The New York Time’s David Leonhardt has the perfect article for the layperson who wants to understand the current debate between the deficit hawks and the stimulus advocates:

“The policy mistakes of the 1930s stemmed mostly from ignorance. John Maynard Keynes was still a practicing economist in those days, and his central insight about depressions — that governments need to spend when the private sector isn’t — was not widely understood. In the 1932 presidential campaign, Franklin D. Roosevelt vowed to outdo Herbert Hoover by balancing the budget. Much of Europe was also tightening at the time.

If anything, the initial stages of our own recent crisis were more severe than the Great Depression. Global trade, industrial production and stocks all dropped more in 2008-9 than in 1929-30, as a study by Barry Eichengreen and Kevin H. O’Rourke found.

In 2008, though, policy makers in most countries knew to act aggressively. The Federal Reserve and other central banks flooded the world with cheap money. The United States, China, Japan and, to a lesser extent, Europe, increased spending and cut taxes.”

Given that, what is the issue for the austerity debate today?

“The reasons vary by country. Greece has no choice. It is out of money, and the markets will not lend to it at a reasonable rate. Several other countries are worried — not ludicrously — that financial markets may turn on them, too, if they delay deficit reduction. Spain falls into this category, and even Britain may.

Then there are the countries that still have the cash or borrowing ability to push for more growth, like the United States, Germany and China, which happen to be three of the world’s biggest economies. Yet they are also reluctant.

China, until recently at least, has been worried about its housing market overheating. Germany has long been afraid of stimulus, because of inflation’s role in the Nazis’ political rise. In responding to the recent financial crisis, Europe, led by Germany, was much more timid than the United States, which is one reason the European economy is in worse shape today.

The reasons for the new American austerity are subtler, but not shocking. Our economy remains in rough shape, by any measure. So it’s easy to confuse its condition (bad) with its direction (better) and to lose sight of how much worse it could be. The unyielding criticism from those who opposed stimulus from the get-go — laissez-faire economists, Congressional Republicans, German leaders — plays a role, too. They’re able to shout louder than the data.

The whole piece is well worth a read . . .



Governments Moving to Cut Spending, in Echo of 1930s
NYT, June 29, 2010

Category: Economy, Really, really bad calls, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

43 Responses to “Austerians vs Keynesians: NYT Edition”

  1. I added the tag “Really, really bad calls” pre-emptively —

    Why? Because one position is very likely to be proven completely and totally wrong

  2. NoKidding says:

    “The New York Time’s David Leonhardt has the perfect article for the layperson who wants to understand” … why the New York Time’s political positions are correct.

    Or: Assuming that Keynesians are right and Austrians are wrong, lets compare and contrast.

  3. ACS says:

    Crisis: cheap money. Result: bubble and new crisis. Response: cheap money. Result: bubble and new crisis… Insanity: doing the same thing over and over again and expecting different results.

  4. Lugnut says:

    “They’re able to shout louder than the data.”

    The problem with guaging the relative state of the US economy is that one is assumed to take that data at face value. As we all know, government figures for things like the rate of inflation, CPI, GDP, unemployment rates, money supply (e.g. M3) and interest rates are rarely reflective of the realities on the ground and are ‘tweaked’ by the issuing bodies to suit the various political and fiscal ‘necesseties’ of the government. Thus giving the Austerians all the more reason to shout above said data.

  5. farfetched says:

    It might work if we break the cycle. We foolishly rescued the greedy b’tards, but one wonders how it might have gone had we rescued PEOPLE instead of banksters and the OWNERS of capital had the chance to seek a fair return on what, at the time< was obviously a very rare commodity…

    I know I would feel a little better off if I were getting a fair return on my savings, and I'll bet grandma and grandpa would do better on fixed income. And where would that 'rescue' money and valued capital go?
    Yep, the most sound and stable banks. And the less sound and stable? They would have to pay more for the risk. I'm not sure it's Keynsian or Austerian, but it's just common sense. People would spend the money and the economy would be better off. Let the banks get the 'trickle down'.
    It's a little twist on Suze Orman…..people first, then money, then banks.

  6. cswake says:

    “Or: Assuming that Keynesians are right and Austrians are wrong, lets compare and contrast.”

    Don’t confuse the “Austerians” and “Austrians” – there are several magnitudes of difference in their policy prescriptions.

  7. constantnormal says:

    “The Federal Reserve and other central banks flooded the world with cheap money.”

    Really? I thought they only flooded the big banks with money. Or is this the NYT version of “trickle-down” economics?

  8. constantnormal says:

    Just flooding a broken system with cheap money, without correcting the flaws in that system, is a recipe for a rinse and repeat behavior.

    If we had showered the system with liquidity, while AT THE SAME TIME reinstating the legislative constraints that kept the nation out of these situations for the past 70 years, and processing the failed institutions through bankruptcy, zeroing out their stockpiles of toxic debt, then there might be a hope of recovery into a bright new future.

    But that’s not the case here …

  9. jmoharris says:

    The reason some politicians are calling for deficit reduction at this point is very clear: Trillions of dollars have already been transferred to their corporate masters. Mission Accomplished!

    So now the politicians can pretend to want to balance the budget.

  10. Mannwich says:

    Bingo, constant. They flooded the BANKS with cheap money. The people got platitudes on how the economy is in “recovery”. The banks’ economy is in recovery, for sure? The real one that we inhabit? I don’t think so. That’s why this thing is such an unmitigated disaster. They’d have been better off saving the real economy over a banking system that’s rotten to the core.

  11. JustinTheSkeptic says:

    So, pouring more gasoline into the already soaked carburetor is going to get our economic car rolling again? I say, let it rest and the gasoline will evaporate away, i.e. the market will find its proper price signals. Just make sure that no one goes hungry and has a roof over their heads.

  12. d4winds says:

    The Austerians are much more firmly in place in the USA than in Europe, where the media fixate. European austerity promises have been only modestly about the immediate budgets but predominantly about the future ones, presumably after a recovery is well underway. In the USA by contrast, political support for further federal stimulus cannot be revived; but state and local austerity measures, which can no longer offset by current federal stimulus since it is disappearing, are about to enter overdrive.

  13. VRWC says:

    There are those among the Austerians who recognize the need to stimulate generally, but question exactly where the money seems to be going. From what I can tell, very little of the stimulus seems to be going toward the oft promised “shovel ready” infrastructure projects and conversely, way too much of the money is going to state union workers in order to prevent them from having to tighten their belts.

    That may help hold up consumer spending by a fraction…. among state workers anyway. But it does little for long term growth because we all know that at some point the private sector is going to get socked with even higher taxes to pay for the thus far undiminished expectations of a bloated public sector.

  14. Graphite says:

    I added the tag “Really, really bad calls” pre-emptively — Why? Because one position is very likely to be proven completely and totally wrong

    Barry, what sequences of events are you looking for to “prove” one side or the other completely wrong? I don’t see how that is even possible, because unfortunately, in economics we don’t get to run the system over again with the same set of initial conditions and some different inputs to see how the output would have changed. The only people who I think can be proven wrong are the ones saying “the market WILL do this” or “economic growth WILL do that.” But as far as “pulling economic lever A will change the economic outcomes by amount B,” forget it. (On that note, Paul Krugman is already writing a string of ass-covering blog posts so he can say “I told you so” if Congress doesn’t pass a $5 trillion spending bill tomorrow and the economy slips into a depression.)

    So say that we tighten the government spending belt and the economy slips into a depression. Does it mean the outcome would have been better if we had kept spending? Or worse? How do we know? Or, say that we keep on deficit spending and deficit spending and all that we get out of it is a Japan-style 2 lost decades … does that mean we should count our blessings because we avoided total catastrophe, or lament the lost generation that it produces?

    The 1930s are often pointed to as a period that “proves” the efficacy of government stimulus spending, but that is simply because the economy happened to get better (VERY haltingly and unevenly better) after deficit spending was increased. It’s pure post hoc ergo propter hoc reasoning. And some of it just plain contradicts the evidence. For instance, people (especially neoclassical economists) often say the Federal Reserve “tightened” the money supply in the early 1930s, which was a major “policy error” and cause of the Great Depression. But if you go back and look at the figures, the BASE money supply, which is the only variable the Fed really controls, was expanded almost throughout the entire period. What the Fed could not control then, and can’t control now, was the collapse in confidence that led to a contraction of credit and the decline in the broader measures of money which people are referring to when they say that “money supply in the early 1930s collapsed.”

    So what do we know? Well, we know that every single credit bubble in financial history was followed by an economic collapse that was either deflationary or hyperinflationary in nature. We also know that most government attempts to fight the ensuing bust have only ever gained traction AFTER the process of debt destruction had run its course. Most of the mainstream Keynesian commentary presumes that you can run a 30-year credit bubble, with all the economic errors that entails, and come out completely unscathed on the other side. I’m open to this idea, I certainly hope it’s right, but without any examples from financial history whatsoever I remain pretty skeptical.

  15. dsawy says:

    So… Japan is going to recover to their 1990 level, are they? If they just keep up the Keynesian stimulus for a couple more years… what is two more years when they’ve been at it for nearly 20, right? – they’re going to see their markets and real estate valuations recover to 1989-1990 levels. Keep the faith!

    Never mind that their debt:GDP is now at 170% and headed upwards.

    The problem in Japan and the problem here are the same: We have fraudsters running the banking system. Keynesian stimulus does nothing to clean out the fraud in the banking system. Neither do free market theories while there is a Federal Reserve gaming the system. We need to clean out the financial system before we’re going to see some real results – Japan shows us this quite well: 20 years on, and they’re still extending and pretending.

  16. VennData says:

    The prior group showed their true colors – not Austrian, not Keynesian, not Randian, not Marxist – to “save” the big banks creditors (and management.)

    They used a Randian set of talking points when their SEC allowed the ibanks to set any level of leverage they want, not Keynesian not Austrian.

    Their tax cuts without spending cuts which gave us 1T$ structural deficits used Keynsian-type talking points, not Randian or Austrian.

    The GOP uses whatever grab bag of argumentative snippets to support their tax cuts for the rich. Until you voters figure that out, the GOP will have a following.

  17. Graphite says:

    We also know that most government attempts to fight the ensuing bust have only ever gained traction AFTER the process of debt destruction had run its course.

    Actually, this should have said ALL government attempts.

  18. insaneclownposse says:

    In 1990 the U.S. raised taxes and cut spending in the middle of a recession, yet the economy still recovered in 1991. I don’t think this issue is as black and white as people are making it out to be.

  19. purple says:

    Germany likes tight money because it constricts wage growth, pumps exports. Has nothing to do with historical memory.

  20. Robespierre says:

    @constantnormal Says:

    “Really? I thought they only flooded the big banks with money. Or is this the NYT version of “trickle-down” economics?”

    The banks is the only real world. The rest is just people in pods to distract and control ala Matrix

  21. Robespierre says:

    “Several other countries are worried — not ludicrously — that financial markets may turn on them, too, if they delay deficit reduction”

    I’m really amazed at this sentence. It basically says that Spain and Britain are basically told how to govern by financiers. I submit to you that the US is exactly in the same boat. Did anyone noticed where “financial reg” is going?. The only country I have seen that is not afraid of its bankers seems to be China. Why is that?

  22. call me ahab says:

    Then there are the countries that still have the cash or borrowing ability to push for more growth, like the United States, Germany and China

    a well framed sentence- because if “borrowing ability” isn’t included- the United States is not on the list

    so . . . let’s strip out the “cash” nonsense when talking about the United States-

    the essence of this whole article is that growth is all that matters no matter how it is achieved-

    have we not already gone that route and found it wanting? how long should the US deficit spend? Was the past 30 years not enough? should we continue 10 more years, 20 more years? as long as it takes in the hopes that the private sector can pick up the “credit and spend” torch to future prosperity-

    in the words of Team America-

    America- Fuck Yeah!

  23. farfetched says:

    More accurately it’s the banksters running the politicians and the Fed, right?

    I mean, who’s money is it to devalue or loan? It’s the people’s money. So what happens is a giant fraud on the owners of capital. The Fed steps in as ‘Vinnie (Ben) the middle man’ and sets the interest rates and prints an s’load of cash, which cuts off the owners of capital from their fair return and also devalues their currency. It’s theft via a shell game.
    If they were street hucksters playing the same game the cops would arrest them and they’d be jailed.

    And who owns the press that controls the dialogue? The press sells this line of crap about ‘moral hazard’.
    Who’s the hazard, a few hundred banksters or millions of J6P’s living under a bridge abutment on food stamps? If J6P had political leaders working for him (or the thousands of lobbyists roaming DC) HE would have been rescued and the banksters would have been rescued second hand. Sure, there would be higher interest rates and some instant inflation, but that is what the Fed is for and instead of worrying about deflation and starving they would have the opposite problem. But it would have fixed the banking system post-haste! If there were any decent sound banks left they would have received the rescue deposits and paid RE loans and the banksters would either pay more for capital or go the way of the do-do bird.
    Either way those citizens that made sound decisions would have been pissed, but they would still have some home value, jobs and made a fair return on their savings. Instead the government/Fed threw the lifejackets to the guys standing on the deck of the yacht while J6P was left overboard treading water.
    But then again, I couldn’t know what the hell I’m talking about as I’m not a PhD economist….LOL

  24. beaufou says:

    “Several other countries are worried — not ludicrously — that financial markets may turn on them, too, if they delay deficit reduction”

    Yes, we are governed by spineless and corrupted people.
    Financial markets are made of people, not some invisible entity fucking everything up once in a while and then demanding deficit reductions, deficits they largely profited from.
    I’ll say it again, how the hell do we start with a deregulated financial world creating the biggest crisis in history and end up with a deregulated and bailed-out financial world demanding to reduce deficits.

  25. call me ahab says:

    The only country I have seen that is not afraid of its bankers seems to be China. Why is that?

    firing squads?

  26. cranker says:

    >>Just flooding a broken system with cheap money, without correcting the flaws in that system, is a recipe for a rinse and repeat behavior.

    During the boom, a lot of fictitious claims on the economy has been generated. Most of these claims are being held by the wealthy. This is the whole boom bust game played by Greenspan and Wall Street. Manufacture a lot of fictitious paper and convert it into legitimate claims on the productive capacity of the economy.

    The wealthy seems to believe that these claims are somehow valid because they are denominated in terms of “money”, or are bank bonds. These claims are mostly bunk. They hold these claims on the productive capacity of the masses, and the masses have to be in serfdom to satisfy these claims by the wealthy.

    The wealthy argue that the masses should go into serfdom to satisfy their claims. That is, Social Security and other safety net programs that provide a _minimum_ safety net should be busted, and the masses should slog to fulfill the claims being held by the wealthy on the economy.

    This is why writing down mortgages and giving bondholders haircuts was the right thing to do. I have to cite this from Steve Waldman (emphasises mine) which is the best layman description of the unspeakable — why most of the claims (wealth) today is bogus.


    But since wealth is positional, people’s desire for wealth may far exceed their intention or ability to consume. When great wealth is earned by contributing to production, this leads to a surplus, which seems like a good thing, but creates the “problem” of excess capacity. The obvious solution is to redistribute claims on production, so that those with unmet wants make use of the excess. But doing so reduces the differences in station that inspire Herculean efforts to produce, and provokes conflicts over who gets what.

    The macroeconomic stories of this decade have all been about squaring this circle: Rather than redistributing claims outright, we adopted the fiction of trading present goods for future claims. **The ambitious grew wealthy by accumulating claims on the future of the less ambitious, in exchange for which the less ambitious (and sometimes very distant) consumed present production, and demanded more.** Entrepreneurs could measure their position against their fellows by the quantity of their claims. Others could consume in proportion to their ability to manufacture claims that entrepreneurs would accept, that is, they could consume what they could borrow. But high quality claims on future wealth are in reality very scarce. An economic system that depends upon ever expanding claims on the future in order to provide current incentives to produce can not be stable. ***Once the “wealthy” learn that many of their claims are worthless, the system falls apart.*** The less-wealthy have no means of consuming, as new claims are shunned. Owners of capital gain nothing but bear costs for maintaining productive infrastructure. “Excess capacity” appears. [End quote]

    Now the ambitious are demanding that the rest of the world go into serfdom, to satisfy their claims. They still believe that their claims can be met, by Austerianism. They are yet to realize that the system will fall apart.

    They are yet to realize that giving up part of their claims is the best option they have.

  27. Rescission says:

    deregulated financial world? I can’t think of many more regulated worlds than the financial world. it’s all the regulations that allow these banksters to cozy up to weak politicians. no one loves regulations more than the corporate oligarchs. it keeps competition out. if not for the politicians and their regulations many of these losers would have gone bust and should have been allowed to. Oh the myth of more regulation and how it can save us….

  28. Cdale_dog says:

    Rescission, truer words have not been spoken. I worked in the securities industry for 6 years and I was audited 4 – 5 times a year. The problem is, the regulators (NASD, NYSE, SEC, etc.) only look at the low hanging fruit. Anything that is remotely complext doesn’t get reviewed because it takes too long and doesn’t fit into the “audit program”. These audits are just a waste of time. These organizations don’t pay nearly what you can make in the “private” sector, so you are also not getting the best of the bunch in these roles.

    Now, if you increased the compensation of the auditors and merely took a common sense approach to performing audits, where you could properly identify risks and create approaches that allowed you to spend as much time as needed on these risks, then you might have something.

    More regulation is NOT the answer. It is hiring / compensating smart people and giving them the flexibility to audit these firms as they see fit which will make sure this sh*t doesn’t happen again.

  29. Cdale_dog says:

    OT – I still can’t believe Barry doesn’t think Freddie and Fannie were prime suspects in this whole mess. If I had a $ for all the people from within the Mortgage industry who have pointed their fingers at these two as the “enabler” to these mortgage companies I would be rich.


    BR: Show me the data that supports Fannie & Freddie as anything more than 2 more crappy banks like Citi or Bof A or Countrywide.

    I’ve looked for it, and the facts do not support your thesis.

  30. Gator81 says:

    You’re on a two-lane blacktop in the roadster, top down, enjoying the sun and proceeding at a satisfactory pace when you come upon a slower vehicle that impedes your progress. A big, fat tractor-trailer rig, actually. When the yellow lines give way to yellow dashes, you pull out for a safe, legal pass. You’re dead even with the big rig, but pulling ahead, when an oncoming vehicle surprises you from a side road up ahead. Oh no! Now what?!?

    Two choices: 1) Nail the Austerian brake pedal and duck back behind the truck, hoping the big rig driver doesn’t do the same; or 2) slam the Keynesian gas pedal to the floor and hope you get around the big rig before you run out of room.

    How to decide? For one thing, how much juice have you got under the hood? Do you have confidence that you can power up and get it done? You haven’t much room or time to debate. You can’t just give it a little gas, baby, you got to give it all there is or it won’t matter! But what’s that big rig driver doing while you’re making up your mind? Is he hitting his Austerian brakes, too? That’ll give you more time and room, and your Keynesian accelerator has a better chance of getting all concerned through the event unharmed. But if not, then you’d better do the safe thing and bail on the pass, if you can do it quickly enough. That’ll mean slow going for a while longer, maybe for a long while.

    One thing’s for sure: be indecisive about it long enough, and your decision will become irrelevant.

    OK, it’s an imperfect analogy, to say the least. The point is, there are at least three moving parts to this conundrum: what the big rig (the economy minus government policy) is doing, what the roadster (government policy) is doing, and what the not-well-defined but scary as hell oncoming pair of headlights (the as-yet unnamed next fiscal/financial crisis) is doing. There cannot be any automatic pre-defined answer. It is a dynamic and highly fluid situation. I think I’d want as much info as I could get in a timely way about what each of the moving parts is doing, what my options are, the risks of each option, and how much time I’ve got to choose. But it ain’t for the faint of heart, that’s for sure.

  31. impermanence says:

    “So it’s easy to confuse its [The Economy] condition (bad) with its direction (better) and to lose sight of how much worse it could be.”

    This justification of one’s own ignorance is pathetic.

  32. moonmullins says:

    You gotta hand it to Barry.

    The Keynesians create the mess we are in today and then blame others for attempting to fix the mess. Look, the Austrian school is flawed but Keynesianism is a really, really poor economic model. Even if you think it has its place, it only works when you are starting from a position of low deficits and low debt/GDP. To add more debt and red ink to our financial position today would only exacerbate the painful sacrifices that lie ahead (further to this point, see Bill Gross’s excellent July Investment Outlook on the PIMCO website – this from a guy who supported Obama and is no Austrian economist).

    What is equally amazing is how the Ritholtz Keynesians want stimulus but always want to lead with more fiscal spending or monetary easing. I can see them asking – is there any alternative??? Hello!!! Why not pursue stimulus with a higher return? We need lower tax rates across the board. Lower payroll taxes, lower corporate taxes (soon to be the highest in the developed world), lower capital gains taxes, etc. This will stimulate the economy far better than the dopey Ritholtz-Pelosi pork spending, and by creating jobs (can’t wait to see the Friday number) start to provide more tax revenues.

  33. sangfroid says:

    If Keysians believe that inflation must be created now to combat deflation and gov’t spending creates that inflation then…

    well, first, these Keysians got brainwashed by the free marketers who have for years used that train of thought to attack their political opponent.

    And second, inflation can be created by gov’t spending only when the underlying economy is healthy. I repeat, inflation can be created by gov’t spending only when the underlying economy is healthy.

    Japanese economy was already in a world of hurt when Japan started Keysian. China’s Keysian worked last year because…it’s economy was healthy. Even though US lost Vietnam, but the US economy was relatively healthy after that war so all that gov’t spending created inflation.

    Does Keysian work? Of course, but only as a quick boost to buy a short amount of time for the economy to get back on its feet (this assumes that the economy is not so wounded that it could turn around in short order, which means it’s relatively healthy).

    Even if you plan to use it for the “long run”, gov’t should have been saving during ‘seven fat years’ so that it could be used during ‘seven lean years’.

  34. willid3 says:

    i would like to just what is suppose to replace the government spending when its cut? the consumer is tapped out. business hasn’t invested in the US in a decade and exports are hopeless cause as the rest of the world is going to match any US cuts.

    so that leave who or what? Aliens from space????>

  35. stevevan says:

    As someone not from the US I find it incredible as the mainstream austerity debate in the US hasn’t come to terms with the fact that for many countries in Europe (Greece Spain Ireland Portgual Hungry the Baltics etc) the government does not have a choice re austerity. The credit markets will not lend to the government or their banks at anything approaching sustainable interest rates if the governments do not reduce deficits substantially. For other countries (Italy, UK, France, Belgium etc) the edge of the cliff is a little further away but clearly it’s better for long term sustainability to start cutting a little now rather than get to the edge of the cliff then have draconican cuts forced upon them. Don’t even get me started on the fantasy world the Japanese are living in.

    The US would be in the same situation as Europe were it not the world’s reserve currency. Of course reducing deficits is bad for growth and unemployment in the shorter term. The US national debt/deficit problem is currently postponed but, given current structural deficit and debt position and the impact of the aging population, the point where austerity becomes an inevitability and not a choice austerity is in the forseeable future. In the mean time US exports will slow and imports will stregthen as other countries start on the austerity path.

  36. Vilgrad says:

    More austerity bullshit. Krugman and Leonhardt are complete idiots.

  37. beaufou says:

    Rescission and Cdale_dog

    Yes I know, less government is more.

    “In the nineteenth and early twentieth centuries, bankers and brokers were sometimes indistinguishable. Then, in the Great Depression after 1929, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions’ securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass Steagall Act”

    1. Conflicts of interest characterize the granting of credit (that is to say, lending) and the use of credit (that is to say, investing) by the same entity, which led to abuses that originally produced the Act.

    2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.

    3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

    4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).

    You are not masters of the universe and your actions impact people’s lives.
    If you feel like fucking around and screwing the system by your vain dream of a rich paradise fueled by giving the poor hell, go ahead.

    “It is hiring / compensating smart people and giving them the flexibility to audit these firms as they see fit which will make sure this sh*t doesn’t happen again.”
    No thanks, I’d rather pull my pants down before I shit myself than have someone else tell me I should have done so.
    Freedom, as you probably understand it, is not the exercise of free cupidity.

  38. FrancoisT says:

    I was underwhelmed by this NYT article.

    Try this one:

    where, at least, Rob Parenteau demonstrate why and how the neoliberal economists are completely wrong on the twin deficits construct.

    Now it is true, as a matter of double entry book keeping, that if the US as a nation is going to reduce the gap between its spending and its income (which would reduce the currently widening trade deficit by definition), then nations that are major trading partners of the US must be prepared to reduce their net saving. Just as it takes two to tango, there are two sides to every exchange or transaction. One nation cannot increase its financial balance or net saving with the rest of the world unless the rest of the world is prepared to reduce its net saving. So from a rational perspective, rebalancing global growth does, as a matter of fact, require both sides to move in the right direction. This is not a theory – it is simply an accounting reality. One side can initiate the move, but both must be prepared to move.

    Frequently, we are told by neoliberals, who dominate the economics profession and policy making circles, that there is something called the “twin deficits” that must be recognized and addressed in the US. The twin deficit story goes like this: an increase in the fiscal deficit will tend to lead to an increase in the current account (or trade) deficit. Therefore, if reducing the US current account deficit is a desirable if not a necessary policy objective, then it is surely necessary to reduce the fiscal deficit. We have been hearing this story for nearly three decades from the neolibs.

    The problem with the twin deficit story is the facts do not seem to bear the theory out. Below you may observe a chart for the US the shows the current account balance as a share of GDP, and the combined government fiscal balance as a share of GDP. You will notice the twins seem unrelated – not even separated at birth.


    Domestic private sector financial balance + government financial balance – current account balance = 0


    DPSFB + GFB – CUB = 0

    This means in order for the current account (CUB) and the fiscal balance (GFB) to be twins, as the neoliberals often assert, such that a fall in the fiscal balance (say an increase in the fiscal deficit) leads to a commensurate fall in the current account balance (say an increase in the trade deficit), then there must be little or not change in the domestic private sector financial balance (DPSFB). This, it turns out, is empirically false. The DPSFB is rarely stable, especially in the past two decades of serial asset bubbles, when both the household and nonfinancial business sectors have gone deeper than ever into deficit spending territory under the influence of asset prices kiting ever higher.

    So what is the true twin of the trade deficit? We can split the DPSFB, as we hinted just above, into the household and nonfinancial business sectors.


    When we do so, we notice a new set of twins arises from the historical data. The true twin of the CUB is the HB, or household financial balance.

    The whole article has helped me understand a lot about the true nature of deficits.

    Hope this helps.

  39. vaughn says:

    I can settle this Keynesian Vs Austrian argument once and for all using nothing more than the logic available to a 7 year old….
    You don’t solve problems of Debt with more Debt. If you are broke, a credit card can make everything seem like “normal” for a while…but that delusion comes with an even greater price tag down the road.
    Keynesianism CAN work IF you take the other part of his prescription and SAVE during the fat times in order to tide the economy through the hard times but THIS NEVER HAPPENS.
    It’s a bad idea to incentivize criminality, Fraud, Malfeasance and Failure and punish Prudence…and it’s a TERRIBLE idea to ask the innocent to atone for the crimes of the guilty.
    Recessions HAPPEN! Like clockwork, yes, like “leaves coming off the trees” in autumn.
    If you attempt to glue the leaves back on with an industrial size barrel of crazy glue there’s a good chance you will KILL THE TREE!
    Our Amerikan economy has become as toxic as the gulf of mexico. There is nothing “stimulating” about that

  40. oc bear says:

    I don’t doubt that spending more in hard times works under the proper circumstance and helps reduce the pain of a business cycle. That circumstance is when you have amassed a surplus during the good times. Without regard to parties it seems most politicians never met a surplus they couldn’t spend. If you look at the level of debt going into the 1930′s depression it was nothing like what we faced in 2009. I wonder what Keynes would have said about the events leading up to the recent crisis?

    I still love this:

    which one makes more sense today?

  41. mheck82 says:


    F&F were more than just normal banks. They deserve are a not a dominant, but important part of the reason for the housing bubble.

    Some closer look on facts:
    F&F’s share in the subprime market took off at exactly the time Krugman claims the start of the subprime boom:

    Huge losses of F&F stem from loans orginated before Lehman:

    The housing boom in total of course is indeed correlated to the discussion of Austrians vs. Keynesians and 100% caused by false decisions by the gov’t. When after the reunification in Germany housing prices went up far more than the inflation target, the Bundesbank increased the interest rates rapidly above 8%. The boom was killed just the moment it took off.
    When the housing boom took off at the end of the 90s in the US, Greenspan didn’t put interest as high, despite a very robust economy. In 2001 the US fired everything – monetary and fiscally – to prevent a deeper recession. The Keynesian approach doesn’t allow the clearing of malinvestment, but tries to validate it – maybe this is not the original Keynes, but it is the result of Keynesian policy advocacy.


    : Show me the data that sup[ports the argument they were a primary cause. Not squishy theory or political talking points, but data

    (CSB ? Really?)

  42. mheck82 says:

    Given, that nobody, who tried to make the point, that F&F had nothing to do with the crisis has looked seriously at the data, the numbers from the second article should be sufficient. From F&F’s own estimations, they guess combined losses of 325 bn dollar in the future from deals already done, after there have already been write downs in the past and capital injections of more than 100 bn$.

    The IMF estimates global losses on US originated mortgage backed assets to be about 4 tn$ (, so about 10% of global losses on the housing crisis would be with F&F.
    However, if the initial posts of losses are a guide to future losses, more than half will be with foreign institutes. The reason for this is partially as well, that foreign institutes went LATE into the game and stayed after prices already started to decline. This has been extendedly discussed elsewhere e.g. for the Landesbanken in Germany. The losses on the late mortgages are especially high and those mortgages themselves have especially little to do with the cause of the crisis.
    When judging the 10% of losses share, one has as well to keep in mind, that F&F have limits to the amount of mortgages. High end housing is not mainly financed by F&F. And there have been losses on that part of that market, too, so even without looking into the balance sheets of other banks, it seems unlikely, that any other institution can have a similar high share in that market. You can only so often have a 10-20% share.

    I have no time to look into the balance sheets of various banks in the US and find out, how much money they have lend at which time to which creditors. But I haven’t seen anybody else doing this neither. The plausibility is in the face of the loss estimates and the anecdotal evidence when e.g. European institutes* got involved with those, who claim, that the F&F did play a considerable role in the subprime housing mess.

    *The start of the boom is the decisive moment. Once house prices rise with 5+% per year, it becomes unstoppable without political suicide until the boom runs out of steem without political full break. So the general housing bubble took off ca. 1999, but subprime housing doesn’t seem have been an issue at that time.

  43. [...] a great schism divides them. Each side’s answers seem incomplete to the other. On one side, Keynesians. On [...]