The Third Depression

http://www.nytimes.com/2010/06/28/opinion/28krugman.html

by sound • 16 years ago

65 113 16 years ago

lionhearted3• 16 years ago

I click the article. I see it's Krugman. Before I read further, I say, "Ah, Krugman. I bet his solution is to print money."

> ...governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

That's Krugman's answer for everything. Dot-com crash? Create more money:

2001 Krugman: “During phases of weak growth there are always those who say that lower interest rates will not help. They overlook the fact that low interest rates act through several channels. For instance, more housing is built, which expands the building sector. You must ask the opposite question: why in the world shouldn’t you lower interest rates?”

Oh, wait, they did that and that created the housing bubble that he's now suggesting we prop up by... creating more money.

This quote from the article is even crazier:

> But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

Balanced-budget orthodoxy? Man, the guy's got huge cojones, at least. When your policy causes problems, insist it on even louder as the solution, and point to classical common sense ("balance revenues and spending") as orthodoxy. Good economics, not so much, but huge cojones definitely. Startup founders could do worse than emulating his confidence when pitching investors.

davidw2• 16 years ago

> That's Krugman's answer for everything. Increase spending.

Just like articles from reason.org or cato or mises invariably decide the problem is too much government.

Which is why articles like this are best left to other sites.

kiba6• 16 years ago

It doesn't matter to me if they always decide a certain solution to certain problems, as long as they are right.

Now, I am not against regulations per se(at least in the broad sense), but the kind of regulations that corporations brought and pay for. Government regulators can be brought, or sometime the regulatory framework cause a lot of economic distortion, often to the benefit of oligopolies or monopolies. Sometime, the regulators comes from the industry that they're trying to regulate themselves.

We seen regulatory capture happens with the trains, the ACTA fiasco, and easy treatment of BP by US inspectors.

Sometime, I think people are too naive about the regulators and the regulatory framework. Libertarians got a lot more going for them than "too much bureaucracy".

known2• 16 years ago

Investing Cash will create new jobs, spending will preserve existing jobs and saving Cash will destroy jobs & the economy.

arijo• 16 years ago

Would you care to explain why printing money is a bad solution for the current scenario? And since economics is not a science who decides what is good economics? And what about criminalizing speculation against sovereign debt - that is the root cause of what is happening in europe right now.

lionhearted3• 16 years ago

> Would you care to explain why printing money is a bad solution for the current scenario?

Sure, housing was overpriced for a few different reasons. There's quite a few causes of it, you probably know a lot of them. But - it was definitely overpriced (in a "bubble").

Now, we're having what's called a "correction" - a correction is where housing prices come back into line with where they'd in a more sensible environment. This is where stupid and reckless people get burned, and people who were sensible and saved their money now buy at the correct market prices.

Krugman is saying we should print money, which strips the value of people holding cash via inflation. This transfers money from people holding cash to people holding debt (because during inflation, hard assets like housing increase in price relative to debt - mortgages). That takes money primarily from middle class people who were sensible and cautious, and distributes that money to a mix of middle class people who weren't sensible and to upper class people (who typically have significant debt and hard assets).

Krugman's basically saying - "whoa, whoa, whoa, we can't let this correction happen - instead, we should take money from people who didn't play in this mess and give it to people who did" - that is horrific.

> And since economics is not a science who decides what is good economics?

Economics can have falsifiable hypotheses, so it can be science at times. But you're right, I should have called Krugman's ideas reckless policy instead of economics. It's more policy than economics, yes.

hnal9434• 16 years ago

How would you legally define "speculation?" How could you prove it is different from normal investment? Do you think anyone would buy the debt of a nation that threatened to throw you in jail if you did so in a way they didn't like? What would prevent such a government from jailing its debtors simply to get out of a situation such as what is happening in Europe?

bjnortier_hn4• 16 years ago

Speculation against sovereign debt is the root cause?

Have you considered profligate government spending? Using currency swaps to hide deficits with the help of Goldman Sachs? It wasn't speculators who pushed Greece's deficit up to 13%. "Speculators" is the straw man of European politicians, who don't want to admit blame (not something confined to European politicians).

Then there is also the fact that when traditionally high interest-rate countries like Spain and Ireland entered the Eurozone, cheap financing was available for the first time. This resulted in a housing/construction boom and then crash. All the taxes from property development and services evaporated, which makes it harder to service debt.

cia_plant2• 16 years ago

I'm glad to finally find someone who knows exactly what caused the housing bubble and subsequent crash. Could you explain it to me? I find the whole matter very confusing myself, although I've read a lot about it. So: low interest rates caused the housing bubble. Could you explain how that happened exactly?

Tuna-Fish• 16 years ago

It's somewhat more complicated than that. However, the interest rates staying far too low for far too long was a necessary, but not sufficient part of the bubble. Or in other words, pulling the interest rates back up to sane amounts the second the economy recovered from the worst slump would have turned the loan market from a borrower's market to a debtor's one, and prevented the bubble.

varjag• 16 years ago

The ever-lowering base interest rate made real estate acquisition (and refinancing) way more lucrative than traditional instruments like savings account. This outstanding stream of revenue turned the whole of financial industry with its powerful lobbying machine to twist as much out of it as it can, encouraging the stampede.

lionhearted3• 16 years ago

> I'm glad to finally find someone who knows exactly what caused the housing bubble and subsequent crash. Could you explain it to me? I find the whole matter very confusing myself, although I've read a lot about it.

Yeah, it is a complicated topic. What did you want to know specifically, what were your questions?

> So: low interest rates caused the housing bubble. Could you explain how that happened exactly?

Low interest rates were a big part of the problem - the price of money got below the cost of inflation. That means borrowing as much as you can is profitable. Let's say your interest rate is 4%, but the rate of inflation is 5%. That means that all things being equal, your rents on a commercial property are increasing faster than you're paying in interest! That doesn't seem like a big difference to a layman, but the gap between 4% and 5% is huge. That's 20% on your money.

In that kind of environment, it means if you borrow as much as you can, you turn bigger and bigger profits. This drives housing prices up. It also drives the stock market up. But the assets are artificially high because the money lending rates are artificially low, ie, set by the Federal Reserve. An arbitrage like this would be much less likely to happen over such a long period without the rates being set artificially low for political reasons, to make things look good when they weren't.

And then you know the rest of the story after that.

For the most straightforward, plain English explanations, I'd recommend Peter Schiff - he was correctly predicting the housing crash almost to the letter and getting mocked on news analysis programs for it. Here's a link to some of his clips from 2006 and 2007:

http://www.youtube.com/watch?v=2I0QN-FYkpw

He's got some free videos and wrote some books, check the clips above out - he's consistent with that message - and then check more of him out if you want to understand more.

If you have any specific questions, I'll try to answer to the best of my ability.

RyanMcGreal• 16 years ago

This is my take: http://raisethehammer.org/blog/1111/the_finance_crisis_in_ei...

miked• 16 years ago

So: low interest rates caused the housing bubble. Could you explain how that happened exactly?

Many things caused the housing bubble, but printing money (causing low interest rates) was a huge part of it. It works like this: when something becomes cheaper, more people purchase it. Interest payments are a huge part of the cost of buying a house. When they get a lot cheaper...

People forgot that interest rates can't stay cheap forever. And when money gets expensive again, housing prices tank.

This, BTW, is a great insider account by someone who was in the trenches. A confession from a home ownership advocate http://www.ft.com/cms/s/2/f64a9e36-9da3-11de-9f4a-00144feabd...

cturner• 16 years ago

You might find this interesting: http://www.creditwritedowns.com/2008/12/confessions-of-an-au...

That blog in general deals with a lot of these issues.

yequalsx5• 16 years ago

It is definitely true that borrowing money is quite cheap for the U.S. right now. Long term rates are low. The question is how much long term borrowing we can do now without causing structural problems to the economy. After WWII our debt was quite high as a percent of GDP. High tax rates on the wealthy lowered the debt steadily until the Reagan administration. WWII was a massive government spending spree that got us out of the depression.

It is definitely incorrect to say that more stimulus necessarily must lead to hyperinflation or other things predicted by the Austrian view of economics. WWII is a counterexample. This does not mean that more stimulus must necessarily make the economy better. Spending money paying for millions to go to college for free (essentially), as in the GI Bill after WWII had a tremendous benefit to the country. There are wise expenditures and unwise expenditures.

The fact right now is that millions are out of work and even more or underemployed. People are suffering. It is sound and humane to take steps to help such people. During bad economic times it is generally wise to make major structural investments in society. During good economic times it is wise for government to pull back.

The borrowing right now is only a problem if there is not enough future discipline by our leaders. They will need to raise taxes on the wealthy in the future to pay for the mess we need to get out of today.

kiba6• 16 years ago

WWII is a counterexample. This does not mean that more stimulus must necessarily make the economy better

Heard of the broken window fallacy?

In any case, the shift to war productions cause the population some misery. You got rationing of essential foodstuff and the like. You can't buy anything you like. There was almost certainly no R&D money spent on consumer research.

Never mind the fact that all the men went to wars! That's going to cause less employment. When a lot of men die, that make your employment statistics awfully good, doesn't it?

Spending money on education is all well and good, but what about the dead GIs that we can't bring back to life? How many Einsteins, Teslas, and Neumanns die in that war anyway? We probably lost some of them in that war.

Wars are just another case of digging holes and then filling it in again, except you're digging graves for dead soldiers, airmen, and sailors, and a whole perfectly good workforce too.

bjnortier_hn4• 16 years ago

I'm not convinced that reasonable comparisons can be made to the circumstances surrounding WWII. WWII was a far-from-equilibrium economic situation, and decisions around debt are very different from more "normal" economic situations.

mark_l_watson• 16 years ago

I agree with you. The most important area to save money: we have military bases and/or installations in about 3/4 of the countries on this planet. We need to stop that. We also need to allow state and local governments to go through bankruptcy to renegotiate pensions, etc. Harsh, but necessary.

The easy copout is printing money.

hga9• 16 years ago

The interest we're paying on Federal debt is or soon will equal the total US defense budget (or so the Chairman of the JCS recently noted).

You might also be really upset if the US returns to a pre-WWII isolationist mode (you do remember one of the things that happened as a result...). We keep the peace in large parts of the world and e.g. implicitly prevent a lot of those we're protecting from going nuclear.

The only thing less brutal than a Pax Romana, Britannia or America is its absence.

gaius3• 16 years ago

Without a global presence it's questionable how long the USD would continue to be the world's reserve currency. If OPEC decides it'd rather trade in EUR then the USD goes into freefall and the US is pretty much screwed.

SkyMarshal3• 16 years ago

He's right that the real threat is deflation, not inflation. But printing money isn't the solution. A defaulting and clearing of billions, maybe trillions, of unsustainable debt in the system is required.

That will either happen chaotically, orderly, or governments will bankrupt themselves trying to prop it up and avoid it. Looks like the US is hell-bent on the latter, in no small part because most large creditors have deep captured the government itself.

j_baker3• 16 years ago

"A defaulting and clearing of billions, maybe trillions, of unsustainable debt in the system is required."

Seriously? What you propose would be the economic equivalent of a nuclear winter. You can't cure a disease by killing the patient.

Besides that, it could even come back to bite us. Think of how many other countries are indebted to us. If we can default on our debts, why can't they?

orblivion• 16 years ago

> Balanced-budget orthodoxy? Man, the guy's got huge cojones, at least.

The tone he takes about other economists is a little scary, really. "We've made all this great Right progress. But here come these people who are trying to destroy all of it, daring to go back to the clearly discredited old ways of Wrong-Think."

I'll say it again, I suspect this man is a paid propagandist.

j_baker3• 16 years ago

This is a strawman argument. Krugman isn't trying to say that the debt isn't important. What he's been saying is that normal fiscal policy doesn't apply in the current crisis: http://www.nytimes.com/2008/11/14/opinion/14krugman.html?_r=...

In particular, there's a reason interest rates are adjusted regularly: in different economic situations, you need different interest rates. Were interest rates too low before the current crisis? Probably. That's mostly academic now though. What matters is what interest rates should be at now. And our economy is in totally different shape since before the crisis. What made sense then isn't necessarily good policy now.

hnal9434• 16 years ago

However, if following his advice in the past has led the world to financial ruin, wouldn't it be logical to question his assessment of the current situation?

effn3• 16 years ago

You are confusing monetary policy with fiscal policy.

cwp• 16 years ago

From that quote you conclude that the world followed his advice, and that led to the housing bubble? Now that's cojones.

akkartik• 16 years ago

I like sethg's rebuttal: http://news.ycombinator.com/item?id=1468454

Retric5• 16 years ago

I suspect the real problem is the evaporation of superficial jobs. We have become a nation devoted to our wants, but when things look bad people quickly cut back on such things. A tiny fraction of our population are "farmers" but with the over abundance of food produced and the only way to make money is to either suck on the governments subsidies or create specialty locally grown, free range, Organic etc goods.

I think only long term way to get out of chronic high levels of unemployment is to either accept we are going to live in a welfare state, or remove the minimum wage.

exit5• 16 years ago

what do you think of basic income?

http://en.wikipedia.org/wiki/Basic_income

hnal9434• 16 years ago

We have so many people today who needs aren't being met and still aren't contributing. What about Basic Income motivates people to work when all their needs are met by doing nothing?

This question even ignores logistical difficulties like what the definition of a wage "to meet all their needs" would be, or where the money to fund such a program would come from.

Retric5• 16 years ago

I think it's a reasonable idea if set low enough.

Over time remove Social Security, Medicare, Unemployment assistance etc and set all taxes at a flat rate then give everyone say ~700 to 1000$ per month inflation adjusted + heath care. The problem is we live in a democracy so that number can and will be fucked with. Also, handling money for young children to avoid "professional welfare mothers".

PS: The odd things the actual numbers don't change much from the current system, but the advantage is it removes perverse incentives. There is no threshold where earning more money is taxed at insane levels (sometimes over 100%) as public assistance is removed.

protomyth3• 16 years ago

Maybe in the future, but it sure seems like a disincentive to working. I would prefer we implement a flat-rate tax on income filed as individuals and not as a family. Something like a 20/20 (first 20k exempt then 20% of the rest). I am not sure about the actual numbers (sounds like a big data crunch through the IRS income reporting would be good).

Regardless of policy, it is very important to get as many people in the mode "I am paying for this government" so that fiscal responsibility is desired by most as opposed to a handout mentality.

fondue2• 16 years ago

What's a 'superficial job'?

Retric5• 16 years ago

Jobs that don't create long term value AND don't serve a basic human need. We need X farmers, but we have X + Y actual farmers the Y is are optional jobs that have limited long term economic value.

robryan2• 16 years ago

Or use advances in technology to find jobs, probably mostly in the way of finding ways to use unskilled people effectively. Theres no doubt their is an endless amount of work out there that could be done to make life better, it's just that it's probably uneconomical to undertake currently.

Maybe the answer is part welfare state, except that the government assign positions to people collecting welfare.

Retric5• 16 years ago

I don't think technology helps the unskilled all that much. Consider the knowledge it takes to use a shovel vs. a backhoe.

exit5• 16 years ago

people working below minimum wage are "employed" in name only.

jswinghammer• 16 years ago

Considering that his Keynesianism has basically destroyed Japan's future (while at the same time he faults them for not borrowing enough) I'd hope he'd proceed with a bit more caution. The basic problem he has is that he doesn't really understand why we're here. When debt chases bad assets it's a disease that has to be cleared.

He ignored some pretty serious depressions in his analysis as well. The panic of 1819 comes to mind as a pretty serious one. People ignored the desires of those long on stocks and real estate to bail them out. They realized the problem was too much debt and just let it work itself out despite the pain it caused them in the short run.

Then there is the depression of 1920-21. This depression probably highlights most clearly the Austrian theory of the business cycle and why the Austrian response to the bust is the correct one. There were no interventions in the economy following the bust. It was a very serious contraction by any definition.

We live in a world that's consumed by debt. We're taught that debt is good despite our instincts to the contrary. We're taught that being irresponsible is the way to get yourself out of short term pain. Listening to these people seems like madness at this point. The real reason that budget cuts are on the table is that everyone knows we're all broke. After 10 years of this I imagine people are going to get fed up with bailouts and inflation. Krugman will still be crying for more stimulus while a few people might get serious enough to let the banks fail and start over.

Our fear of short term pain might be the worst part of the modern political system. We'd rather avoid some of the short term pain even if that means dragging things out for decades.

kiba6• 16 years ago

Our fear of short term pain might be the worst part of the modern political system.

When people realize that they can vote themselves more money, they will. Government will then promise more than it can deliver and proceed to spend money like no tomorrow just like what happens to Greece and California.

But it's heresy to suggest that democratic institutions should be scrapped altogether. Everyone thinks democracy equal freedom, but it's really just majority rules.

hnal9434• 16 years ago

When people realize that they can vote themselves more money, they will.

I would agree had you said "When people think that they can vote themselves..." because who are they kidding? There is no "Obama Money." The government's money comes from the people, as the residents of Greece and California are discovering.

I suppose you can vote yourself more money if you can vote and yet pay no taxes, which might be the true problem. Perhaps in order to have a say in the direction of the country, you need to have skin in the game.

I don't think that chucking democracy is really the right reaction. I stand with Winston Churchill: "Democracy is the worst form of government, except for all those other forms that have been tried from time to time."

hga9• 16 years ago

Well, that gets into the question of "to whom to you extend the franchise to"?

Cut that back (yes, I know, beyond hard), maybe limit it to a new class of Taxpayers, and things could change real fast.

Of course the Social Justice types would be ... unhappy.

Used to be in many states you had to own some land (one guy owned a doghouse sized plot of land to make a point) or pay a poll tax to vote. The latter's corruption by the Southern segregationists makes that right out for the time being, but ... well, republics tend to last only as long as they have the moral fiber to not vote themselves the treasury. We're obviously way beyond that point, but the game will run out at some point. And with so much of our debt in bonds (1 year or less maturity) is could have very quickly. Probably would already be happening if not for the Eurozone crisis.

gaius3• 16 years ago

This is exactly what happened in the UK under New Labour. However now it seems the voters have come to their senses.

w00pla• 16 years ago

That is one thing I don't understand about this whole fiasco.

He advocates spending and stimulus to get out of the this. He says "And both the United States and Europe are well on their way toward Japan-style deflationary traps".

But didn't Japan spend a shitload of money during the 90ies (making their debt 200% of GDP)? Don't they now sit with that debt, a declining population and still no growth?

I'm not an economic expert and maybe I just have a biased for government/personal austerity and saving.

hga9• 16 years ago

Well, 192.1% estimated as of last year.... Their apparent recovery from the Lost Decade a few years ago is now realized as being just another external bubble induced bump and they're well into their second Lost Decade.

You may not be an economic expert and maybe have a bias against this sort of thing, but most anybody should be able to see that this was a horrible mistake.

Almost certainly a terminal one for the Japanese people, or as Kenshiro of Fist of the North Star would say, "omae wa mō shindeiru" ("you are already dead").

paulnelligan2• 16 years ago

I often wonder why more engineers don't get into economics. It is a control system and would be well suited to engineering graduates with expertise in control systems.

SkyMarshal3• 16 years ago

Doesn't control system theory require some level of predictability in the system, plus a system that does not adapt to the controls placed on it?

bjnortier_hn4• 16 years ago

"Adaptive control involves modifying the control law used by a controller to cope with the fact that the parameters of the system being controlled are slowly time-varying or uncertain" http://en.wikipedia.org/wiki/Adaptive_control

bjnortier_hn4• 16 years ago

I've wondered if it would be beneficial to apply some control systems theory to financial systems. But I'm not convinced that it would be applicable since control systems are designed for systems that follow the laws of physics. Financial systems include emotional responses and irrationality, how would control systems cope with that?

P.S. I find it interesting that the majority of Chinese presidents from 1993 to 2010 have an engineering background.

roel_v3• 16 years ago

Sweet mother of jesus no. Engineers would gravitate towards a centrally controlled system in no time. Economics is not a control system, it's emerging behavior from independently acting agents (free market economics is, which I argue is the only morally defensible system). A UK (?) technology-oriented scientist build a computer-controlled economic system for some South-American country in the 1970's, complete with a Star Trek like control room. There was a revolution before it could be put to proper use though. I don't remember enough details to google it, anyone else who can dig up some links?

bd• 16 years ago

Project Cybersyn:

http://en.wikipedia.org/wiki/Project_Cybersyn

Discussed here:

http://news.ycombinator.com/item?id=1190508

paulnelligan2• 16 years ago

The fact that one experiment went wrong does not a bad theory make... there are many variables to be accounted for in a complex system such as this.

I respectfully, but completely disagree with you on the fact that free market economics is morally defensible, there isn't really any conscience behind it, just an overriding aim (i.e. profit) ...

as for independently acting agents, I assume you mean various corporations, financial institutions, and government bodies... Again, I disagree, they all have a degree of interdependence and are centrally bound by regulations, and central banks, which exist whether we like it or not ...

As a disclaimer, I consider myself a liberal centrist with both libertarian and social democratic leanings.

DanielBMarkham• 16 years ago

Related article from this morning's reading: http://www.telegraph.co.uk/finance/comment/ambroseevans_prit...

jimbokun• 16 years ago

...directly addressing Krugman's viewpoint:

"The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined Japan."

hga9• 16 years ago

I'll read this later, but do note that he's been aptly described as "never the calmest man in the room" ^_^. (I like him a lot but you have to apply a certain filter while reading most of his financial stuff.)

stcredzero2• 16 years ago

So, besides drugs and entertainment, what were the growth industries during the Great Depression?

hga9• 16 years ago

Government ( 1/2 :-).

That's certainly the case right now; since the start of the recession, according to the BLS government jobs have increased by 590,000 and 7,960,000 private sector jobs have been lost (http://www.powerlineblog.com/archives/2010/06/026620.php)

stcredzero2• 16 years ago

Yes, but I know there are several other private sector industries that held their own or even flourished during the Depression.

startuprules• 16 years ago

We're certainly in a great depression already - with real unemployment close to 20% (shadowstats.com), most of our states having greece-like deficits, people losing 50%+ wealth from the market/real estate crash. We don't see soup lines because we have food stamps and unemployment checks mailed to our home and deposited right into our bank account .

And it's only the beginning. Global austerity is here (except US and Japan is fighting valiantly to steal more honest work from its people via printing). World's biggest consumer, the boomers, are retiring. Automation/Software will keep reducing jobs permanently.

The ancillary point is, boostrap your startup wisely. Hire smartly. Don't spent money on things unless you have to. Don't take money. Keep control of your company.

known2• 16 years ago

America is saturated and inhabited by people who will live on http://en.wikipedia.org/wiki/Passive_income

The Third Depression

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