It seems that the architects of Obama's economic policies are facing the wrath of the Democrats and the pundits, and Paul Krugman is trying to be first in line to come up with a catchy term: Geithnerdammerung
. (A play on Wagner's Gotterdammerung
, or "Twilight of the Gods." Kind of appropriate.)
Yet, as I have read Krugman's columns over the last year, his criticism of Obama, Geithner, and Bernanke has not been over their policies of printing vast sums of money or driving our government into unpayable debt. No, he is upset because they have not tried to turn our economy into something akin to Venezuela or Bolivia.
I mean, what's there for a Keynesian not to like in a situation in which the state effectively shuts out entrepreneurs and raises the barriers for private firms that are not looking for handouts? When the original "TARP" was debated in September 2008, many of us objected not on ideological grounds (although certainly libertarians aren't going to support this kind of thing), but also on longer-term economic issues.
In a recent interview with the New Yorker
, financial economist Eugene Fama forcefully made the point to let the bad financial institutions fail. He was not speaking as an ideologue; he was speaking as someone who understands finance and human nature. Asked about the claims by Bernanke and Henry Paulson that not bailing out the banks would have brought the entire financial system crashing down, Fama's reply is instructive:
Maybe it would have—for a week or two. But it pretty much stopped for a week or two anyway. The credit markets stopped for more than a week or two. But I think that was really a function of increased uncertainty about the future.
He goes on:
...there is just a high degree of risk aversion on the part of people currently in government. They don’t want to be blamed for bad outcomes, so they are willing to do bad things to avoid them. I think Bernanke has been the best of the performers.
Having had a lot of graduate economics classes taught by people who hold to Fama's way of thinking, I understand the points in the interview in a way that the average reader does not. (He makes a number of surprising comments regarding asset bubbles and the like, and the average reader or even average economist is going to be doing some head-scratching.)
Now, what does this have to do with Krugman? In the beginning, Krugman was for the bailouts because to him, economic assets are all the same. It does not matter if the banks balance their books using newly-printed money or if they do it by actually engaging in real-live profitable behavior. That's the nature of Keynesian "economics." It is "economics as though economics doesn't matter."
So, Krugman's objection was not in the government's running up debt, the Fed inflating (saving us from the faux threat of "deflation") and buying billions of dollars of assets with funny money, or even the government's nationalizing the mortgage system. (Yeah, no moral hazard there.)
Instead, he objects because the Obamaites have not gone whole hog and done what Juan Peron did in Argentina and Hugo Chavez has done in Venezuela: seize the banks and other businesses and turn them into state-run enterprises. That such moves led to chaos in those countries and destroyed their economies does not compute with the Keynesians.
(I would challenge readers to look at what Peron did and see if it differs in substance from what Krugman has demanded be done here. To a Keynesian, there is no difference at all in assets, whether they are held by government or by private owners, except that the government always can do things better and cheaper because they don't have to bear the costs of profits.)
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