Sinking the QE2 and the False Monetary Policy -- Fiscal Policy Divide

For most of my life, QE has meant Queen Elizabeth. (An early-childhood thrill was being able to board the Queen Elizabeth I while it was docked at a New York harbor and have the opportunity to look around. This also was an age when trans-Atlantic passenger travel often was conducted on the water because flying still was prohibitively expensive.)

Today, QE2 means "Quantitative Easing, the second round," which is another way of saying the Federal Reserve System is supposed to find a way to convert the massive monetary base in banks into lots of new loans. However, as Paul Krugman and many others have pointed out, with interest rates close to "the zero bound," it does the Fed little or no good to use low interest rates to employ "Monetary Policy." (Krugman does favor devaluation of the US Dollar, as it would raise prices and cut real wages, which, according to Keynesians, would accomplish what the so-called Classical economists held: that unemployment occurs when wages are higher than what the labor market is willing to bear.)

As anyone who has taken a typical course in Macroeconomics, the supposed debate is between "Monetary Policy" and "Fiscal Policy" prescriptions for how government should deal with the economy. The debate between followers of John Maynard Keynes (Keynesians) and followers of Milton Friedman (Monetarists) centers around which kind of policy is effective in situations like the one we face today.

Keynesians say that when interest rates are extremely low, then government needs to take up the slack by borrowing and spending in hopes that the "stimulus" will "prime" the economy and get it moving again, the "traction" argument that Krugman often uses. On the Monetarist side, the Friedmanites say that Keynes was wrong in claiming that "money does not matter," and that the Fed really does have tools to get businesses to borrow once again.

Thus, we see the academic arguments spilling to editorial pages and onto the street, with the assumption that the Monetary Policy -- Fiscal Policy prescriptions take up the entire universe of macroeconomic prescriptions. However, what if there were a "third way" of viewing this matter, one that eschews both arguments?

Neither Keynesians nor Monetarists bring factors of production into the mix and specifically capital. Instead, if they do concentrate on prices, it is prices of final or consumer goods, but even there, the only "prices" that matter are those that are part of the "price indices," or the Consumer Price Index. (True, Friedman did speak out against price controls and he certainly had a better understanding of price theory than does Krugman, but nonetheless the macro arguments from both Keynesians and Monetarists ignore the micro-level system of prices.)

Likewise, both groups tend to view the macro economy as having homogeneous factors of production in which production pretty much automatically happens just as long as there is "enough money" by which to make the requisite transactions that will keep the goods moving. As noted before, they differ on the role of money, but also the nature of economic shocks.

The Keynesians hold that a market economy is internally unstable because individuals have a marginal propensity to save that sets off a cycle of under-consumption/overproduction that drags the economy down to a liquidity trap, which can last indefinitely. The Monetarists, on the other hand, hold that the market economy is stable and that the shocks are external, specifically coming when the monetary authorities at the Fed try to push too much money at one time into the economy. Thus, they argue that the Fed should have monetary growth targets. (Friedman even argued for a Constitutional amendment which instructed the Fed to permit the supply of money to grow about two percent annually.)

So, that supposedly is the crux of the Big Debate. However, as noted earlier, neither Keynesians nor Monetarists are willing to concede the Austrian point that during a boom, capital will be malinvested and the crisis occurs when lines of production are no longer sustainable, given the economic bubble has burst. In order for a recovery to occur, the malinvested capital must be liquidated or transferred to uses that can be profitably sustained. In the Austrian view, factors of production (and especially capital) are heterogeneous, not homogeneous, and that simply adding money or new spending to the mix only will further the malinvestments.

Now, in the current debate, I agree with Krugman and the Keynesians that simply easing loan terms will solve nothing, given that businesses are not going to borrow just for the heck of it. Entrepreneurs (who generally are left out of the macro discussions, since it is hard for these "economists" to find proper mathematical variables to depict them) must see the possibilities for economic profit, and in this current age with the White House spouting out anti-business rhetoric and the New York Times editorializing continuously for criminal prosecutions for "economic crimes," entrepreneurs are seeing the handwriting on the wall.

Furthermore, from what I can tell, Keynesians and the "Progressives" who now hold political power see entrepreneurs as being either evil and greedy or as being "socially useful" when they seek to build enterprises that depend upon government funding. To people like Krugman, production of goods is little more than a technological question that is answered by a production function. I doubt seriously that Krugman would even begin to understand the real role of entrepreneurs, given that I never have read any economic commentary from him that even recognized their existence.

So, in a nutshell, it won't do any good to increase bank reserves, but nor will it do any good for government to launch a massive, bond-fed "spending" program. Yes, some people will be employed and temporarily have money in their pockets, but the larger effects cannot and will not be sustainable.

Falling Into Economic Illiteracy

During the fall of 2008, a video made its way around the Internet. Some children of Hollywood producers and Democratic activists were put into a small choir, complete with a leader who directed them to sing about how "Obama's gonna save us." The children sang praises like the choirs of Chinese children four decades earlier who had sung praises to Mao, the Great Leader who was portrayed as the very Sun.

The camera panned on the parents who listened with enraptured hearts, and the expressions on their face were of unalloyed joy. The Very Messiah was here, and he was going to spread freedom, happiness, and plenty. All it would take would be a vast expansion of the State and Obama was the One to do it.

Paul Krugman was not in the audience, but he might as well have been, given the tone of his columns that fall. Indeed, even those who decided upon the Nobel Prize were caught up in the Messiah Fever and awarded its highest honor to Obama's Prophet Krugman.

Two years later, there are no choirs singing praise to the Holy One of Chicago, and the economy is in much worse shape than we could have imagined, and all signs on the horizon are bad. What could Obama have done? Paul Krugman knows, and he shares his Prophetic Vision (Oh, lucky us!) in his column today.

Obama, Krugman writes, did not do enough. He did not spend enough, nor regulate enough, or spread Joy and Peace and Happiness. He should have immediately imposed the very medical system that Canadians would like to change. According to Krugman's fellow NY Times columnist, Frank Rich, Obama apparently did not arrest enough people, either, nor throw enough people into prison, to join with the other two-million plus that already are spending time in government cages.

Yes, the state has neither been a great enough Sugar Daddy, nor has the state killed enough people overseas, nor has it been harsh enough to people who don't meet the approval of the editorial board of the "Newspaper of Record." The same newspaper that decries the state of imprisonment in this country claims that our Real Problem is that we don't have enough people in prison. It has come to that. The children sang of Obama "spreading freedom," but apparently (at least at the NY Times) spreading "freedom" means more incarceration of people who don't meet the newspaper's definition of being politically correct.

So, what does Krugman claim is the reason that unemployment is higher than it was when Obama took office? The government did not pretend that it is wallowing in riches and money, and while it boosted spending and debt, it engaged in Krugman's definition of "austerity."

A few commentators will point out, with much more justice, that Mr. Obama never made a full-throated case for progressive policies, that he consistently stepped on his own message, that he was so worried about making bankers nervous that he ended up ceding populist anger to the right.

But the truth is that if the economic situation were better — if unemployment had fallen substantially over the past year — we wouldn’t be having this discussion. We would, instead, be talking about modest Democratic losses, no more than is usual in midterm elections.

The real story of this election, then, is that of an economic policy that failed to deliver. Why? Because it was greatly inadequate to the task.

Krugman, it seems, was the Keeper of the Secret, and he gives us the Answer For Which We Have Waited:

When Mr. Obama took office, he inherited an economy in dire straits — more dire, it seems, than he or his top economic advisers realized. They knew that America was in the midst of a severe financial crisis. But they don’t seem to have taken on board the lesson of history, which is that major financial crises are normally followed by a protracted period of very high unemployment.

If you look back now at the economic forecast originally used to justify the Obama economic plan, what’s striking is that forecast’s optimism about the economy’s ability to heal itself. Even without their plan, Obama economists predicted, the unemployment rate would peak at 9 percent, then fall rapidly. Fiscal stimulus was needed only to mitigate the worst — as an “insurance package against catastrophic failure,” as Lawrence Summers, later the administration’s top economist, reportedly said in a memo to the president-elect.

But economies that have experienced a severe financial crisis generally don’t heal quickly. From the Panic of 1893, to the Swedish crisis of 1992, to Japan’s lost decade, financial crises have consistently been followed by long periods of economic distress. And that has been true even when, as in the case of Sweden, the government moved quickly and decisively to fix the banking system.

To avoid this fate, America needed a much stronger program than what it actually got — a modest rise in federal spending that was barely enough to offset cutbacks at the state and local level. This isn’t 20-20 hindsight: the inadequacy of the stimulus was obvious from the beginning.

One wonders at the ingratitude of Krugman's words. After all, has not the Obama administration done everything in its power to undermine entrepreneurs all the while giving lip service to them? Oh, the administration has found clever ways to offer low interest rates to those firms who Follow In The Way Of Obama instead of doing real entrepreneurship.

Instead of insightful people finding ways to put resources to use that will enable real economic growth to occur, the Obama administration is dunning taxpayers to continue to finance and to expand the Ethanol fraud. Favored firms from those on Wall Street to GM to the producers of "clean energy," the vast subsidy machine rolls on, pushing us further into depression. Yes, 15 percent Ethanol in our gas tanks "is gonna save us." (Given the performance of this administration, I think that the Ethanol would do better as cheap whiskey, which at least would permit us to better drown our sorrows.)

The fundamental issue here is that not one person in this administration, nor its acolytes like Krugman, has a clue as to what makes an economy grow. They really believe that it is little more than a perpetual motion machine, a mixture of homogeneous stuff into which one throws money to make everything work magically.

So, today, instead of singing praises to His Messiah, Paul Krugman is left to rage that Obama didn't listen to him and borrow, print, and spend even more money, further empower labor unions, jack up the minimum wage to a zillion dollars an hour, or give all government employees a big raise. Thus, we see that those most honored in academic economics really have no idea what economics is, a discipline that is based upon the simple Law of Scarcity.

No, Obama refused to pretend that the Law of Scarcity did not exist. And why not? Two years ago, he was the Chosen One, the Holy One of Chicago, the One Who Would Save Us.

The Austerity Bogey

I do hope that Paul Krugman practices what he preaches, and does not have a savings account and maxes himself on credit cards. If he saves any of his money, then he really is an Enemy of the People.

The guy who recently claimed that the U.S. Government really didn't go on a spending spree now says that the British Government is channeling Andrew Mellon. I think it is important that we understand a couple of things: first, even if Britain or the U.S. Government will not be raising spending as much as Krugman claims they should be doing, nonetheless both countries are characterized by bloated public sectors.

Second, Herbert Hoover did not take Mellon's advice to "liquidate the farmers" and "purge the rottenness out of the system." This is a quote that people like Krugman are fond of laying out, but all Mellon was saying was that the government cannot and should not prop up malinvestments, and needed to let the markets take their courses. Contra Krugman, that is what happened in 1921, and the economy recovered nicely. (Notice that Krugman never speaks of that particular recession because he can't spin a Keynesian tale out of the recovery.)

Given that Krugman generally rewrites history, I find this quote to be amusing. Krugman writes:

The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax.

But trendy fashion, almost by definition, isn’t sensible — and the British government seems determined to ignore the lessons of history.

Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.

From where does the British Government get all of those resources that Krugman claims it should be spending? Well, in Wonderland, governments crank up the printing press and - Voila! - create wealth. Krugman never does seem to grasp the simple fact that when governments spend, they are using real resources that have to come from somewhere; he really does believe that borrowing and printing money is the economic equivalent of serious private investment.

There is one more thing. I never have known politicians not to want to spend, spend, and spend some more. The notion that politicians are stingy with other people's money is laughable, and the notion that the only thing saving us from utter destruction is government's ability to borrow and print is a joke, a sick joke, but a joke, nonetheless.

Should Paul Krugman and Robert Murphy Debate?

Perhaps the best Paul Krugman critic on the web today is Robert Murphy, who has managed to break down a number of Krugman's arguments and point out the Princeton Prof's errors. Obviously, it is time for these two men to debate!

See more on this proposal at this site. Debate!!!!

Robert Murphy Takes On Krugman's "Hangover Theory" Caricature

In recent blog posts, Paul Krugman has been claiming that the Keynesian paradigm has been vindicated by recent employment and financial statistics, but that officials foolishly are listening to the "hangover theory" nonsense.

Since Krugman does have a perch at the NY Times, he is able to control his side of the debate, but he cannot control the facts. Robert Murphy, who in my view is a much better economist than Krugman ever will be (given that Krugman has decided that being a political partisan is much more fun -- and lucrative -- than being an economist), demonstrates that two can play the graph game.

In a recent post on the Mises site, Prof. Murphy takes on Krugman's contention that the breakdown of employment numbers "proves" his points correct. First, he posts a graph used by Krugman that "proves" that the downturn is due to a general fall in "aggregate demand," as opposed to problems within the structures of production (as Austrians maintain). (I post the graph below, including Krugman's explanation):

I tried, in that old piece on hangover theorists, to explain what's wrong with this view in general. Among other things, "this story bears little resemblance to what actually happens in a recession, when every industry — not just the investment sector — normally contracts."

And this is strikingly true this time around. Kocherlakota would have us believe that there's a big problem of mismatch because manufacturing is trying to hire, while construction has slumped. But here's the employment reality:

Manufacturing employment has slumped, not risen — in fact, it has fallen more than construction employment. The problem is lack of overall demand, not worker mismatch.

However, Prof. Murphy does what any good economist should be doing: breaking down the data to see what trends lie in numbers dehomogenized from their aggregates. He writes:

First of all, Austrians can easily explain why there is a general drop in employment after a bubble pops, rather than just drops in (say) capital-goods industries. The problem in the aftermath of a bubble isn't merely that a "given" level of demand switches from one sector to another. On the contrary, people in general are poorer than they thought they were at the height of the boom.

In particular, during the boom, people unwittingly consumed capital. In a simplistic Keynesian model with "no time and no capital," it's not surprising that Krugman finds the Austrian story nonsensical. But as I spelled out in my "sushi article," a distortion in the interlocking capital structure of a modern economy can quite obviously lead to a general rise in unemployment across many sectors, as the mistaken investments are flushed out of the system.

Prof. Murphy then directly takes on the employment issue by noting that a breakdown of employment in construction trades and in durable and non-durable goods does demonstrate -- contra Krugman -- that the kind of employment shifting that Austrians would predict actually has happened. The graph is shown below:

Add Prof. Murphy:

I submit that the above chart is entirely consistent with the Austrian explanation of business slumps following an unsustainable boom period. Contrary to Krugman's misleading chart, in percentage terms the construction sector has taken a larger hit than "manufacturing" in general, and construction has been brutalized compared to the mild downturn in nondurable-goods manufacturing.

Moreover — and this is presumably what motivated Kocherlakota's comments — a naive extrapolation of year-to-date trends suggests that the manufacturing sector has bottomed out and is on the road to recovery. Construction employment, on the other hand, is still falling.

The Austrians can easily interpret the above chart. How does Krugman? If the recession is really just about falling aggregate demand, then why did construction fall so much more than nondurable manufacturing, and why has durable manufacturing risen in 2010 while construction still languishes?

I'm not always enamored with the "my statistics are better than your statistics," but I do think that Prof. Murphy has added some important things to the current debate. Now, I doubt that all the statistical "proof" in the world would dislodge Krugman from his position, but at least I can appreciate someone like Bob Murphy who takes on Krugman at the very points where the Princeton Prof believes he is triumphant.

Captain Ahab Krugman and the Great Yellow Whale

I might be mistaken, but I believe Paul Krugman has a real fetish about China, pursuing the "new Yellow Peril" with the tenacity of Captain Ahab himself. Yes, THAT China, the China where factories turn out vast quantities of goods that make it to the shelves of Wal-Mart. (Krugman doesn't like Wal-Mart, either, so the fact that the company purchases Chinese-made goods makes it complicit with China's apparent dastardly plan to take over the World!)

In today's column, Krugman writes about an incident involving a Chinese trawler colliding with Japanese coast guard vessels, and then turns it into yet another scare story involving trade that I would hope a Nobel Prize winner (for his trade material) would not be writing. We need some reasoned voices, and I would have hoped that Krugman would have been one of those, but apparently we have someone who thinks a trade war would be good for the country. Yes, and Smoot-Hawley brought prosperity to America.

According to Krugman, after the China-Japan incident, China refused for a time to sell rare earth materials to Japanese companies, which highlighted the vulnerability the rest of the world has regarding these materials, given their importance in manufacturing different components. He writes:

On one side, the affair highlights the fecklessness of U.S. policy makers, who did nothing while an unreliable regime acquired a stranglehold on key materials. On the other side, the incident shows a Chinese government that is dangerously trigger-happy, willing to wage economic warfare on the slightest provocation.

Some background: The rare earths are elements whose unique properties play a crucial role in applications ranging from hybrid motors to fiber optics. Until the mid-1980s the United States dominated production, but then China moved in.

“There is oil in the Middle East; there is rare earth in China,” declared Deng Xiaoping, the architect of China’s economic transformation, in 1992. Indeed, China has about a third of the world’s rare earth deposits. This relative abundance, combined with low extraction and processing costs — reflecting both low wages and weak environmental standards — allowed China’s producers to undercut the U.S. industry.

In answer to the obvious question - How did the USA allow its own rare earth industry to falter? - Krugman writes:

You really have to wonder why nobody raised an alarm while this was happening, if only on national security grounds. But policy makers simply stood by as the U.S. rare earth industry shut down. In at least one case, in 2003 — a time when, if you believed the Bush administration, considerations of national security governed every aspect of U.S. policy — the Chinese literally packed up all the equipment in a U.S. production facility and shipped it to China.

Did the Chinese take these materials by force? No, they purchased them because conditions in the United States made it too costly to mine these resources, but instead of dealing with that fact, Krugman makes it sound as though the Chinese were engaging in something nefarious.

The mining of rare earths - like a lot of mining - is dirty and has a lot of environmental issues. American environmental law makes it very difficult to do some mining with any cost-efficiency, so we should not be surprised that the Chinese have managed to undercut what once was a profitable industry in the USA.

While Krugman does not make any real suggestions - other than "punish" China for not valuing its currency as high as Krugman says it should be valued - he is vague about the "solution" to this problem. Do we subsidize rare earth mining in this country? In other words, do we engage in these operations, paying union wages and other environmental costs, and do so by cannibalizing those industries that still are profitable? This is not an idle nor spurious question.

Does Krugman believe we should have tariffs against rare earth materials from China? That would have the same effect as a subsidy, and Krugman then would have to defend his position that tariffs somehow would make us "safer."

Unfortunately, Krugman finishes with some of the most naked hypocrisy that I have read. First, his own words:

So what are the lessons of the rare earth fracas?

First, and most obviously, the world needs to develop non-Chinese sources of these materials. There are extensive rare earth deposits in the United States and elsewhere. However, developing these deposits and the facilities to process the raw materials will take both time and financial support. So will a prominent alternative: “urban mining,” a k a recycling of rare earths and other materials from used electronic devices.

Second, China’s response to the trawler incident is, I’m sorry to say, further evidence that the world’s newest economic superpower isn’t prepared to assume the responsibilities that go with that status.

Major economic powers, realizing that they have an important stake in the international system, are normally very hesitant about resorting to economic warfare, even in the face of severe provocation — witness the way U.S. policy makers have agonized and temporized over what to do about China’s grossly protectionist exchange-rate policy. China, however, showed no hesitation at all about using its trade muscle to get its way in a political dispute, in clear — if denied — violation of international trade law.

Couple the rare earth story with China’s behavior on other fronts — the state subsidies that help firms gain key contracts, the pressure on foreign companies to move production to China and, above all, that exchange-rate policy — and what you have is a portrait of a rogue economic superpower, unwilling to play by the rules. And the question is what the rest of us are going to do about it.

Yes, this is the same Paul Krugman who has written elsewhere that the formulation of an industry based upon state subsidies and rules forcing individuals and businesses to purchase higher-cost "environmental-friendly" items would be good for the economy. Don't think for a second that the U.S. government does not do many of the same things, and this country hardly is a bastion of free trade.

And while I cannot heap praise on China for many of its oppressive domestic policies, nonetheless, the USA, with about a quarter of China's population, incarcerates many more people than does China. Yes, China, a country that had real death camps and gulags and summary executions does not imprison as many people, not to mention anything close to a percentage of its population, as the USA.

Furthermore, for all of the bellicosity that one may see in the trawler incident, China does not have troops scattered about the globe and other than Tibet, does not involve itself in "nation-building." I hate to say it, but China hardly poses a "threat" to the world economy and world peace. I wish I could say the same for my own country.

What About Mortgages?

At the end of class yesterday, a student and I were discussing the housing bubble and the current situation with foreclosures and things that could be done. I remarked that I was puzzled as to why banks were not willing to do more renegotiating to keep foreclosures from happening, since traditional foreclosures are poison for banks as they deal in money, not real estate.

In his October 14 column, Paul Krugman makes some sense, but I can see that he is as puzzled as the rest of us regarding what should be done. Furthermore, I agree with much of what he says here:

Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage. More significantly, certain players have been ignoring the law. Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by “robo-signers,” or low-level employees who had no idea whether their assertions were true.

Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist. In the frenzy of the bubble, much home lending was undertaken by fly-by-night companies trying to generate as much volume as possible. These loans were sold off to mortgage “trusts,” which, in turn, sliced and diced them into mortgage-backed securities. The trusts were legally required to obtain and hold the mortgage notes that specified the borrowers’ obligations. But it’s now apparent that such niceties were frequently neglected. And this means that many of the foreclosures now taking place are, in fact, illegal.

This is very, very bad. For one thing, it’s a near certainty that significant numbers of borrowers are being defrauded — charged fees they don’t actually owe, declared in default when, by the terms of their loan agreements, they aren’t.

Beyond that, if trusts can’t produce proof that they actually own the mortgages against which they have been selling claims, the sponsors of these trusts will face lawsuits from investors who bought these claims — claims that are now, in many cases, worth only a small fraction of their face value.

And who are these sponsors? Major financial institutions — the same institutions supposedly rescued by government programs last year. So the mortgage mess threatens to produce another financial crisis.

Furthermore, I think he is partially correct in this next statement, taking his hyper-partisanship into account:

True to form, the Obama administration’s response has been to oppose any action that might upset the banks, like a temporary moratorium on foreclosures while some of the issues are resolved. Instead, it is asking the banks, very nicely, to behave better and clean up their act. I mean, that’s worked so well in the past, right?

The response from the right is, however, even worse. Republicans in Congress are lying low, but conservative commentators like those at The Wall Street Journal’s editorial page have come out dismissing the lack of proper documents as a triviality. In effect, they’re saying that if a bank says it owns your house, we should just take its word. To me, this evokes the days when noblemen felt free to take whatever they wanted, knowing that peasants had no standing in the courts. But then, I suspect that some people regard those as the good old days.

Lest anyone think that the TARP (which Krugman endorsed) actually solved anything, think again. As much as anything, the TARP and the willingness of so many in Congress to bestow favors to financial institutions that were busy running off the cliff certainly feeds the belief by many that the "banksters" are above the law, and even above the laws of economics.

Krugman makes another point next, and I believe it bears some discussion:

What should be happening? The excesses of the bubble years have created a legal morass, in which property rights are ill defined because nobody has proper documentation. And where no clear property rights exist, it’s the government’s job to create them.

That won’t be easy, but there are good ideas out there. For example, the Center for American Progress has proposed giving mortgage counselors and other public entities the power to modify troubled loans directly, with their judgment standing unless appealed by the mortgage servicer. This would do a lot to clarify matters and help extract us from the morass.

Indeed, Krugman is right when he points out that ill-defined property rights can cause much economic dislocation. (When he endorses socialistic schemes that, in effect, eviscerate property rights, I cannot figure out why he is shocked, SHOCKED when they don't work.)

The securitization of mortgages -- done first by the government entities Fannie and Freddie and then picked up by private Wall Street firms -- has put a huge new wrinkle into this mess. Furthermore, I absolutely agree that if a financial entity cannot establish legal title to a property (and Krugman forgets that the private title companies were the first organizations to sound the alarm on this latest scandal), then it should not be permitted to perform foreclosure.

As for Krugman's statement that it is up to the government to "create" property rights, that makes no sense. What Krugman is saying is that governments de facto own everything, but if we follow some rules given by the state, the government will let us pretend that we own property. At best, government can be a referee in this process, although I believe our government these days is so abusive and so dysfunctional that it is incapable of turning into a trusted referee.

There is one thing he writes, however, that I think absolutely is wrong:

The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance.

Enron's demise was not due to an accounting "scandal," nor was it a failure of corporate governance. (As we can presently see, government governance is not exactly going great guns, as the Congressional Budget Office makes the Enron crowd look like A-plus prognosticators.)

The Enron collapse was the collapse of a company that depended heavily upon the stock bubble AND easy credit. When the credit dried up, the heavily-leveraged firm crashed down hard, as one might expect. The accounting measures that Enron did pushed the envelope, but were not illegal.

(I have participated in a project that takes a second look at the Enron case, and I discuss on camera both the legal and economic aspects of what happened at Enron. Now, I absolutely disagreed with the person who put this project together on the role of the short sellers. The late Ken Lay insisted that short sellers caused the demise of Enron; I say that the short sellers exposed Enron. That's a huge difference.)