5 ms·

>But his prime examples of economics malfeasance are, well, terrible: >Policymakers don’t know what to do. They press the usual (and unusual) levers and nothin

>But his prime examples of economics malfeasance are, well, terrible: >Policymakers don’t know what to do. They press the usual (and unusual) levers and nothing happens. Quantitative easing was supposed to bring inflation “back to target.” It didn’t. Fiscal contraction was supposed to restore confidence. It didn’t. >“Supposed to” according to whom? Not basic macroeconomics! >Look, we had a more or less standard model of macroeconomics when interest rates are near zero — IS-LM in some form. This model said and says that (a) monetary policy is ineffective under these conditions (b) fiscal multipliers are positive and large — in particular, fiscal contraction is strongly contractionary. And these predictions have been borne out! Huge monetary expansion didn’t raise inflation; extreme austerity was strongly correlated with severe economic downturns. >In other words, policy had exactly the effects it was “supposed to.” Krugman actually used his ISLM model to decide to remortgage his house in 2003, and in a bout of epic predictive failure, foresaw skyrocketing interest rates: http://www.nytimes.com/2003/03/11/opinion/a-fiscal-train-wreck.html http://www.nytimes.com/2003/03/11/opinion/a-fiscal-train-wre... "With war looming, it's time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits." Whoops

ctchocula 10y ago
Thanks, I enjoyed that anecdote.
rhizome 10y ago
To be fair, Alan "flaw in the model" Greenspan was still Chairman of the Fed in 2003.
- mannykannot 10y ago
  Ah, yes, Alan Greenspan - the guy who took much of the credit that Paul Volcker earned.
  - rhizome 10y ago
    I think we can forgive Krug for believing in Greenspan's scam. Information asymmetry and all that.
smallnamespace 10y ago
> Whoops According to the data, not really. Short-term mortgage rates increased steadily for the next several years; long-term rates also ticked up, but not by as much. He basically refinanced his home exactly at the bottom [1]. [1] http://www.bankrate.com/finance/mortgage-rates-history-0112.aspx http://www.bankrate.com/finance/mortgage-rates-history-0112....
- crdoconnor 10y ago
  I think we need to change the scales and put it in context: http://mortgage-x.com/images/graph/fhfb_contract_rate.gif http://mortgage-x.com/images/graph/fhfb_contract_rate.gif According to the data, yes really.
  - bildung 10y ago
    Your graph shows the same as the one from smallnamespace: 2003 was a good year to refinance because rates were at a bottom.
    - crdoconnor 10y ago
      Krugman's bet - in his own words and using ISLM - was that interest rates would skyrocket because of deficit spending on the Iraq war in 2003. He paid extra to make this bet. Where on that graph did rates skyrocket exactly?
      - bildung 10y ago
        From the article: "And as that temptation becomes obvious, interest rates will soar. It won't happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future." (emphasis mine) That's pretty much what happened: http://www.gridgit.com/postpic/2011/09/us-inflation-rate-historical-chart_259737.png http://www.gridgit.com/postpic/2011/09/us-inflation-rate-his... Inflation doubled from 2002 onwards, then the housing bubble popped, causing inflation to fall. Thankfully not into a long-term deflationary spiral, though.

ctchocula 10y ago

Thanks, I enjoyed that anecdote.

rhizome 10y ago

To be fair, Alan "flaw in the model" Greenspan was still Chairman of the Fed in 2003.

mannykannot 10y ago
Ah, yes, Alan Greenspan - the guy who took much of the credit that Paul Volcker earned.
- rhizome 10y ago
  I think we can forgive Krug for believing in Greenspan's scam. Information asymmetry and all that.

smallnamespace 10y ago

> Whoops According to the data, not really. Short-term mortgage rates increased steadily for the next several years; long-term rates also ticked up, but not by as much. He basically refinanced his home exactly at the bottom [1]. [1] http://www.bankrate.com/finance/mortgage-rates-history-0112.aspx http://www.bankrate.com/finance/mortgage-rates-history-0112....

crdoconnor 10y ago
I think we need to change the scales and put it in context: http://mortgage-x.com/images/graph/fhfb_contract_rate.gif http://mortgage-x.com/images/graph/fhfb_contract_rate.gif According to the data, yes really.
- bildung 10y ago
  Your graph shows the same as the one from smallnamespace: 2003 was a good year to refinance because rates were at a bottom.
  - crdoconnor 10y ago
    Krugman's bet - in his own words and using ISLM - was that interest rates would skyrocket because of deficit spending on the Iraq war in 2003. He paid extra to make this bet. Where on that graph did rates skyrocket exactly?
    - bildung 10y ago
      From the article: "And as that temptation becomes obvious, interest rates will soar. It won't happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future." (emphasis mine) That's pretty much what happened: http://www.gridgit.com/postpic/2011/09/us-inflation-rate-historical-chart_259737.png http://www.gridgit.com/postpic/2011/09/us-inflation-rate-his... Inflation doubled from 2002 onwards, then the housing bubble popped, causing inflation to fall. Thankfully not into a long-term deflationary spiral, though.