In his op-ed yesterday, Paul Krugman goes on to tell us that today’s low interest rates “are telling us something about what markets want.” I would suggest that government is supposed to serve the public rather than markets, and that “what markets want” is not necessarily good for the public, but Krugman is probably incapable of discerning the difference.
He then tells us that “having at least some government debt outstanding helps the economy function better” because, he says, “the debt of stable, reliable governments provides ‘safe assets’ that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.”
The last two reasons are just laughable. What, precisely, is a “destructive scramble for cash,” and how does government debt prevent it? And the provision of “safe assets” is not as logical as it would seem, which Paul Krugman promptly proceeds to explain, neatly destroying his own argument in the process.
In the very next paragraph he tells us that “the private sector can also create safe assets, such as deposits in banks that are universally perceived as sound.” In fact, banks did that for many decades, a point which Mr. Krugman does not dwell on much, actually glosses over pretty much entirely by skipping to “the years before 2008” which, you may recall, were the years leading up to a major financial crash.
He describes the private sector’s claim “to have invented whole new classes of safe assets by slicing and dicing cash flows from subprime mortgages and other sources” which turned out not to be safe at all and that as a result “investors scurried back into the haven provided by the debt of the United States” as a result of which “they drove interest rates on that debt way down.”
So much for his economic theory that the Fed is in control of interest rates, lowering them when times are bad and raising them when times are good. There is much talk about fear that the Fed is going to raise interest rates soon, but if investors drove the rates down, how is the Fed going to arbitrarily raise them? Paul Krugman, like most economists, has this problem: he cites the Fed as being in control when that suits his present argument, and then turns around and cites the market as the controlling factor when that suits a different point which he is trying to make.
Anyway, to the current point, a more reasonable action by government would have been to force the private sector to stop the “creative financial instrument” process, which is fraud by another name, and return to their proper function of providing safe assets, rather than allowing private sector fraud to continue and going into greater debt to provide the “safe assets” that the private sector was no longer providing.
He then goes even further down the rabbit hole. Having praised government debt at low interest as a “safe asset” and a bargain for the taxpayer he says that “low returns on safe assets may push investors into too much risk-taking — or for that matter encourage another round of destructive Wall Street hocus-pocus,” all of which is, of course, bad.
So what can be done about the low rates which, apparently, are good for government and the taxpayer but bad for investors and the economy? First we have to answer the question of how they can be good for taxpayers and bad for the economy, which is a question that has no viable answer. You notice that he has utterly abandoned the concept of building infrastructure, roads and bridges and such things, and is now talking entirely about investors buying government bonds.
Raising interest rates, he says, “would undermine our still-fragile recovery,” so we can’t do that. He wants to see us have “policies that would permit higher rates in good times without causing a slump,” which means he wants the economy to recover before we raise interest rates and is a non-answer. Sort of, “don’t do anything to solve the problem until after the problem is solved.” But, he suggests, a policy which would do that “would be targeting a higher level of debt.” And he went the place he always goes.
So Krugman starts by telling us that today’s low interest rates are a good thing, then he tells us that they are a bad thing, then he tells us that we should be “Targeting a higher level of debt” as “a policy which would allow higher interest rates,” meaning that we would be borrowing more money so that we could raise the cost of borrowing.
And they accused Reagan of Voodoo Economics.
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