012 at 04:33:53 AM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

When I read these both posts by Krugman I get the impression that the conversation goes something like this:

Keen

One key component of Minsky's thought is the capacity for the banking sector to create spending power "out of nothing"--to quote Schumpeter.

Krugman

[Keen] asserts that putting banks in the story is essential. Now, I'm all for including the banking sector in stories where it's relevant; but why is it so crucial to a story about debt and leverage?

Krugman again

[Banks] exploits the law of large numbers to offer a better tradeoff between liquidity and returns, but does so at the cost of taking on very high leverage, with all the risks that entails.

I see here a conflict between an empirical and an idealistic approach. In the empirical approach it is crucial if banks do or do not create spending power out of thin air. In the idealistic approach, it is crucial if it makes a better story.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Wed Mar 28th, 2012 at 04:52:50 AM EST
[ Parent ]

Re: Debt Does Matter (none / 1)

In the empirical approach it is crucial if banks do or do not create spending power out of thin air.

But that is not crucial at all. It appears to be important to Keen, but it's not actually important in Minsky.

The crucial difference is that an economy with a single bank is more financially stable than an economy with many interconnected banks.

To make a thermodynamic analogy, in thermodynamics it is usual to encircle a chunk of your system in an imaginary boundary, call the imaginary boundary a "subsystem" and consider it a black box described only by its aggregate thermodynamic quantities (temperature, pressure...) and the aggregate flows through the boundary.

In economics, you can do the same with "the banking sector" and you get the "one bank" toy model used to explain the (bogus) money multiplier (see the table illustrating the "process of money multiplication" here).

In a real economy the black box "the bankign sector" may be "one bank" with an aggregate (net! meaning interbank debt, since it isn't debt between the inside and outside of the "imaginary boundary", doesn't count) balance sheet actually contains a dynamical system which is quite capable of generating its own instabilities, which then propagate to "the real economy" outside the "imaginary boundary" because it does matter to individual agents in the real economy which individual bank goes belly up inside the "imaginary boundary" even if the aggregate "ona bank" is still solvent and functioning.

That is why you need to model explicitly the banking sector as many banks.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 28th, 2012 at 05:01:34 AM EST
[ Parent ]

Re: Debt Does Matter (4.00 / 4)

I see your point, but I was aiming at something else. I'll rephrase.

I see a conflict between an empirical and an idealistic approach. In the empirical approach wheter banks do or do not create spending power out of thin air is an empirical question that can be checked. In the idealistic approach wheter banks do or do not create spending power out of thin air is a question that is ruled by getting the simplest representation possible.

The idealistic models will thus have a preference for simplicity that is unchecked by empirical findings. Which then leads to oversimplification.

This may look terribly unfair, but Krugman is arguing that his description of banks is better because it has fever assumptions, without any reference to wheter the assumptions can be checked or not. And that is just straight out of scholasticism.

Or to put it another way, this is the impression I get when I read these articles.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Wed Mar 28th, 2012 at 08:11:06 AM EST
[ Parent ]

Re: Debt Does Matter (none / 1)

Yanis Varoufakis: Keynesian Legacies neither Europe nor Keynes deserved: A critique of New and ISLM Keynesians in the context of Europe's Crisis (28 March, 2012)

The answer is: Because `Keynesianism' had, after Keynes had met his `long run', accepted the preposterous proposition that one can think of the macroeconomy as if it comprised of millions of clones of a single person; a genetically reproduced Robinson Crusoe whose clones think the same thoughts (plus or minus some random error). (Recall the disastrous Samuelsonian interpretation of Keynes.) And why did they make this concession? In order to put Keynes' thought into a closed mathematical model or, at the textbook level, to capture his `thought' in terms of some appealing, easy to explain geometry. To see that this concession destroyed whatever analytical value Keynes had to offer, consider again the little game I presented (in blue) in Section 2. Suppose that the players are clones and they think identical thoughts, plus or minus a random error. Suddenly, the game loses all its interest: The outcome becomes predicable (each will choose 0 and everyone will gain $1000) and the game's subtle point (that it is impossible even for the smartest player to know what to do; the result depending on the average degree of optimism) vanishes. Similarly, the moment Keynes' thought was imprisoned in these mathematical models, populated by telepathic clones of some Robinson Crusoe, Keynes was doomed to oblivion.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 28th, 2012 at 09:44:53 AM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

the moment Keynes' thought was imprisoned in these mathematical models, populated by telepathic clones of some Robinson Crusoe, Keynes was doomed to oblivion.

And Samuelson had succeeded in doing to Keynes what the first generation of NCE economists had done to George, though, in this case, with a twenty year delayed action fuse. I cannot help but wonder about motivation. From Wiki:

Samuelson studied economics under Joseph Schumpeter, Wassily Leontief, Gottfried Haberler, and the "American Keynes" Alvin Hansen.

Of his graduate committee Hansen seems the most likely to have been the source of such motivation. Hanson had studied under Ely at Wisconsin who had been scarred by having taken inappropriate views towards socialism early in his career and was one to the NCE economists profiles by Gaffney. The others were foreign born and educated. But this is speculation.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 28th, 2012 at 11:44:11 AM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

But that is not crucial at all. It appears to be important to Keen, but it's not actually important in Minsky.

Are you sure about Minsky here? This is a crucial question. If a bank creates credit on top of the real economy, it creates extra demand that wasn't there. In practise banks create asset price inflation, ..and perhaps misallocation of capital. There is no wealth in the underlying real economy to pay these interest charges. And when credit creation ends, deflation begins.
The situation is completely different, if the deflation preceeds credit creation. Then there is capacity to expand in the real economy.

by kjr63 on Wed Mar 28th, 2012 at 10:45:26 AM EST
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Re: Debt Does Matter (none / 1)

I don't know about the entirety of Minsky's work, I'm talking about the financial instability hypothesis only. Whether purchasing power is created or not is immaterial. What matters is the interconnectedness of economic units and the more or less leveraged financing postures. What makes banks peculiar is that, unavoidable according to Minsky, banks are "speculative" [Minsky's term] financing units. Banks are also connected to a much larger number of other entities than average economic units.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 28th, 2012 at 11:09:27 AM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

If a bank creates credit on top of the real economy, it creates extra demand that wasn't there.

When a bank grants credit to the real economy, it monetizes pent-up demand.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 28th, 2012 at 11:24:32 AM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

<blockaquote>When a bank grants credit to the real economy, it monetizes pent-up demand. </blockaquote>

Perhaps, but without creating supply.

by kjr63 on Wed Mar 28th, 2012 at 11:33:20 AM EST
[ Parent ]

Re: Debt Does Matter (none / 1)

The supply is there, otherwise there wouldn't be a creditworthy credit request.

Basically, when a buyer pays a manufacturer on credit the supply exists (or the process to manufacture it is mobilized by the payment) and the credit monetizes pent-up demand.

Seriously. Not all credit fuels asset price bubbles.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 28th, 2012 at 11:38:03 AM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

This argument assumes proper underwriting, the lack of which was the key characteristic revealed by the GFC. But most of the abuses occurred in the 'shadow banking' sector and this likely would not have been anticipated by Minsky. When you get people seeking to make doomed loans, package and sell them to others and then bet against them, and regulators refusing to see what is happening then all presumptions of 'normal' banking and business go out the window, as happened with bankster finance.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 28th, 2012 at 11:52:09 AM EST
[ Parent ]

Re: Debt Does Matter (none / 1)

This argument assumes proper underwriting,

Yes. All stories about banks which do not end with "and then the socially optimal response is to line all the bankers up against a wall and shoot them" assume proper underwriting standards. If you do not have proper underwriting standards, you are running an unusually privileged counterfeiting operation, not a bank.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 28th, 2012 at 01:56:40 PM EST
[ Parent ]

Re: Debt Does Matter (4.00 / 2)

Yet there is the ongoing official obliviousness towards ongoing obvious failures of underwriting. And then there is the ongoing propaganda 'stories' about how vital the existing TBTFs are to the system. All the while those who would advocate lining even the obviously criminal fraudster bankers up against a wall and shooting them would be labeled as 'terrorists' and even those who would advocate prosecuting and imprisoning them are accused of threatening the foundations of our society, which it would, given the criminal nature of those financial foundations at present.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 28th, 2012 at 06:02:17 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

The supply is there, otherwise there wouldn't be a creditworthy credit request.

No there isn't for the interest charges without preceding deflation.

Basically, when a buyer pays a manufacturer on credit the supply exists (or the process to manufacture it is mobilized by the payment) and the credit monetizes pent-up demand.
Seriously. Not all credit fuels asset price bubbles.

Seriously not. If the credit creates expansion of the real economy enough to cover the interest. Assuming the other factors are neutral.

by kjr63 on Wed Mar 28th, 2012 at 11:59:36 AM EST
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Re: Debt Does Matter (none / 0)

So, according to you, all economic activity should be done out of cash reserves?

Otherwise I don't understand your fundamental objection to the mechanism by which a bank creates the cash to advance to a client to purchase some good or service from a seller.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 28th, 2012 at 12:50:09 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

No. I don't have objection to fiat money. Why would you think that? I have objection to asset price inflation, wage deflation and debt deflation, that is unproductive credit.

Even inflation in goods and services may not be such a bad thing. If that results wage inflation.

by kjr63 on Wed Mar 28th, 2012 at 01:42:33 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

I am in no way against consumption. The point of Keen/Minsky (at least how i see it) is just that debt growth does not stop where the real economy stops. Banker may think a customer has the ability to pay, but if debt deflation is too high the credit creates just more unpayable interest charges at the macro level. Which will lead to disaster, the magic of compund interest.

by kjr63 on Wed Mar 28th, 2012 at 02:04:46 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

Interest is typically not allowed to compound. Prudent bankers make sure to collect interest as it accrues rather than permitting it to compound. The only place you regularly find compounding interest in the real world is in Ponzi scams.

(Incidentally, this little fact blows "long-run money neutrality" wide open, which in turn torpedoes half the neoclassical modeling framework.)

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 28th, 2012 at 02:17:16 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

You find a sort of compounding interest almost everywhere where is asset price bubble. When the real economy does not cover the interest without recession, it can only be paid by new debt, to keep economy going. At some point there is no return.

by kjr63 on Wed Mar 28th, 2012 at 03:09:42 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

Yes, bubbles are Ponzi scams without the Ponzi (or sometimes with one). This is why it's the financial regulator's job to kill bubbles dead, or at the very least plan ahead for dealing with the fallout.

But blowing bubbles is not the main activity of a properly run financial system. Of course, an improperly run financial system does all sorts of dumb shit, but that is a problem with right-wingers breaking the financial system, not a problem with interest-bearing debt per se. If the system worked otherwise, the right-wingers would just find ways to break that system.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 28th, 2012 at 04:46:10 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

Part of the problem is that many have little or no experience with a 'properly run financial system', as Alan Greenspan's tenure ran from 1987 to 2006. When and where were there properly run financial systems? It is a judgement call, but finance has been predatory to some extent for a long time, even if the predation was more practiced in other countries for a long while, as is the case in Germany today. Perhaps it would be instructive to look at such golden eras.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 28th, 2012 at 06:13:23 PM EST
[ Parent ]

Re: Debt Does Matter (4.00 / 3)

Financial repression.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 28th, 2012 at 06:36:28 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

Excellent clue.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 28th, 2012 at 08:56:30 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

But blowing bubbles is not the main activity of a properly run financial system.

That is the nature of fiat money. To prevent it self-destruct you need regulation.

by kjr63 on Thu Mar 29th, 2012 at 07:10:22 AM EST
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Re: Debt Does Matter (none / 1)

blowing bubbles is not the main activity of a properly run financial system
That is the nature of fiat money

No, since bubbles were blown also under the gold standard (most notably, the bubbles leading to the crash of 1929).

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Mar 29th, 2012 at 07:17:54 AM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

That is the nature of ~~fiat~~ money.

Fixed it for you.

To prevent it self-destruct you need regulation.

And in other breaking news, water is wet and the Sun rises in the East each morning.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 29th, 2012 at 04:36:32 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

Seriously not. If the credit creates expansion of the real economy enough to cover the interest. Assuming the other factors are neutral.

That is a sufficient requirement, but not a necessary one. Banks have overhead costs too, and these must be covered by the interest (or, more to the point, by the difference between the interest and the rediscount rate).

Stock-flow consistency is your friend, and he's feeling left out of your argument.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 28th, 2012 at 02:00:58 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

Not necessary one?. Are you seriously claiming that fiat-bankers earn their interest?

by kjr63 on Wed Mar 28th, 2012 at 02:10:05 PM EST
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Re: Debt Does Matter (none / 1)

First: Whether income is earned or unearned is immaterial to its effects on aggregate prices and volumes of production. We can have a great morality play about whether interest (or, for that matter, unemployment payment) is "earned" or "unearned." But for the purposes of determining prices and volumes, income is income.

Second: Some fiat bankers actually do earn their interest. It would be silly, of course, to claim that all do, but it would be equally silly to claim that none do.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 28th, 2012 at 02:25:12 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

I meant outside real economy. We can say that income distribution does not matter, within real economy, and call all income there earned. I can accept that for the sake of theory. But interest captured from monetary bubble in asset price inflation is immaterial to volumes of production?
No way.

by kjr63 on Wed Mar 28th, 2012 at 03:01:45 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

I meant outside real economy. We can say that income distribution does not matter, within real economy, and call all income there earned.

No, income distribution absolutely does matter. What doesn't matter is whether that income distribution arises from, say, high wages and high personal taxes, low wages and high corporate taxes; private pensions or discriminatory public pensions; and so on.

Once you have the income distribution, you have the income distribution. To low order, its origin story isn't all that interesting for the purpose of economic forecasting.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 28th, 2012 at 04:49:48 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

No, income distribution absolutely does matter.

Of course (even neoclassists claim otherwise).

What doesn't matter is whether that income distribution arises from, say, high wages and high personal taxes, low wages and high corporate taxes; private pensions or discriminatory public pensions; and so on.

Yes, it matters. The more you have unearned (unproductive) incomes in an economy, the less there is returns to earned incomes and less wealth. Thats why rents, interest etc. create poverty. All the poverty.

by kjr63 on Thu Mar 29th, 2012 at 07:06:29 AM EST
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Re: Debt Does Matter (none / 0)

Eh? Are you postulating some sort of supply side effect here, whereby lower profits discourage productive investment? If such effects exist (which is not totally clear from the available data), they are higher-order effects. To low order, investment is determined by current and expected demand. Where that demand comes from doesn't really matter that much.

I can see a plausible effect from finance soaking up talent that would otherwise have gone into engineering or industry. But that effect is, in my opinion, exaggerated - financialisation of the economy is as much a consequence as it is a cause of de-industrialisation.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 29th, 2012 at 04:47:19 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

Yes, you are absolutely right. The issue is all demand side.

by kjr63 on Sat Mar 31st, 2012 at 06:10:14 AM EST
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Re: Debt Does Matter (none / 0)

But i have to elaborate a little.

Eh? Are you postulating some sort of supply side effect here, whereby lower profits discourage productive investment? If such effects exist (which is not totally clear from the available data), they are higher-order effects. To low order, investment is determined by current and expected demand. Where that demand comes from doesn't really matter that much.

Naturally the investments follow demand. But why would i.e. rents create demand? Actually Henry George says something that rents don't go into circulation, but to latifundasation. Lords buy more land and in the end rentmonopolies capture all economic surplus. And Marx says, i believe, the same about capital interest. This interest just buys off all capital and monopolises industry.

The same with banking. Intrest just creates more debt, it does not circulate. Finance capitalism is just a "cuckoo" version of capitalism. Banks don't have capital like a capitalist. They lay their eggs to other capital and suck their income stream. So this "bank capital" is the amount of debt.

by kjr63 on Sat Mar 31st, 2012 at 09:26:22 AM EST
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Re: Debt Does Matter (none / 0)

Finance capitalism is just a "cuckoo" version of capitalism. Banks don't have capital like a capitalist. They lay their eggs to other capital and suck their income stream

Describe the operation of "credit" in the "real economy".

So this "bank capital" is the amount of debt.

That is bizarre identification.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Mar 31st, 2012 at 09:28:33 AM EST
[ Parent ]

Re: Debt Does Matter (none / 1)

Naturally the investments follow demand. But why would i.e. rents create demand?

Why would they not? Bankers have to eat too.

Actually Henry George says something that rents don't go into circulation, but to latifundasation. Lords buy more land and in the end rentmonopolies capture all economic surplus. And Marx says, i believe, the same about capital interest. This interest just buys off all capital and monopolises industry.

That is a property of sufficiently unequal distribution of income, not a property of rents or profits as such. You get similar results when corporate officers are allowed to pay themselves enormous bonuses, even though this money is, in your terminology, "earned."

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Apr 1st, 2012 at 11:03:50 AM EST
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Re: Debt Does Matter (none / 1)

ASKOD:

I see here a conflict between an empirical and an idealistic approach.

Indeed! It reminds me of the medieval scholastic Realist-Nominalist debate. And every time Krugman talks about 'stories' it puts teeth on edge. It is as if he is only concerned with indoctrinating undergraduates with useful fairy tales, as if economics is only intended as rhetoric. Sadly, that does seem to be its highest function from the viewpoint of most of those who funded the creation of private universities in the USA.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 28th, 2012 at 12:09:59 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

http://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish/?smid=tw-NytimesKrugman&a mp;seid=auto

Krugman:
What I can do, however, is offer some brief notes on what puzzles me here, and why, I guess, I'll never be a true Minskyite in Keen's sense.
So, first of all, my basic reaction to discussions about What Minsky Really Meant -- and, similarly, to discussions about What Keynes Really Meant -- is, I Don't Care.

Krugman is honest, but some wise man said that: "wise men learn from other people's mistakes."

by kjr63 on Wed Mar 28th, 2012 at 12:37:35 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

It is becoming clearer that, for Krugman, economic theory is not about analytic power, predictive power or internal consistency, but about rhetorical power in the service of the status quo. He has just been the most presentable of the NCE mavens from 'mainstream economics', in large part because of his social liberalism and willingness to see economics used to provide further deficit spending. Absent a 'road to Damascus' experience I don't expect much change from him.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 28th, 2012 at 12:57:53 PM EST
[ Parent ]

Re: Debt Does Matter (4.00 / 2)

It is becoming clearer that, for Krugman, economic theory is not about analytic power, predictive power or internal consistency, but about rhetorical power in the service of the status quo.

This is unfair to Krugman. He has actually had a quite remarkable intellectual journey from the 1990s until today, and he is still moving in the right direction, however slowly.

What you are seeing is not an indication that he is a staunch defender of the status quo. It is, rather, an indication of how far down the rabbit hole really goes that it has taken him a ten- or twenty-year journey to get even this far.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 28th, 2012 at 02:13:31 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

Unfortunately few have any idea that a rabbit hole even exists in economics and Krugman is seen as the public face of the 'liberal' wing of US mainstream economics by much of the public, yet he is where he is.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Mar 29th, 2012 at 01:11:08 PM EST
[ Parent ]

Re: Debt Does Matter (none / 1)

As centre-left pundits go, you could do a lot worse than Krugman. His policy recommendations, as distinct from his scholarly analysis, are usually good and frequently excellent.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 29th, 2012 at 04:35:33 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

That I grant. It has been the disconnect between reasonable policy proposals and his defense to the nonsense that led to the problem that I have found so disturbing. He has become a bulwark against all that needs to be done to change the situation. The fact that he and a few others who are identified and accepted as part of the 'mainstream' propose reasonable policies is, for me, ceasing to be justification for defense of pernicious approaches in their discipline. If the other 95% of the mainstream were as reasonable in their policy recommendations we might have a much less acute crisis, but we would still remain vulnerable to such events due to the economists employing frameworks that blind them to the problems.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Mar 29th, 2012 at 07:19:51 PM EST
[ Parent ]

Re: Debt Does Matter (none / 1)

Cue Bob the angry flower

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sat Mar 31st, 2012 at 05:13:37 AM EST
[ Parent ]

Re: Debt Does Matter (none / 1)

He wrote a preface to the General Theory, and I had a feeling it was about what Keynes really meant....

by gk (g k quattro due due sette "at" gmail.com) on Wed Mar 28th, 2012 at 01:17:42 PM EST
[ Parent ]

Re: Debt Does Matter (none / 1)

As I (and I think many other economists) see it, banks are a clever but somewhat dangerous form of financial intermediary, one that exploits the law of large numbers to offer a better tradeoff between liquidity and returns,

But this is quite comprehensively wrong, even within the neoclassical picture. This is essentially narrative one, when even his fellow neoclassicals have moved beyond that to narrative two in their actual academic work. For that matter, I strongly suspect that Krugman has so as well in his actual academic work, just as I suspect that many of his fellow-travelers who model narrative two are actually conceptually stuck in narrative one.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 28th, 2012 at 01:40:43 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

But those large numbers did such magic with the whole securitization industry since 2008. In fairness, most of that was done by the shadow banking system and the TBTFs, but that is scant consolation. But the idea that many are stuck conceptually on one variation or another of 'loanable funds' while employing more accurate models in their work would explain a lot of perplexing output.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 28th, 2012 at 06:29:49 PM EST
[ Parent ]

Keen replies (none / 1)

Debtwatch: Krugman on (or maybe off) Keen

Paul Krugman has just commented (twice) on my most recent blog about my paper for INET. In one sense, I'm delighted. The Neoclassical Establishment (yes Paul, you're part of the Establishment) has ignored non-Neoclassical researchers like me for decades, so it's good to see engagement rather than wilful (or more probably blind) ignorance of alternative approaches.
...
In another sense, I'm appalled, because Krugman's comments put on display that very ignorance of Neoclassical literature--let alone of alternative economic thought.
For instance, Paul refers to many of the propositions in my blog (it's clear that he hadn't read the paper on which it is based) as "assertions about what is crucial, without much explanation of why these things are crucial."
...
So while I welcome any Neoclassical economist at the forthcoming INET conference taking up Krugman's call ("I hope someone in Berlin presses Keen on all this"), in reality Paul, empirically oriented non-Neoclassical economists like myself are the ones challenging the unsupported assertions of Neoclassical economics--not the other way round.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 28th, 2012 at 04:35:47 PM EST
[ Parent ]

Debt Does Matter | 80 comments (80 topical, 0 editorial, 0 hidden)

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