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How not to end a recession



October 25, 2010 – Comments (4)

Krugman is really giving me the creeps with his blogs like this one.  

A lot of clever words about boosting aggregate demand (read: enabling more debt-taking) by shifting debt away from balance-sheet constrained individuals like himself and having the Janets pay the bill because they are balance-sheet unconstrained (read: haven't bought into the bubble).

Needless to say, this Robin-Hood-In-Reverse from Krugman comes with the ready excuse: economics is not a morality play. 

Well, for one, Krugman is wrong. Economics need not be a morality play, but it also should not promote immoral behavior too brazenly. It's a bad idea to remove the rational economic incentive system for the foreseeable future for the sake of an extra two percent of GDP growth in the next couple of years.

In the cozy world Krugman constructed for himself, the Janets bail out the Sams without complaining and continue to save even as the Sams continue to borrow. In the real world, the Janets will want a revenge. They will realize that the way to succeed in America is not by saving, but by taking on debt. And the Sams will realize that they have won and can now win a second time. In a few years you get a new OPM (Other People's Money) bubble that gets much worse than the first one, because now everybody is in it, and you no longer have the Janets to absorb OPL (Other People's Losses).  Soon asset prices will lose any meaning as the government is forced to fix them at the bubble level that was attained by the Janets' last desperate triple-leverage-gamble. 

When you attempt to scold the Sams for acting irresponsibly, they will cite the previous bailout and tell you that their actions were rational based on the entire previous history of your responses to bubbles. And when you attempt to scold the Janets, they will tell you that they had to act as they did because they were afraid you would make them bail out the Sams a second time.

Given your track record, you will have nothing to say to that. 

4 Comments – Post Your Own

#1) On October 25, 2010 at 6:40 PM, dbjella (< 20) wrote:

Like the guinness commercial that was BRILLIANT! 

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#2) On October 26, 2010 at 4:36 AM, portefeuille (98.92) wrote:

To see my point, imagine first a world in which there are only two kinds of people: Spendthrift Sams and Judicious Janets. (Sam and Janet who? If you’d grown up in my place and time, you’d know the answer: Sam and Janet evening / You will see a stranger … But actually, I’m thinking of the two kinds of agent in the Kiyotaki-Moore model.)

the paper by Nobuhiro Kiyotaki and John Moore.

Credit Cycles (pdf)

another paper by the authors.

Liquidity, Business Cycles, and Monetary Policy (pdf)

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#3) On October 26, 2010 at 10:07 AM, chk999 (99.96) wrote:

Krugman never met a currency he didn't want to inflate.

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#4) On October 27, 2010 at 5:26 PM, Dow3000 (< 20) wrote:

That is a tremendous blog...thank you very much for salvaging my day.

+ infinite FRN backed recs!

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