Paul Krugman — The Worst May Be Over
Kurt Brouwer May 5th, 2008
Princeton economist and New York Times columnist Paul Krugman has been very bearish on this financial crisis — until now. In this column, he actually exudes a whiff of confidence in Federal Reserve Chairman Ben Bernanke and in our financial system [emphasis added]:
Success Breeds Failure (New York Times, May 5, 2008, Paul Krugman)
Cross your fingers, knock on wood: it’s possible, though by no means certain, that the worst of the financial crisis is over. That’s the good news.
…Last August, as investors began to realize the scope of the mortgage mess, confidence in the financial system collapsed.
I believe we’ve been lucky to have Ben Bernanke as Federal Reserve chairman during these trying times. He may lack Mr. Greenspan’s talent for impersonating the Wizard of Oz, but he’s an economist who has thought long and hard about both the Great Depression and Japan’s lost decade in the 1990s, and he understands what’s at stake.
Mr. Bernanke recognized, more quickly than others might have, that we were in a situation bearing a family resemblance to the great banking crisis of 1930-31. His first priority, overriding every other concern, had to be preventing a cascade of financial failures that would cripple the economy.
The Fed’s efforts these past nine months remind me of the old TV series “MacGyver,” whose ingenious hero would always get out of difficult situations by assembling clever devices out of household objects and duct tape.
Because the institutions in trouble weren’t called banks, the Fed’s usual tools for dealing with financial trouble, designed for a system centered on traditional banks, were largely useless. So the Fed has cobbled together makeshift arrangements to save the day. There was the TAF and the TSLF (don’t ask), there were credit lines to investment banks, and the whole thing culminated in March’s unprecedented, barely legal Bear Stearns rescue — a rescue not of Bear itself, but of its “counterparties,” those who were on the other side of its financial bets.
It’s still far from certain whether all this improvisation has resolved the crisis. But it was the right thing to do, and for the moment things seem to be calming down…
Professor Krugman’s columns often have an overt political tone to them and I generally ignore those. However, he is an excellent economist, so I do pay attention to his economic opinions. He has been quite bearish and negative for the past year or so. For example, in an interview in Fortune magazine on March 17, 2008, Krugman opined that the economic downturn could last into 2010 or even 2011 [Identification added in brackets below and emphasis added]:
How Bad Is The Mortgage Crisis Going To Get? (Fortune, March 17, 2008, Jia Lin Yang)
…[Fortune]:Can you compare this to other economic crises the U.S. has faced?
[Paul Krugman]: The financial stuff looks like a combination of 1990 and 2001, and probably bigger than both combined. You’ve got the financial disruption, which is probably bigger than the savings and loan crisis. And you’ve got the loss of wealth from the housing bust, which is bigger than the dot-com bust. So this looks fairly nasty. And then everybody who’s paying attention is worrying about the Japan analogy. Japan never had a really severe recession. It just started with a recession and never really had a recovery for a whole decade. And that’s the kind of thing we’re afraid of.
[Fortune]: You’ve been saying 2010 is when we get out of this recession. How did you arrive at that date?
[Paul Krugman]: The last recession officially ended after eight months, but employment didn’t start to recover until 30 months later, so I think we go at least that long this time. If the recession started in January 2008, then that would mean July 2010 is the first month we have anything that feels like a recovery. But I wouldn’t be surprised if it goes longer than that - maybe into 2011…
Given how negative Professor Krugman has been — even as recently as March of this year — today’s column struck me as a sea change in his thinking. What do you think?
Via: Larry Kudlow and Donald Luskin
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