"What’s wrong?" my wife asked anxiously as I looked at the computer screen. I didn’t answer, except to blurt out another, "Oh, no!" Finally, I looked at her and said quietly, "Paul Krugman has won the Nobel in economics."
"Whew!" she answered. "I thought maybe one of your parents had died." "No," I replied. "This is much worse."
And, so an intellectual event matched only by the sacking of Constantinople in 1453, the Swedish central bank has announced that Krugman will take his place alongside F.A. Hayek and others as the Nobel laureate. Now, the bank announced that the prize was for Krugman’s semi-discombobulated trade theories, not his incoherent, Keynesian columns that he writes for the Democratic Party, er, the editorial page of the New York Times.
Now, before going on, I must say that most of the people who have received the Nobel in economics actually were economists; this is the first time I have seen a pure political operative receive the prize. However, there is precedence for this outrage: last year, Al Gore won the Nobel Peace Prize for his crackpot movie on Global Warming; this year Gore preaches violence against those who might have different thoughts or who might be economic competitors of his own bankrolled "new technologies."
(If any executive were to call for violence to shut down his competitors, he would be vulnerable to being charged under the RICO statutes; Gore, of course, receives a free pass. That is what a Nobel can do.)
Thus, armed with his Nobel, Krugman almost surely will be able to set forth with his own crackpot economic "theories" and ride this prize to a high position in the upcoming Obama administration. Because he has been front-and-center in the latest debate on the meltdown in financial markets, perhaps it is time to see what Mr. Nobel believes will be our economic salvation.
What better place to start than with today’s column in which he praises the British government for nationalizing the country’s banks? He writes:
But the (Gordon) Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn’t been matched by any other Western government, least of all our own.
What is the nature of the crisis? The details can be insanely complex, but the basics are fairly simple. The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments; these losses have left many financial institutions with too much debt and too little capital to provide the credit the economy needs; troubled financial institutions have tried to meet their debts and increase their capital by selling assets, but this has driven asset prices down, reducing their capital even further.
What can be done to stem the crisis? Aid to homeowners, though desirable, can’t prevent large losses on bad loans, and in any case will take effect too slowly to help in the current panic. The natural thing to do, then — and the solution adopted in many previous financial crises — is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.
This sort of temporary part-nationalization, which is often referred to as an "equity injection," is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.
As with so many other Krugman howlers, it is hard to know where to begin. First, this "liquidity crisis" exists because the banks found themselves owning worthless assets and, thus, could not raise the cash to make loans. This is kind of like my throwing my household money into pork bellies, losing my shirt, and then not having the cash on hand to pay my bills.
Krugman makes a huge assumption, and that is that governments actually have the spare change to raise the money to "inject" into the system. The $700 billion boondoggle (which he supported) means the government must float what surely has to be the largest single bond issue in history, with the seller on the hunt for suckers. (I don’t even want to think of logistics of this nonsensical exercise, except to say that in the end, the Fed will purchase the bonds and monetize the whole thing.)
Thus, this is not an "equity injection." It is a backdoor attempt by the government to print money, give it to banks, and call it equity. Furthermore, the reason that these banks got into trouble in the first place was because they made a series of very bad loans, yet the government is insisting that they continue to march in the same direction, even though a very high and thick wall stands in their way.
However, Krugman saves the best for last. The problem, he declares, is that the Bush administration is too free-market oriented to be able to solve this crisis:
Meanwhile, the British government went straight to the heart of the problem — and moved to address it with stunning speed. On Wednesday, Mr. Brown’s officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday — five days after the plan’s announcement.
At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts. And whaddya know, Mr. Paulson — after arguably wasting several precious weeks — has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).
As I said, we still don’t know whether these moves will work. But policy is, finally, being driven by a clear view of what needs to be done. Which raises the question, why did that clear view have to come from London rather than Washington?
It’s hard to avoid the sense that Mr. Paulson’s initial response was distorted by ideology. Remember, he works for an administration whose philosophy of government can be summed up as "private good, public bad," which must have made it hard to face up to the need for partial government ownership of the financial sector.
Now, I know that having a Nobel Prize gives one a certain amount of authority to speak in certain areas, but I must say that an administration that has ratcheted government spending to ruinous levels, effectively nationalized the financial system, and engages in systematic abuse of its citizens hardly qualifies as "free-market." Henry Paulson might be a lot of things, but a clone of Ron Paul is not one of them.
So, Krugman continues to peddle his snake oil, but today he gets to do it as the Nobel Laureate instead of just another partisan hack. Nonetheless, having a Nobel will enhance his stature as a guy who supposedly knows something. However, just as the peace prize does not make Al Gore a man of peace, neither does the Nobel Prize in Economics make Paul Krugman an economist. As I wrote five years ago:
… since my own writings have been extremely critical of the Bush Administration and both political parties, it does not bother me to read Krugman’s anti-Republican rants. What does bother me is that the man pretends to be something he clearly is not: an economist.
That is correct. Let me say it again. Paul Krugman is not an economist. His colleagues in the economics profession and the editorial board of the Times may call him an economist, but that does not make him one.
This is harsh criticism, I realize, so I must explain my views in full. Yes, Krugman has a Ph.D. from MIT in economics, but his writings, both popular and academic, demonstrate that he does not believe in laws of economics. Instead, like most folks with socialist leanings, he believes that the state is both omniscient and omnipotent and simply by fiat can eliminate those pesky little problems caused by scarcity.
