About Krugman's article linked in lew's blog

[Knight_of_BAAWA]

I posted this on another forum, and I think it bears posting here.

Article source: http://www.nytimes.com/2008/10/27/opinion/27krugman.html?_r=2&hp=&oref=slogin&pagewanted=print&oref=slogin

In Russia, for example, banks and corporations rushed to borrow abroad, because dollar interest rates were lower than ruble rates. So while the Russian government was accumulating an impressive hoard of foreign exchange, Russian corporations and banks were running up equally impressive foreign debts. Now their credit lines have been cut off, and they’re in desperate straits.

Gee, like some idiot who maxes out his or her credit cards and can’t pay the bills? Oh noez, Paul? Whatever shall we do to help the person who willingly lived beyond his or her means? Shall we bail the person out and maybe force the credit card company to up the limit? Why yes, that’s exactly what you’d suggest. And if you think I’m joking about this: read on.

Needless to say, the existing troubles in the banking system, plus the new troubles at hedge funds and in emerging markets, are all mutually reinforcing. Bad news begets bad news, and the circle of pain just keeps getting wider.

Yeah, maybe the house-of-cards has collapsed, Paul. It’s called “Austrian Business Cycle Theory”. You’re familiar with it; you just prefer some mishmash of neo-keynesian, neo-classics, and good ol’ fashioned marxist hatred of the successful.

Meanwhile, U.S. policy makers are still balking when it comes to doing what’s necessary to contain the crisis.

Oh, wait for it. This is good. What do you suppose the good Nobel Prize winner suggests, hmmmm? Hint: it’s not free markets!

It was good news when Mr. Paulson finally agreed to funnel capital into the banking system in return for partial ownership. But last week Joe Nocera of The Times pointed out a key weakness in the U.S. Treasury’s bank rescue plan: it contains no safeguards against the possibility that banks will simply sit on the money. “Unlike the British government, which is mandating lending requirements in return for capital injections, our government seems afraid to do anything except plead.” And sure enough, the banks seem to be hoarding the cash.

1. They’re actually still lending, despite Paul’s blatant lie to the contrary.

2. Mandating lending requirements is one of the reasons we’re in this mess!

3. What do you think it means to “mandate lending requirements” anyway?

There’s also bizarre stuff going on with regard to the mortgage market. I thought that the whole point of the federal takeover of Fannie Mae and Freddie Mac, the lending agencies, was to remove fears about their solvency and thereby lower mortgage rates. But top officials have made a point of denying that Fannie and Freddie debt is backed by the “full faith and credit” of the U.S. government — and as a result, markets are still treating the agencies’ debt as a risky asset, driving mortgage rates up at a time when they should be going down.

Only if Paul wishes to blind himself to reality could he possibly believe that bullshit tripe he just wrote. Actions have effects, and we do not act in a vacuum. Freddy and Fannie’s debt is still risky according to the subjective valuations of individuals. Paul wishes to impose HIS monetary-crank view upon everyone else so he can further complain about the free market so he can have more fascist controls imposed.

His view of Fannie and Freddy is his alone. That he can’t force people to believe him angers him. Watch:

What’s happening, I suspect, is that the Bush administration’s anti-government ideology

BWAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA!

Anti-government ideology? Bush? What the fucking fuck? The man expanded the federal government more than his father, Clinton, and Reagan! Anti-government my ass, Paul! Come up with a new lie, you socialist shill.

still stands in the way of effective action. Events have forced Mr. Paulson into a partial nationalization of the financial system — but he refuses to use the power that comes with ownership.

IOW: if banks don’t do what Paul wants, Paul wants the federal government to take full ownership and run the banks itself.

Yeah, how about that Nobel Prize winning economist?

Whatever the reasons for the continuing weakness of policy, the situation is manifestly not coming under control. Things continue to fall apart.

Yeah, because the policy is too strong. Intervention begets intervention begets intervention. It spirals down. Paul wishes to deny that fact of reality.

Anyone still think Paul deserved the Nobel Prize?

[liberty_student]

That’s pretty intense bro. You should list all of his inaccuracies, and submit them to the NYT Ombudsman. Serious.

[rroopstr]

Let us suppose for a minute there were absolutely no bailout. (In Economics, it is actually acceptable to “assume” things, right?)

OK. So, lt’s assume there is no bailout. What would happen?

I do not think that many banks would fail. I have seen here at mises.org a few reports showing that actual cash reserves of banks are enormous and they are not lending out those funds.

I guess banks would have to compete and eventually would have to start lending if they wanted to get any business at all, right. And therefore this would be THE QUICK WAY TO END THE CRISIS, through free market.

Sounds so simple that I am tempted to think there must be something wrong to it. But the more I think of it, the more I conclude that, should the assumption of no bailout hold, the quick solution and the quick recovery would also hold.

[MacFall]

There would be some bank failure, Reuben. Those banks whose policies relied entirely on inflationary policies would certainly fail; those who did not would persist. In between there would be an array of degrees of failure and success. Unfortunately, there are none of the latter sort in the mainstream economy, and so we must expect that every financial institution would suffer to some degree, some more than others.

But you are certainly right that, absent the meddling of the government, the correction (called a “crisis” by government and media doomsayers) would be quick - and not painless, but not nearly as painful. The government’s insistence upon artificially preserving the bloated corpse that is the current financial sector only means that the situation will get much, much worse before it is possible for it to get better.

[rroopstr]

I compare it to my personal situation.

Over the last few years I got onto debt with 4 credit cards. I eventually stopped paying anything to them. This year I worked a lot harder, I didn’t take a vacation, I spent a lot less, worked more efficiently to earn a paycheck raise; so a few days ago I managed to pay the last credit card in full. So this year was certainly rough for me. But next year will probably be nicer.

On the other hand, had I been bailed out, I would probably have continued acting as an immature kid for a few more years (while life goes away and time lost does not come back), and perhaps in 2011 I would have had to do the same thing I did this year, but since the amount of debt by that time would probably be higher, it would take me two years instead of one to pay everything back.

Is this analogy acceptable to translate it to the whole economy?