Incidentally, the TARP money invested in the banks made a handy profit

Apple and Steve Jobs made their money by creating products sold at retail. Like Henry Ford and many others.

Not the billion dollar pieces of so-called “AAA” rated paper peddled by the former group!

Are these concepts so hard to grasp? This is as pessimistic as much as saying I am going to die.

Quality of developement matters. Through a mispricing of credit and risk the U.S. economy for more than a decade has taken on an unsustainable shape though massive malinvestment. This needs to be torn down and rebuilt company by company and job by job.
The result is the great recession and it mirrors the fake boom in size. Looking at potential GDP on a trajectory and measuring the output gap is futile, because it measures an economy that no longer exists and shouldn’t exist!

Schumpeter is on the bridge of this icebreaker and not Keynes and Canada has the better economy to boot to pass this ice age.

1) Krugman is right, but shrill, (and outside consensus!) so loses the debate
2) Summers is wrong, but convincing, so wins the debate
3) Keynesianism is “leftist”
4) Pessimism is bad, and anything that leads to pessimism can therefore be ignored.

It’s this sort of shallow facile discussion that makes me wonder why Salmon bothers to write an article at all. Maybe it was late, and he was just tired. Sad Salmon.

Krugman was very clear that he was pessimistic about the gridlocked politics or, more precisely, the scorched earth politics of the Republicans which has been overwhelmingly obstructionist about anything that might pass for rational and/or even moderate.

Summers had no specific rejoinder to this. Replay the debate. He simply offered generalized bromides about possibilities for change with nary a reference to what has been happening politically on the ground — and is likely to continue happening.

Thus, Bremmer at one point stated what is probably going to be the case when he said the Republicans will take the Senate, retain the house, and possibly gain the presidency. Krugman said “maybe not,” but you could tell he was expressing more hope than conviction.

So the questions to Summers should be:

1. Assume that in 2012 the Republicans take the Senate, retain the House, and Mitt Romney is our next President. Do you really believe that this political outcome has any reasonable probability of making economic matters better for the body politic as a whole, as distinguished from Bremmer’s 1%? You don’t really think that Greg Mankiw will have his way over the Tea Party crowd in Congress, do you?

2. Or, assume that Obama is reelected, the Republicans take the Senate (even with less than 60)and retain the House. Tell us concretely why this materially increases the probability for economic improvement for the 99%, as opposed to most of us languishing through 4 more years of Japan-style stagnation.

And, Larry, please uncross your fingers and answer these questions with a straight face.

So much for Summers being more attuned to “probability distributions” as Felix stated. For unless Felix had in mind pure Monte Carlo simulations — which are suspect even in anything other than purely theoretical economics, let alone politics — pretty much the opposite was the case: i.e., Krugman and Summers were basically in agreement — perhaps too optimistically — that if they could have their similar Keynesean ways with the economics, there was a reasonably high probability that things would work out.

But as to politics, yes, Krugman was pessimistic, but arguably realistic, i.e., the probabilities are overwhelmingly on his side. Summers, somewhat disingenuously, to put the matter charitably, completely ducked this aspect of the debate, and it is somewhere between puzzling and laughable that Felix seems, in however a garbled fashion, to have suggested otherwise.

One can see that Felix never took auto shop. The magneto isn’t the engine – it’s an AC generator that provides electric power to the spark plugs.

In Keynes’s day, you used a hand crank to turn the magneto, which got the engine going, which then turned the magneto turning to keep the juice flowing.

The point being that Keynes didn’t think there was anything wrong with the “engine” — i.e. the capitalist market economy — but that in periods of deep slump it might need a jump start, in the form of government deficit spending.

@Danny_Black, I didn’t say that, did I?

Banks borrow short and lend long. The low interest rates allow the banks a greater spread on their pre-collapse book, helping them absorb losses as they come in. The banks are not particularly profitable right now because the default rate remains very high, but they are more profitable than they would be if rates were higher. Among other things, the low interest rates allow them to reap fees on refinancing activity.

As for GS and MS, they aren’t what I typically think of as “banks”. I guess they are considered “investment banks”, but their business is very different from that of the retail banks.

Moreover, they are doing very well. GS earnings:
2009 $22.13/share
2010 $13.18/share
2012 est. $14/share

Their earnings didn’t hit double digits until 2005, so it is fair to suggest that they are profiting brilliantly from this recession. Far more so than the retail banks, even if 2011 earnings are down briefly.

Do you believe GS would be earning this much if the Fed hadn’t flooded the market with cheap money? Or would they perhaps have faced some lean years instead?