14 ms·

The Third Depression

65 points by sound 16y ago

lionhearted 16y 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.
- davidw 16y 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.
  - kiba 16y 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".
    - davidw 16y ago
      > It doesn't matter to me if they always decide a certain solution to certain problems, as long as they are right. It doesn't seem obvious that anyone is "always right", and the discussions tend to go 'round and 'round...
      - rikthevik 16y ago
        Especially with economics. It's impossible to determine the causes of the current situation, though everyone loves to attribute successes to policies they like and failures to their opponent's policies.
  - known 16y ago
    Investing Cash will create new jobs, spending will preserve existing jobs and saving Cash will destroy jobs & the economy.
- arijo 16y 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.
  - lionhearted 16y 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.
    - duncanj 16y ago
      You're essentially saying that anyone who gets hammered by the "correction" necessarily morally deserved it because they must have "played in this mess". Because otherwise, you are arguing that some of the people who didn't play in the mess should give money to others who may or may not have played. This, besides the fact that a correction has already happened, as evidenced by the drop in house prices and the number of homes in foreclosure. If there is another "correction" now, beyond what has already happened, and it causes even more bankruptcies, discharged debts, haircuts, bank runs, and the like, then the entire economy will suffer, not just those who played in the mess. As banks look toward deflationary times, they are holding onto cash reserves. (http://research.stlouisfed.org/fred2/series/EXCRESNS http://research.stlouisfed.org/fred2/series/EXCRESNS) This may be because they fear making loans that will not be paid back 100%, but the result is deflationary because they are all doing it, and they are all keeping that money from the system. It's a self-fulfilling prophecy. A deflationary period, while our country has so much private debt, combined with high unemployment, will likely leave us with more and more bankruptcies and the "dynamo problem" of the great depression. If this is what you're looking forward to to punish a few house flippers, well, I can't agree with your sentiment on that.
- cia_plant 16y 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 16y 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 16y 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.
  - deleted 16y ago
    [deleted]
  - lionhearted 16y 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 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.
- yequalsx 16y 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.
  - kiba 16y 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.
    - yequalsx 16y ago
- effn 16y ago
  You are confusing monetary policy with fiscal policy.
- cwp 16y ago
  From that quote you conclude that the world followed his advice, and that led to the housing bubble? Now that's cojones.
- akkartik 16y ago
  I like sethg's rebuttal: http://news.ycombinator.com/item?id=1468454 http://news.ycombinator.com/item?id=1468454
- mark_l_watson 16y 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.
  - hga 16y 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.
    - dantheman 16y ago
      Why? The US involvement in WWI led to the harshness of the Treaty of Versailles, if the US held back it's been argued that England and France would have sued for peace earlier and the harshness of the treaty wouldn't have been there and then one of the prime causes of WW2 would not have existed. The Us involvement in WW2 is due to escapades in China and the Philippines - the reason Japan attacked the US.
      - hga 16y ago
        What are you arguing here? The fact (well, I agree) that the US badly screwed up its first really major intervention in world affairs has little to do with the present day, unless you contend that we learned nothing from it (e.g. for WWII Unconditional Surrender and the occupation and nation building we did in Japan and West Germany).
        dantheman 16y ago
        I'm arguing that non-intervention might be good; that perhaps interfering with other countries might not be a good idea. Now I'm all for humanitarian assistance, and helping people fleeing countries that are war torn. In fact, I think when their is serious strife the US should do it's best help people relocate to the US -- e.g. instead of letting people get slaughtered in Rwanda we should have helped evacuate them to the US. I think that it is far from given that the US should be the world police, or that anyone should be the world police.
- SkyMarshal 16y 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_baker 16y 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?
    - d2viant 16y ago
      They can and they are. We ARE going to default on our debt, it's inevitable. We can't possibly pay back the money we owe. We're going to do default the hard way by not paying our debts or we're going to default by inflation.
      - hga 16y ago
        Well, there is one other method: set things up so that zombie banks can earn enough money to become solvent in a decade or so and then do the necessary liquidations. I'd read this has happened several times before (Japan may be doing a form of it), we seem to be doing it now, it's the best practical outcome of the current Eurozone crisis, but it does really mess things up during the "recovery" period.
      - rbranson 16y ago
        > We can't possibly pay back the money we owe. If the government were a person, economics might agree with you, but it's not. This is what fiscal conservatives fail to see. The government can hold debt so long, that, due to inflation, it's value will fall to the point where paying it off is trivial. This is not practical for persons that have a finite lifespan. Corporations also fall in this category, albeit to somewhat less of a degree. Investors often do not see justifiable corporate debt as a problem, but an indication that the executive team understands opportunity cost.
- orblivion 16y 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_baker 16y 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=1&ref=paulkrugman 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.
  - hnal943 16y 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?
    - sethg 16y ago
      His advice was not followed in the past. The Keynesian prescription, basically, is for the government to run deficits during recessions and to pay back those loans when the economy recovered. During the 2000 Presidential campaign and the first three-quarters of Bush 44’s Administration, Krugman excoriated Bush’s economic policies, because those policies were running up the national debt to unprecedented levels while the economy was going well and the country could have afforded to pay down the debt.
      - anamax 16y ago
        The last Bush+Republican Congress deficit was $100B and was on track to surpluses in the following years. (It had been decreasing for a couple of years by that point.) Krugman complained bitterly. The first Bush+Dem Congress deficit, before the current crisis, was significantly larger than $100B. Krugman didn't make a peep.
      - hga 16y ago
        The Keynesian prescription is fatuous because, with rare exceptions, politicians never are willing to stop the flow of goodies that get them elected (tax and borrow, spend, elect). Sure, in theory, it might work to smooth out the normal business cycle (although I have serious doubts about its applicability to catastrophes, e.g. pushing on a string), but in normal circumstances it's a recipe for ever increasing sovereign government debt in the hands of mortal humans.
Retric 16y 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.
- exit 16y ago
  what do you think of basic income? http://en.wikipedia.org/wiki/Basic_income http://en.wikipedia.org/wiki/Basic_income
  - protomyth 16y 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.
    - exit 16y ago
      > Maybe in the future, what are the criteria for this future?
      - protomyth 16y ago
        I guess when robots get too good at replacing humans (reasoning, mobile, perform skilled work).
        16y ago
jswinghammer 16y 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.
- w00pla 16y 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.
  - hga 16y 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").
startuprules 16y 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.
known 16y ago
America is saturated and inhabited by people who will live on http://en.wikipedia.org/wiki/Passive_income http://en.wikipedia.org/wiki/Passive_income
paulnelligan 16y 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.
- bjnortier_hn 16y 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_v 16y 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 16y ago
    Project Cybersyn: http://en.wikipedia.org/wiki/Project_Cybersyn http://en.wikipedia.org/wiki/Project_Cybersyn Discussed here: http://news.ycombinator.com/item?id=1190508 http://news.ycombinator.com/item?id=1190508
    - roel_v 16y ago
      Thank you, that's the one.
  - deleted 16y ago
    [deleted]
DanielBMarkham 16y ago
Related article from this morning's reading: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html http://www.telegraph.co.uk/finance/comment/ambroseevans_prit...
- hga 16y 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.)
- jimbokun 16y ago
  ...directly addressing Krugman's viewpoint: "The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined Japan."
stcredzero 16y ago
So, besides drugs and entertainment, what were the growth industries during the Great Depression?
- hga 16y 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 http://www.powerlineblog.com/archives/2010/06/026620.php)
  - stcredzero 16y ago
    Yes, but I know there are several other private sector industries that held their own or even flourished during the Depression.

65 points by sound 16y 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.

davidw 16y 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.
- kiba 16y 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".
  - davidw 16y ago
    > It doesn't matter to me if they always decide a certain solution to certain problems, as long as they are right. It doesn't seem obvious that anyone is "always right", and the discussions tend to go 'round and 'round...
    - rikthevik 16y ago
      Especially with economics. It's impossible to determine the causes of the current situation, though everyone loves to attribute successes to policies they like and failures to their opponent's policies.
- known 16y ago
  Investing Cash will create new jobs, spending will preserve existing jobs and saving Cash will destroy jobs & the economy.
arijo 16y 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.
- lionhearted 16y 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.
  - duncanj 16y ago
    You're essentially saying that anyone who gets hammered by the "correction" necessarily morally deserved it because they must have "played in this mess". Because otherwise, you are arguing that some of the people who didn't play in the mess should give money to others who may or may not have played. This, besides the fact that a correction has already happened, as evidenced by the drop in house prices and the number of homes in foreclosure. If there is another "correction" now, beyond what has already happened, and it causes even more bankruptcies, discharged debts, haircuts, bank runs, and the like, then the entire economy will suffer, not just those who played in the mess. As banks look toward deflationary times, they are holding onto cash reserves. (http://research.stlouisfed.org/fred2/series/EXCRESNS http://research.stlouisfed.org/fred2/series/EXCRESNS) This may be because they fear making loans that will not be paid back 100%, but the result is deflationary because they are all doing it, and they are all keeping that money from the system. It's a self-fulfilling prophecy. A deflationary period, while our country has so much private debt, combined with high unemployment, will likely leave us with more and more bankruptcies and the "dynamo problem" of the great depression. If this is what you're looking forward to to punish a few house flippers, well, I can't agree with your sentiment on that.
cia_plant 16y 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 16y 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 16y 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.
- deleted 16y ago
  [deleted]
- lionhearted 16y 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 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.
yequalsx 16y 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.
- kiba 16y 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.
  - yequalsx 16y ago
effn 16y ago
You are confusing monetary policy with fiscal policy.
cwp 16y ago
From that quote you conclude that the world followed his advice, and that led to the housing bubble? Now that's cojones.
akkartik 16y ago
I like sethg's rebuttal: http://news.ycombinator.com/item?id=1468454 http://news.ycombinator.com/item?id=1468454
mark_l_watson 16y 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.
- hga 16y 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.
  - dantheman 16y ago
    Why? The US involvement in WWI led to the harshness of the Treaty of Versailles, if the US held back it's been argued that England and France would have sued for peace earlier and the harshness of the treaty wouldn't have been there and then one of the prime causes of WW2 would not have existed. The Us involvement in WW2 is due to escapades in China and the Philippines - the reason Japan attacked the US.
    - hga 16y ago
      What are you arguing here? The fact (well, I agree) that the US badly screwed up its first really major intervention in world affairs has little to do with the present day, unless you contend that we learned nothing from it (e.g. for WWII Unconditional Surrender and the occupation and nation building we did in Japan and West Germany).
      - dantheman 16y ago
        I'm arguing that non-intervention might be good; that perhaps interfering with other countries might not be a good idea. Now I'm all for humanitarian assistance, and helping people fleeing countries that are war torn. In fact, I think when their is serious strife the US should do it's best help people relocate to the US -- e.g. instead of letting people get slaughtered in Rwanda we should have helped evacuate them to the US. I think that it is far from given that the US should be the world police, or that anyone should be the world police.
SkyMarshal 16y 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_baker 16y 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?
  - d2viant 16y ago
    They can and they are. We ARE going to default on our debt, it's inevitable. We can't possibly pay back the money we owe. We're going to do default the hard way by not paying our debts or we're going to default by inflation.
    - hga 16y ago
      Well, there is one other method: set things up so that zombie banks can earn enough money to become solvent in a decade or so and then do the necessary liquidations. I'd read this has happened several times before (Japan may be doing a form of it), we seem to be doing it now, it's the best practical outcome of the current Eurozone crisis, but it does really mess things up during the "recovery" period.
    - rbranson 16y ago
      > We can't possibly pay back the money we owe. If the government were a person, economics might agree with you, but it's not. This is what fiscal conservatives fail to see. The government can hold debt so long, that, due to inflation, it's value will fall to the point where paying it off is trivial. This is not practical for persons that have a finite lifespan. Corporations also fall in this category, albeit to somewhat less of a degree. Investors often do not see justifiable corporate debt as a problem, but an indication that the executive team understands opportunity cost.
orblivion 16y 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_baker 16y 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=1&ref=paulkrugman 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.
- hnal943 16y 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?
  - sethg 16y ago
    His advice was not followed in the past. The Keynesian prescription, basically, is for the government to run deficits during recessions and to pay back those loans when the economy recovered. During the 2000 Presidential campaign and the first three-quarters of Bush 44’s Administration, Krugman excoriated Bush’s economic policies, because those policies were running up the national debt to unprecedented levels while the economy was going well and the country could have afforded to pay down the debt.
    - anamax 16y ago
      The last Bush+Republican Congress deficit was $100B and was on track to surpluses in the following years. (It had been decreasing for a couple of years by that point.) Krugman complained bitterly. The first Bush+Dem Congress deficit, before the current crisis, was significantly larger than $100B. Krugman didn't make a peep.
    - hga 16y ago
      The Keynesian prescription is fatuous because, with rare exceptions, politicians never are willing to stop the flow of goodies that get them elected (tax and borrow, spend, elect). Sure, in theory, it might work to smooth out the normal business cycle (although I have serious doubts about its applicability to catastrophes, e.g. pushing on a string), but in normal circumstances it's a recipe for ever increasing sovereign government debt in the hands of mortal humans.

Retric 16y 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.

exit 16y ago
what do you think of basic income? http://en.wikipedia.org/wiki/Basic_income http://en.wikipedia.org/wiki/Basic_income
- protomyth 16y 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.
  - exit 16y ago
    > Maybe in the future, what are the criteria for this future?
    - protomyth 16y ago
      I guess when robots get too good at replacing humans (reasoning, mobile, perform skilled work).
      - 16y ago

jswinghammer 16y 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.

w00pla 16y 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.
- hga 16y 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").

startuprules 16y 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.

known 16y ago

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

paulnelligan 16y 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.

bjnortier_hn 16y 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_v 16y 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 16y ago
  Project Cybersyn: http://en.wikipedia.org/wiki/Project_Cybersyn http://en.wikipedia.org/wiki/Project_Cybersyn Discussed here: http://news.ycombinator.com/item?id=1190508 http://news.ycombinator.com/item?id=1190508
  - roel_v 16y ago
    Thank you, that's the one.
- deleted 16y ago
  [deleted]

DanielBMarkham 16y ago

Related article from this morning's reading: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html http://www.telegraph.co.uk/finance/comment/ambroseevans_prit...

hga 16y 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.)
jimbokun 16y ago
...directly addressing Krugman's viewpoint: "The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined Japan."

stcredzero 16y ago

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

hga 16y 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 http://www.powerlineblog.com/archives/2010/06/026620.php)
- stcredzero 16y ago
  Yes, but I know there are several other private sector industries that held their own or even flourished during the Depression.