Krugman’s Ignominious Retreat on Quantitative Easing

In the 1980’s Paul Krugman worked at the White House under Reagan. In later decades, he somewhat mysteriously acquired a left wing reputation for what he wrote (in particular for daring to oppose the Iraq War; that, in 2003, qualified you as far out leftist). Naturally, after he got the Nobel Prize in Economics, his colossal reputation gave him great influence in the Obama administration.

Krugman gave the advice to institute a massive “Quantitative Easing”. In this the Central Bank (“Fed” in the USA) buys assets held by the largest banks (so a branch of government, the Central Bank, buys something sold by another branch of government, Government Bonds, and held by others, supposedly private parties, large banks; it’s all very absurd).

The USA and the EU engaged in trillions of Quantitative Easing.

Result?

More plutocracy than ever, as I had anticipated, more than 6 years ago by calling TARP (the lending of nearly a trillion dollars to the largest banks), Transfer of Assets to the Richest People

Increasing the money supply to banks is not increasing the money supply to people. Especially with the derivative trading being 12 times world’s GDP. So no wonder QE does not work: most of the financial activity is not about financing the real economy, but the big banks casino.

Under the last part of his reign, when Clinton demolished the Banking Act of 1933, FDR’s great work, financial derivatives trading was only 80 trillion dollars. Now it’s 800 trillions. A weakening of rules in effect only weeks ago, written by Citigroup, is now the new law…

People need money and they need work. The government is the lender, and employer, of last resort. When things go back to normal, the government can withdraw. Cyrus the great, founder of Achaemenid Persia used the government, and then, wild private capitalism: there is a time for either. Now we are at a time where governments need to provide with an economy for common people, not just an economy for fat cats.

Absent the will to do this renewal of economic activity in a civil way, the military option will show its ugly face… Yes, could start in Russia… Wait…

Here is Krugman:

“Money isn’t everything… Well, the money supply isn’t everything, either.

… I argued that it’s hard to see why anyone believes that money supply increases will do the trick after the past six years. … maybe describing my own conversion to monetary pessimism may help clarify what’s happening now. 

So, back in 1998 I was looking at Japan’s troubles, and — like Evans-Pritchard and many others now — believed that the Bank of Japan could surely end deflation if it really tried… doubling the monetary base will always raise prices, even if you’re at the zero lower bound… To my own surprise… when you’re at the zero lower bound, the size of the current money supply does not matter at all. You might think that it’s a fundamental insight that doubling the money supply will eventually double the price level, but … short-term interest rate is currently zero, changing the current money supply without … raising expected inflation — matters not at all.

And as a result, monetary traction is far from obvious. Central banks can change the monetary base now, but can they commit not to undo the expansion in the future, when inflation rises? …

But, asks Evans-Pritchard, what if the central bank simply gives households money? Well, that is, as he notes, really fiscal policy — it’s a massive transfer program rather than a conventional monetary operation… it would have no effect … households would know that future taxes will have to rise to pay for today’s gift, and save all of it.

[How silly and wealthy can Krugman be? Really poor people have no money… And very good things to spend it on, should they have any. All poor people know that, but Krugman never interviewed any of them, apparently. If the government gave the poor money, they would spend it right away. It’s actually a well-known fact that all the money given to the poor is immediately recycled in the economy!]

More Krugman:

“… Central banks aren’t in the business of just giving money away; what they do is always some kind of asset swap, in which they buy assets or make loans which then become assets. I’m pretty sure that neither the Fed nor the Bank of England has the legal right to just give money away as opposed to lending it out; if I’m wrong about this, put me down for $10 million, OK?”

Still, isn’t this just theory? Well, no. Huge increases in the monetary base in previous liquidity trap episodes had no visible effect.

And now we have the post-2008 experience, and it’s certainly not an example of central banks easily dealing with economic downdrafts.

Just to be clear, I have supported QE in both Britain and the US, on the grounds that (a) central bank purchases of longer-term and riskier assets may help and can’t hurt, and (b) given political paralysis in the US and the dominance of bad macroeconomic thinking in the UK, it’s all we’ve got. But the view I used to hold before 1998 — that central banks can always cause inflation if they really want to — just doesn’t hold up, theoretically or empirically.”

So Krugman supported Quantitative Easing for the same reason as a drunk searches for his keys below a lamp post: it’s the only thing he sees. How smart is this?

As I said, the state will have to be the employer of last resort, it has always been, and always will be. The free market is great, but it’s not really free; the state pays for it.

Patrice Ayme’

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18 Responses to “Krugman’s Ignominious Retreat on Quantitative Easing”

  1. ianmillerblog Says:

    You may be being a little harsh on Krugman here. When you say QE is the only thing he sees, perhaps an alternative might be, it is the only thing he sees that has any show at all of being acceptable to the politicians, in other words it might have been the only thing he thought he could get away with doing.

    Personally, I think it probably did avert a more serious wipeout, but it should have stopped quickly. All it is doing now is, as you say, financing derivatives trading.

    • Patrice Ayme Says:

      Dear Ian: I have followed Krugman very closely, reading thousands of pages he wrote in the last 7 years. I don’t know him personally, but I do believe that he and his kind MISLED my friend Obama. Now they were all so much misleading, all the same way, Obama, being president, had no choice. He had to preside over the crabs.

      Now Obama has understood much, and, should his presidency happen again, I am sure that he would preside closer to my position than the one that was forced upon him. (Although, exasperated by the fighting about Obamacare, Obama tried to impose Medicare For All, but then he had absolutely EVERYBODY (of weight) against him, from Pelosi to Krugman.)

      And the error about QE was, is, all over the West.

      Krugman is no warrior. As soon as the enemy shows up, he whines that this looks tough, and that, for the sale of political realism, one should raise the white flag, and stop the fighting, ASAP.

      Here, too, he is learning. As Obama is… But it’s too late relative to the mandate they had 6 years ago.

      There was no serious wipe-out, but it was threatened by the very guys who got all the money ever since. banks threatened to close ATMs, if Bush and Obama did not do exactly as they said.

      Solution? All banks ought to capped at some small size (smaller than the size of the 21st largest USA bank). All derivative trading ought to be outlawed, except if it is insurance in the real economy. And then there should be limits on who can trade what (commercial operators may leverage more). Finally the banking Act of 1933 ought to be reconstituted, modernized, and respected in spirit (no casino insured by taxpayers).
      PA

  2. pendantry Says:

    The free market is great, but it’s not really free; the state pays for it.

    I don’t see how any system that can only end in collapse can be labelled ‘great’, unless that word is paired with ‘calamity’.

    I don’t understand why you say ‘the state pays for it.’ Perhaps I misunderstand what you mean by ‘the state’. I think it’s pretty clear who will pay the price of all this folly when the shit again hits the fan — and also who will, yet again, get off without even a slap on the wrist for cocking it all up. Again.

    “It’s the brakes, mate.”
    “Oh, surely not. I think we should put it back on the road and see if it crashes again.”

    I said it would happen. But there’s none so blind as those who won’t see.

    • Patrice Ayme Says:

      Hi Pendantry: Please rest assured that I share your indignation. “Free Market is Great” stands up there with “Allahu Akbar”, pronounced yesterday by a Muslim youth who stabbed 3 French police officers in the commissariat before being shot four times in return.

      It was meant ironically.

      The free market is neither great, nor is it a market, being heavily regulated, nor is it free, as we all pay for it, often with our lives.

      • pendantry Says:

        As so often, I find that I need to parse you carefully before oral insertion of my lowermost appendage. I’m glad to hear that I misunderstood you so well! I strongly suspect that my attempted ironic utterances are often treated thusly.

        Peace! (We live in hope…)

        • Patrice Ayme Says:

          Yes, Pedantry. Humor, irony, sardonicity, enliven a discourse. Yet, I use them very parsimoniously, because I try to convey philosophical meaning, which is hard enough to not make it worse by introducing deliberate confusion. All the more as I often wallop in the Politically Incorrect (as new philosophers are bound to be, and all real philosophers have come into sometimes lethal trouble for. From Socrates, to Boetius, to Jean Cavaillès…)

          I have tried, with sometimes excruciating details, to demolish the reigning financial-economic-plutocratic paradigm… In the last 12 years, on the Internet (on this site, and its predecessor, Tyranosopher…). It was bitter, after helping him so much, to see Obama going over to the Dark Side. I underwent a real depression from it, and came out with a more determined, grim, ironically monastic, ferocious wisdom. The ferocity comes from giving a lot in the pre-Obama era, and finding out that the most selfish, most shark-like people are not just the most materialistically successful, but they suck up all the power. Namely some right wing fascist creeps became Obama’s best friend, once he was president, and their mood has been steering the country, not to say the world, since.

          An example is the war in Syria: doing it right in the beginning, by kicking Assad out (as Ben Ali in Tunisia), would have prevented the horrendous civil war, and promoted a secular state (Tunisia again). But those around Obama were people without moral compass whatsoever, except their own influence.
          PA

          • pendantry Says:

            I feel for you. As for me, the only recourse I feel that remains to prevent a descent into total insanity is mockery of this species that precociously holds to its self-proclaimed moniker: the ‘wise, thinking man’. HAH!

            • Patrice Ayme Says:

              Dear Pedantry: I replied to your reply, without saving… And of course, when I do this, my comments disappear…
              Anyway I agree with all you say. Language is discrete, reality continuous (say the Quantum!). So we have to keep on talking! 😉

              About the baboonesque state of affairs: once one has realized all our leaders, and all the infrastructures we enjoy, are the fruits of the labor, or fancy, of super-baboons, it spurs one’s spirit to elaborate more sophisticated logics.
              PA

            • pendantry Says:

              Can’t resist a reply to this to see how thin this particular example of tech-gone-mad can get… 🙂

            • Patrice Ayme Says:

              Please reply, don’t hesitate! ;-). I am still astounded by Krugman 180 degree turn. Now in his last editorial, he tackled the “Grand Illusion”, and irritated me thoroughly again! His country is sitting on force, by force, with force, and he, half way between Washington and new York, claims that force does not work!

            • pendantry Says:

              My apologies: I went off-topic, was referring to the display of this thread, which I now see has reached minimum width, and less than readable in full-justification. (I had visions of ultimately vertical sentences, one character wide!) — all of which is totally irrelevant to your discourse. So, sorry!

    • Patrice Ayme Says:

      Dear Pendantry: I added this comment on your post (of which I approve, of course):

      The plutocrats are not foolish. Not foolish in their crocodilian mindset. They want more, and more and more. And they are getting it. This scenario has happened many times in history, even to Republics such as Rome, which had extremely explicit anti-plutocratic laws.

      To call them fools is pleasant, because it’s an insult, and they sure have a reduced vision of humanity. But in truth they are the most clever, most venomous snakes, ever evolved.

      Calling them fools underestimates them gravely, it’s not smart strategically. We can call them for the idiots they are, once we have destroyed their power. But power is all they are after, and this madness, this foolishness, is their strength.

  3. johsh Says:

    who are we kidding. The system is setup like a pyramid. On the top sits the moneyed, their foot soldiers being the wallstreet, and financial engineers. They win, always, QE or no-QE.

    Its a modern version of slavery, much more efficient, inclusive, enslaves everybody except the top few percent sitting on top of the pyramid. It even eats its own if needed.

    At the bottom of the pyramid is African nations and its citizens, then little higher, south east asia, mid-east, latin countries and their citizens. BRICS are tad low, developed countries come last. Make no mistake, everybody is a salve in some form, to the pyramid’s top. Global financial system ensures it. It’s foot soldiers understand only one thing – “money”.

    over the last 3 decades, IT revolution, electronic money/currency, has been very effective in enforcing “THE MONEY”‘s will over all humanity. The stealing has never been easier, just few clicks away.

    There is no beliefs, political views or morals at the top. Warren buffet or koch, both equally feel at home. Their currency is “yearly returns” or “growth” (theirs, of course).

    So lets not blame klueless krugman. “The System” is a much larger force, for krugman to matter. Its no single person, or group of persons, the intelligence has been built into the system (and its brother, the “society”).

    Like in medieval times, if you want-in on the pillage, become a foot solider of financial industry which serves the top of the pyramid.

    • Patrice Ayme Says:

      Dear Josh: I agree with most of what you say. However, I am more optimistic. In the past, plutocrats could kill and torture you, all over the planet. Or even eat the commons alive over a few weeks, in some (not so-) Pacific islands. Look at the feast for the Brits, where 200 or so Maoris had been roasted, not so long ago. Matters have improved.

      The two Roosevelts, although plutocrats themselves, saw the error of the ways of their fellows (just as Carnegie did). They corrected a lot. The recruitment of clueless (Reagan) or greedy (Clinton, Nixon) servants has fostered run-away plutocracy. It goes well along the run-away CO2 crisis. It can be mitigated. The coming “Republican”/plutocratic dictatorship (sort of) in the USA will help clarify the situation… Hopefully (I said the same after Reagan got elected, and I was wrong, BTW…)
      PA

      • johsh Says:

        well, lets hope so.

        Humanity as a whole “progressed”. No doubt.

        I am just pointing at the new phenomenon of slavery that is built into the system.

        At least in the past what you earned/built had real value/tangible. Now, its all at the whims of financial wizards. They decide what your country’s currency value is going to be 1 yr, 5yr, from now, thus your entire life’s earnings/wealth.

        Your savings earn zero rate, while somehow, their wealth keeps getting multiplied. Somehow the top of the pyramid always keep gaining, no losses for them,

        The modern financial system of the world has been an excellent tool for the slave masters. Never been this good, no need for spending money on cooked-up wars like in old-times, now its just few clicks away.

        Keep an eye on retirement/pensions of old humans next few decades.

        • Patrice Ayme Says:

          That savings earn nothing is thanks to Krugman and Quantitative Easing: hey, no harm done, says Krugman. Just invest in the derivatives market, and that you can do if you have a few millions. So please stop talking Tea Party style, Krugman says… Or like Santori, as Krugman says…

          Yes, retirement plans are actually failing. It’s a secret: sssshhhh…. The deficit in France, overall, in private and public plans is 10% (it cannot be any better in the USA; both France and the USA have similar derivatives markets).

          My recipe, advocated super loud on my sites at the time, 7 years ago, was not QE, but nationalize and recover the money plutocrats had taken from plutocrats. Instead of making whole the latter… The great QE of Krugman, Obama, Bush, Pelosi, Summers, Paulson, etc…

          Nationalization was used by Bush Senior and Reagan, the well known leftists. For 2,000 banks. The 2008 crisis involved only 21 banks (and a number of “shadow banks” such as AIG, GM, GE, etc.).
          PA

  4. Patrice Ayme Says:

    Pendantry: Hence the necessity to restart a thread!

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