I posted earlier Friday on Alan Greenspan's defense of his tenure. Now for something completely different: Paul Krugman in Friday's New York Times has decided that financial techniques like securitization (and presumably everything beyond plain-vanilla stocks and bonds) are irremediably bad, that Wall Street and the banks must be broken up and radically reduced in size and power, and that we should go back to the 1950s when a more tightly controlled banking sector was sufficient to double the economy in a decade.
Oh man. I guess the first response to Krugman's wail, which has grown increasingly histrionic and despairing as the administration has continued to ignore him, is, well, we're not living in the '50s anymore. I'm aware that Krugman is writing for a broad general audience, but what exactly do his economist colleagues think of this sudden declaration? He offers no facts, no argument beyond the fact that the situation is a mess and (implicitly) he's a Nobel Prize winner, no possible complications to what truly is a Carthaginian solution. At the very least, this leap a half-century-or-so into the past, strikes one as, well, frightening, a speculative leap like China's Great Leap Forward. He doesn't pause to consider the effect of all this on corporations, large and small, that are already gasping for credit; on employment; even, indeed, on New York City, home of his employer, the Times, which would essentially see its economic base (and that of many of its readers) obliterated. Maybe it's because he lives in Princeton, N.J.
He also makes a move that, if one his students had tried it, he would slap them metaphorically silly. For all the talk of the Great Depression, this isn't the '30s, and we're not heading to the '50s or the '60s, when a handful of giant industrial companies dominated the scene, the U.S. was working off a very low base in a devastated world, and equities were still too racy for most folks to consider. Today's economy is extraordinarily different; the world is very different. Yes, all financial crises seem to share certain traits. But I thought we had intellectuals like Krugman to carefully differentiate, to tell us (even if we don't listen) when we're drawing false commonalities or distinctions or extracting conclusions from inadequate evidence: to raise the level of debate.
Instead we get this. It's undoubtedly true that finance grew too large and was inflated through speculation. And perhaps some of the banks are insolvent. But do we have any sense how much that speculation entailed or how large finance should be to drive a certain level of economic growth? Does Krugman have a clue? Has anyone done this research? Does he have an empirical basis for going back? Securitization has many sins to pay for, but you have to be a fool or a demagogue not to realize that it also provides liquidity and credit for millions of people. Eliminate securitization and individuals are back in the '50s, when mortgages were difficult and expensive to get, credit cards barely existed, student loans were nonexistent, and John Kenneth Galbraith could worry about the dangers of Americans buying TV sets through installment lending.
Besides, if the U.S. walks away from all this, why should anyone else in the world, including the Chinese? As the Financial Times asked last Saturday, in response to the House bonus tax, why is America so eager to junk one of its most successful sectors, finance, in terms of foreign trade? And why would we bother to stimulate an economy with its heart ripped out?
Krugman always has two sides: the economist and the political pundit. He has over the past few months engaged in debates that are serious, sophisticated and rational -- notably over bank nationalization, of which he's a proponent. But while his compadres in that debate, from Martin Wolf to Simon Johnson to Adam Posen, have continued to engage the administration in a reasoned discussion, Krugman has increasingly taken refuge in fear mongering, hand-wringing and prophetic appeals. A pity. - Robert Teitelman
See Krugman's column from NYtimes.com
See earlier post about Greenspan from Dealscape
Robert Teitelman is the editor in chief of The Deal.
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I recommend reading "Nostalgianomics" by Brink Lindsey of the Cato Institute which is a very thorough data filled response to many of Prof Krugman's arguments.