Bishop vs Krugman

By Felix Salmon
June 18, 2012
not happy with the choice of Matthew Bishop to review his new book in the NYTBR, and the main locus of the disagreement seems to be, at heart, how much respect Krugman should give to people who disagree with him.

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Paul Krugman was not happy with the choice of Matthew Bishop to review his new book in the NYTBR, and the main locus of the disagreement seems to be, at heart, how much respect Krugman should give to people who disagree with him.

Here’s Bishop:

No opportunity to preach to the choir is missed by the populist Mr. Krugman, nor any chance to mock those he calls the “Very Serious People” who disagree with him. This is often entertaining: during a stern speech in 2010 by Germany’s finance minister, Krugman’s wife dismissed those who regard austerity as a sort of moral purification with the whispered aside, “As we leave the room, we’ll be given whips to scourge ourselves.” But the book’s preachiness gives those politicians and economists who most need to read this book an easy excuse to ignore it.

To this Moderately Serious Reviewer, Krugman’s habit of bashing anyone who does not share his conclusions is not merely stylistically irritating; it is flawed in substance… The austerians may be excessively fearful of so-called “bond vigilantes,” but that does not mean there is no need to worry about what investors think about the health of a government’s finances. Sure, ridicule those fundamentalists who believe it is theoretically impossible for an economy ever to suffer a shortage of demand, but does Krugman really need to take passing shots at Erskine Bowles and Alan Simpson, the chairmen of the widely respected bipartisan Bowles-Simpson Commission on deficit reduction appointed by President Obama? Maybe his case for stimulating the economy in the short run would be taken more seriously by those in power if it were offered along with a Bowles-­Simpson-style plan for improving America’s finances in the medium or long term. Instead, Krugman suggests cavalierly that any extra government borrowing probably “won’t have to be paid off quickly, or indeed at all.”

I can see why Krugman finds this annoying. Krugman’s whole point is that Bowles, Simpson, and the like are wrong and dangerous. And as he reminds us today, he was right and they were wrong, two years ago. He should get credit for that. But Bishop, the kind of person who loves nothing more than schmoozing important people at Davos, thinks that Krugman “would be taken more seriously” if he were more polite to “widely respected” people with the word “chairman” in their names.

This criticism is off-base for three different reasons, I think. Jared Bernstein deals with the substance very well:

Krugman has been consistently empirical on this point. His argument is not that investors’ sentiments don’t matter. It’s that they’re embedded in prices and can be followed on an hourly basis. Those numbers—the bond yields on sovereign debt—show that markets judge US debt to be safe and Spanish and Greek debt to be risky. If you want to criticize Krugman on this count, you need to explain what’s wrong with the markets themselves—why they’re giving the wrong signals. Otherwise, you’re into phantom-menace land, just across the way from where the confidence fairy hangs out.

This is a point I myself tried making to Bishop back in April, with no visible success: Bishop’s convinced that when it comes to gauging future inflation expectations, we should for some reason trust the volatile and largely-insane gold market at least as much as we should trust the most liquid and efficient market in the world, that for US Treasury bonds.

As for the style, there is no shortage of Serious liberals willing to do exactly what Bishop suggests. Indeed, Erskine Bowles probably counts as one himself, even as he sits on the board of Morgan Stanley. Pretty much the entire Obama administration deals constantly with calls for fiscal prudence and austerity, and takes them very seriously. There’s something of a bipartisan consensus on the issue — so if like Krugman you think that the consensus is bonkers, the only real way to get your point across is to be very clear that no matter how grand these people are, they’re simply wrong, and do not deserve to be taken seriously.

And then there’s the whole class-based undertone to the discussion, which I think if anything Krugman doesn’t make forcefully enough. The thing that Serious liberals and Serious conservatives have in common — the thing which in large part makes them “widely respected” in the first place — is that they’re rich. Usually, very rich. And rich people, as I said in my own review of Krugman’s book, don’t actually worry much about unemployment: it doesn’t really hurt them, even if they lose their jobs. What they do worry about is inflation, since that erodes the value of their dollars. And so when Krugman calls for a nice dose of inflation to help cure the economy’s ills, what he’s really calling for is for a significant chunk of the fixed-income portfolios of the rich to be devalued in real terms.

The rich don’t like that, and the austerity consensus is in large part a closing of ranks — one of the few areas where left and right can agree, at least at the upper end of the income spectrum. And that’s why my own review of Krugman’s book was a pessimistic one. When rich liberals and rich conservatives agree on something, that thing is going to happen. Especially when that thing is in their own self-interest.

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Comments
36 comments so far

Please, I’d rather read about art valuation than Krugman.

Posted by stanho | Report as abusive

I can see why Krugman is so angry at these people who suck up to Wall Street. He’s right; they’re wrong.

I’m so mad at Obama that this time I’ll hold my nose and pull the lever, not enthusiastically. I’m not poor or out of a job, but I sympathize with the ones who are. College student debt is disgraceful. Nobody’s paying any attention to global warming. Big oil still gets subsidies. And on and on, so many disastrous moves. Not to mention the military-industrial complex, which keeps us fighting wars that are not only useless but actually are hurting us. Let the Afghanis handle their own problems–they are not ours.

Occupy needs to come back, even stronger. This country is in deep trouble.

Kudos to Felix Salmon!

Posted by carterj98 | Report as abusive

Spot on.

Posted by AngryInCali | Report as abusive

Stanho, agreed.

Felix recently referred to Glenn Hubbard and John Taylor as “partisan hacks”, based on his view that they twist data to fit pre-conceived notions and ideological views. How he can give Krugman a pass on that same issue is beyond me – he’s hyper-partisan to the point where he has modified his arguments depending on who occupies the White House or controls Congress at a particular point in time. Krugman, at least in his writing for the NY Times, dismisses pretty much everyone who disagrees with him as an idiot or a scoundrel (or both). It is completely preach to the choir writing. Setting aside the discussion about what “elites” or “Very Serious People” think about his writings, I can’t see how he is trying to convince someone to come around to his point of view, because insulting and belittling people with whom one disagrees is not a terribly effective means of convincing them to change their minds.

Posted by realist50 | Report as abusive

Mr. Krugman feels no restraint with regard to pontificating in areas beyond their expertise. Mr. Krugman was criticizing Estonia a week go and calling Greece a ‘victim’ a day ago.

From a layman’s viewpoint, the Fed has bought trillions in debt (which by the way, Felix, distorts the bond market) and the administration has sponsored stimulus surpassing a trillion dollars all to negligible effect. Savers have been punished, the wealthy’s assets have increased in value, the ranks of the poor have increased, deficits have exploded, and jobs have not been created. Time for new views and policies.

Posted by abb68 | Report as abusive

The ‘bonkers’ consensus is that the world can go on indefinitely with about a hundred different currencies in free float against one another, each defined by nothing more than the fiat of its own group of central bankers and politicians. Keynes, as it happens, knew better than this. Keynes played a big part at Bretton Woods in re-attaching the world’s money to geology. That system didn’t last forever of course but it had a good run, and the course of world events since 1971 has hardly recommended the alternative with which Krugman seems happy.

Robert Zoellick, former president of the World Bank, said recently, “The system should … consider employing gold as an international reference point of market expectations about inflation, deflaton, and future currency values.”

It is only a FORMER central banker who can dare say such things. But, yes, the “system” should.

Posted by Christofurio | Report as abusive

I think that Krugman has a healthy understanding of the “Overton Window” concept, and consciously tries to move the Window with his writing.

Specifically, he sees people and ideas given an excessive amount of respect and credence that should be getting a moderate to mild amount of each, and argues that they should be given none at all. This rubs some people the wrong way, but I suppose it’s a reasonable approach for a man who’s straining against the inertia of American policy in this day and age.

Posted by esouthard | Report as abusive

“Please, I’d rather read about art valuation than Krugman” (StanH)

I’d rather read about Krugman et.al. than debate the proper accounting of Target2 balances and the tax treatment of KS stuff. Was beginning to think Felix had signed-on with The Journal of Accountancy. (Swear to God – the first time some poster quotes from that I’m clickin’ straight through to the nearest asian/lesbian/porn site.)

Today’s current low yields have become a sort of Rorschach test – people see in them whatever they need to see to reinforce their preconceived opinions. Sure, Krugman is a bit troll-like in his language, but we all do that once in a while, don’t we?

Leftist-Interventionist attitudes have become a type of quasi-religion – those who see things differently aren’t just in error, they are malignant, evil individuals on a moral level. All sides are guilty of it, but the Left is the most extreme and aggressive in this respect IMO. This explains their denigration of their opponents on the personal level.

Inflation isn’t just a tax on the super-rich, but on anyone who has savings set aside in non-inflation-protected assets. If it was confined to the rich, that would be cool – but it isn’t. (Anyone care to challenge my revolutionary credentials?) The rich know how to protect themselves. Those of more modest means don’t – they are the ones who really take it up the back-side from inflation. The imprudent, heavily-indebted among us love inflation – and Krugman et.al. love them. Savers are wicked in their telling of it, and borrowers the ones in the white hats.

Savers have seen their incomes damn near totally erased. Now Krugman and Felix want to attack their principal values as well. Good hunting, lads, but be alert – you leave us no alternative but get you before you get us. This is not a game or an academic exercise. One seriously doubts that you, Felix, intend to serve the status quo forces – but you are doing just that.

Posted by MrRFox | Report as abusive

@MrRFox – That was pretty good. However, I think Felix, and by implied extension Krugman, believe they are fighting the status quo rather than serving it. I’m inclined to prefer your thesis, but find the entire save versus borrow debate to define economic thought today. And if that’s the best economists can come up with, the field in general seems brain dead.

Posted by Curmudgeon | Report as abusive

Thank you, Curmudg. I give Felix the benefit, but not Krugman. He’s not exactly of the ststus quo, but is equally dangerous.

With you all the way about economists, and academics particularly. IMO we would double our chances of coming out of this thing in survivable shape if every academic economist and pol was gifted with two in the back of the head.

Posted by MrRFox | Report as abusive

“Those numbers—the bond yields on sovereign debt—show that markets judge US debt to be safe and Spanish and Greek debt to be risky.”

If I might indulge in a little empirical reasoning myself:

http://www.reuters.com/article/2012/06/1 9/us-spain-debt-idUSBRE85I0C420120619

“On Monday, the 2014 bond was trading at around 5.5 percent compared with 2.069 percent at its last primary auction on March 1.”

In less than four months, the 2014 bond has gone from being “wholly risk-free” to being strongly suspect. I don’t believe Krugman and Felix appreciate how rapidly market sentiment can shift when it is blatantly obvious that you are on an unsustainable path with no exit strategy.

Posted by TFF | Report as abusive

Just like Greece and Spain and nearly every other nation, the US has got itself in a position in which it must roll over its debt when that debt comes due. In such a position, it’s not enough to know that you can afford to increase your debt burdon at current rates; to be safe you must know that you can afford that increased burdon for any conceivable future rate. To assume that it’s fine to load up on debt because the markets are offering us a low rate now is to make the same mistake as people who took out balloon mortgages under the assumption that they could refinance at a low rate when they needed to.

Posted by DCWright | Report as abusive

“If you want to criticize Krugman on this count, you need to explain what’s wrong with the markets themselves—why they’re giving the wrong signals.”

Yes, I do want to criticize Krugman, and most economists, who don’t understand the effect of debt.
http://www.ritholtz.com/blog/2012/06/the -widespread-economic-myths-destroying-th e-economy/?utm_source=feedburner&utm_med ium=feed&utm_campaign=Feed%3A+TheBigPict ure+%28The+Big+Picture%29

And after the biggest financial blowup, by a “market” that mispriced trillions of dollars of fraudulent “assets” causing the biggest economic disaster since the great depression, the defense is that the “market” says its OK? Seriously???

Posted by fresnodan | Report as abusive

And pardon my continuing rant, but honestly, isn’t it emprically irrefutable that the bond market, which gave us MBS, which were rated by the paradyms of virtue, Moodys, S&P, and Fitch, the most irrational and subject to corruption and manipulation part of the “MARKET”???

“…why they’re giving the wrong signals.”
corruption
stupidity
irrationality
The Titanic was unsinkable…until it wasn’t.

Posted by fresnodan | Report as abusive

The enormous European debt finance it chronic fiscal deficits of these countries. How to address the problem? If you spend more than your income, at some point stud farm crisis. There are only two ways to solve this problem. You end up with the deficit and refinance all your debt at a very long time, or looking for someone else to pay your debt. I think the Europeans are looking for a solution like this last option. That way, they would not have to lose the privileges that have been artificially winning.

Posted by Stocktipsinvest | Report as abusive

@DCWright, that is an excellent point. One question I like to ask in evaluating corporate debt loads is, “Could they pay off maturing debt from cash flows if the markets were closed to them?”

Could the US pay off its maturing debt (perhaps $2T-$3T per year?) if the markets shut down? If not, then we are carrying too much for sustainability. Because sooner or later, for good reason or bad, the credit markets WILL shut down. And then how do you recover?

Posted by TFF | Report as abusive

MrRFox: why keep your savings in assets that inflation will devalue? Why not simply move to assets less threatened by inflation if you are so fearful of it?

Posted by Chris08 | Report as abusive

@TFF: in the current world’s economic structure, not likely to substantially change in the next 25-50 years, if the U.S. sovereign debt market fails, then the entire global financial system has failed because there’s been a massive political failure, global GDP falls by a third within months, and I’ll worry more about food and clean water than my portfolio return.

And that would be a hugely deflationary, not inflationary.

If and when the U.S. sovereign debt market can fail without imploding the entire world, then you might have a point. But short of that leads one to incorrect conclusions about how the credit system works in this world.

Spain’s interest rate jumped because it’s a currency user, not a currency issuer. The U.S. is not in that same position, and can never run out of money to pay vendors and creditors. You are conflating what would be a politically-induced hyper-inflationary monetary crisis with how the U.S. credit and monetary system actually works.

Sovereign debt of currency issuers is not the same as corporate debt. Stop thinking that.

Posted by SteveHamlin | Report as abusive

Felix fails to mention another reason why Krugman has such contempt for the “austerians”. They have an, if not hidden at least seldom acknowledged, added agenda: austerity is a way to shrink the size of “government” and that to them means welfare and safety net spending for the poor about whom they care nothing. So austerity is simply another weapon used by the rich in their war on the poor and he finds that contemptible.

Posted by Chris08 | Report as abusive

@SteveHamlin, your thesis makes sense in theory. I, for one, am extremely reluctant to test the theory by continuing on the current path. After all, to paraphrase someone earlier, it works, until it doesn’t any more.

Posted by Curmudgeon | Report as abusive

@Chris08 – you asked – “why keep your savings in assets that inflation will devalue? Why not simply move to assets less threatened by inflation if you are so fearful of it?”

We’re not speaking of particular individuals here, Chris, but of an entire segment of the population, one consisting of all those with net savings but not such high net worth as to justify professional and competent financial advisors. Taking on inflation protection is always costly, involves risk and is vulnerable to the same kind of misjudgments that made The Whale a household name.

More fundamentally, why should individuals who have behaved prudently and lawfully have to sit still for being made the targets of a government sponsored Wack-a-Mole exercise? People shouldn’t have to fear and flee from having their pockets picked surreptitiously through inflation or any other method, by a government that lacks the intellectual integrity to directly levy taxes to collect the revenue it requires.

Government has no mandate to debase the value of the currency, nor should it.

IMO a portion of the wealth of the few super-rich – or a larger portion of the wealth of savers who are not rich-rich – must be confiscated to buy our way out of the hole we are in. Krugman, Felix and you(?) are – intentionally or not – advocating policies that protect the ultra-wealthy status quo-types and put all the burden elsewhere. Are you surprised that there is expressed disapproval of your approach?

Posted by MrRFox | Report as abusive

Chris08′s comment at 10:36 am EDT is true but doesn’t take the analysis far enough.

The chief reason why the austerians are so enamored with cutting the safety net during economic contractions is because they want to force people with fewer financial resources to sell whatever assets they do have in order to just keep living. And who will buy those assets that are presumably being sold at fire sale prices? Why the rich, of course, because they by definition have the cash on hand. They say that recessions are “cleansing” and/or “redemptive” for the same reason.

That’s why you read Objectivists and Austrian Economics adherents spouting lines to each other like “during a recession, all assets flow back to their true owners” or “the time to buy is when blood is running in the streets.”

Posted by Strych09 | Report as abusive

@Chris, I don’t have much invested in fixed-income assets. That isn’t the point. Unfortunately most of our elderly lack the sophistication and risk tolerance to choose wisely from equity investments. Your average retiree puts their meager savings in CDs, presently issuing something less than inflation. Is what it is.

@Steve, are you saying that it is impossible for the cost of US borrowing to rise? That no matter what the debt load, there will always be strong demand for US Treasury obligations?

And yes, the US can issue its own currency. The Fed has unlimited power to monetize Treasury debt. If private demand for this debt were to dry up, and the Fed were forced to print $2T-$3T a year of new money, what impact would that have on the economy?

Deflationary? Inflationary? Why not both? The way I see it, that quantity of new money entering a system devoid of demand would simply destroy the currency (inflationary), while devastating the economy (deflationary).

And yes, it is an “Armageddon” scenario. Am I not supposed to worry about blowing up the real economy and the harm that would result? Am I only supposed to worry about silliness like inflation/deflation and portfolio returns? Seems to me that you have this backwards!

Posted by TFF | Report as abusive

@Strych09 and Chris08, isn’t there a third alternative to “borrow more” and “spend less”? Bright guys like you ought to be able to figure it out. And wouldn’t that third path also constitute “austerity”?

The debate here seems to be between those who want to blow up the economy by destroying the currency and those who want to blow up the economy by starving the 99%. Isn’t anybody interested in finding a solution that doesn’t blow up the economy?

Oh, right. “Read my lips.” I forgot…

Posted by TFF | Report as abusive

TFF: if for good reason or bad, the credit markets shut down, whether or not the US can pay off its maturing debt will be the least of your (or mine, or Curmudgeon’s) problems. Your primary concern at that point will be how fast you can stock your fallout shelter and how much ammunition you can get your hands on.

Posted by Strych09 | Report as abusive

TFF, re: your comment at 12:22 pm EDT; please see the book by Krugman whose review is the subject of this thread.

Tolerating a few years of inflation at the rate of 4 percent a year would not “blow up the economy by destroying the currency”.

Posted by Strych09 | Report as abusive

It is kind of amazing that those who believe in the inflation panacea either don’t remember the 70′s or were too young to experience it. As well as the fact that there is no more wage push inflation. Inflation would merely lower the standard of lving even more.
I imagine we will have inflation in things we need (food and fuel) and deflation in things we don’t (McMansions).
And who does the whole FED money creation operation benefit??? The FED IS BANKERS – and is GIVING money, in the form of interest free money to banks, to use to “lend” (or really, “proprietary” trading, AKA gambling, which makes perfect sense when your losses at the casino are paid by the FED) at a profit. The only problem, the one reason for the TBTF banks, is to be an efficient allocater of capital. But they WERE NOT – they are corrupt and they failed to make economically sound loans, because they wanted bonuses. They still do.

Posted by fresnodan | Report as abusive

@Strych09, I would suggest that you are looking at it from the wrong direction. We agree that if the credit market shuts down for the US Treasury it would be a financial disaster — a real disaster that would make the Great Depression look like a cake walk.

So, which set of policies minimizes the risk of this happening? Borrow-and-spend stimulus? Tax-and-save austerity? Stable currency? Inflation?

The advantage I see for austerity is that, in repairing the primary deficit, the dependency on continued borrowing is reduced. That leaves more options on the table in the future.

The advantage for borrow-and-spend is that austerity is naturally deflationary, in an already depressed economy. A hopeful strategy, but I fear we’ve gone too far along this path already to generate the kind of stimulus that might make it work. Besides, our present system leaves all the wealth in the hands of the 1%. Hard to reach sustainability without fixing that.

While I haven’t read Krugman’s book, I’m happy with a 4% inflation target, even if they overshoot. In my ignorance, I’ve been anticipating 5%-7% inflation whenever the economy picks up.

I simply object to the assertion that the presently low borrowing rates mean we don’t need to worry about our debt load. As referenced above, market sentiment can change rapidly. The ability to borrow at a 2% rate today does not promise that the markets will support our credit needs tomorrow.

“Inflation would merely lower the standard of lving even more.”

@fresnodan, that is the DEFINITION of austerity. Inflation is simply one way to achieve it. Pick your poison — and try not to spill it all over once you’ve made your pick.

Posted by TFF | Report as abusive

@Strych09

While I have very little agreement with Krugman, I completely agree with him about inflation rate of 4%. To be honest I even want a 6-8% inflation to solve one part of the current depression problem quicker (too much government debt).

But it needs to be done after government of stupid countries goes into primary surplus first!!! (surplus without cost of debt)

However, I disagree about how to spear up inflation while keeping necessity cost down.
That is government spending CANNOT be considered!

In addition, it has to be global inflation. Inflation in the West only will just lead to higher wage and higher cost of exporting for the West and thus leads to deeper global trade imbalance reducing their export further. Nothing will get solved.

China (perhaps Korea and Germany) needs to allow wage to rise, their demand at global stage to go up.

I said this before so saying it again, China demand at global stage has to go up. Otherwise, things are not going to get better.

And don’t even bother with India or Brazil. These economies are overrated, compared to China, they are just fruit flies!!!

Posted by trevorh | Report as abusive

@TFF: you wrote “If private demand for this debt were to dry up, and the Fed were forced to print $2T-$3T a year of new money, what impact would that have on the economy?”

Why do you think printing dollars and printing USTs are different things?

Posted by SteveHamlin | Report as abusive

“Why do you think printing dollars and printing USTs are different things?”

@Steve, They aren’t terribly different, are they? So equate the two — we rely on there being a strong market for our currency/debt. We are rolling over all maturing debt and printing $1T of new debt annually. What happens if demand dries up?

I understand that right now the markets are telling us that demand is strong. Some people seem to believe this means that demand will ALWAYS be strong. I’m skeptical, since I’ve seen the markets turn on too many entities in recent years, both corporate and sovereign.

Answer me three questions straight:
(1) Is it inconceivable that demand for US dollars/Treasuries will slow?

(2) Do our present fiscal policies have any influence on the likelihood of demand slowing?

(3) What happens to the US economy if this happens?

Posted by TFF | Report as abusive

From Strych09:
“TFF: if for good reason or bad, the credit markets shut down, whether or not the US can pay off its maturing debt will be the least of your (or mine, or Curmudgeon’s) problems. Your primary concern at that point will be how fast you can stock your fallout shelter and how much ammunition you can get your hands on.”

The best comment I have seen in a long long time.

Posted by trevorh | Report as abusive

Re the inflation argument. I fail to see why people can’t be expected to learn something about money and investment if they have savings. Claiming government policies must above all protect the ignorant or lazy hardly seems a good way to improve the economy in general. And the idea that currencies should never depreciate is simply foolish; they do so all the time, faster during some periods, slower during others. Some degree of inflation is a fact of life the world over. At present inflation is very low in the US; often this is the effect of a stagnant economy not growing. I think economic growth is far more important than a dollar that never loses any value. A higher rate of inflation would be good for the US economy. And savers should have the initiative to cope with it. PS there are always TIPS for people who have a phobia about inflation. Find out about them.

Posted by Chris08 | Report as abusive

@Chris08 – One supposes that if you “fail to see why”, then that ends it. Matter resolved. Besides, inflation worked wonders for Zimbabwe, didn’t it?

Posted by MrRFox | Report as abusive

@Chris08, to some degree I agree with you. I’ve repeatedly said here that people NEED to learn about investment if they have savings. Otherwise all of the real profits flow to the bankers and money managers.

Yet I also agree with those who object that most people have neither the education (they are lucky if they can balance a checkbook properly), the temperament (panic in even small market dips), or the interest (did you see American Idol last night?) to do so successfully. Perhaps one in ten can successfully manage their savings, the rest are (according to GS) muppets.

For these reasons, most people’s comfort zone stops at fixed income investments. Preferably insured, so they don’t need to worry about credit risk.

As for TIPS, you do realize that they do not keep up with inflation, right? First, you need to go to a long maturity before you get a positive coupon these days. Second, the inflation adjustments are taxable as ordinary income. So you only get to keep 75% of the inflation adjustment. Third, there is a reasonable argument to be made that the CPI understates the effective rate of inflation, especially for seniors. They care less about the falling price of consumer electronics, more about housing, food, and health care.

Unlike MrRFox, I’m not one to take inflation off the table. In the present environment, it might be the least painless solution. Worth at least exploring that possibility? But in isolation, inflation harms the majority of retirees, more than any other easily identified group I can think of. If we wish to support their standard of living, we would need other policies (e.g. medical reform) to balance that.

Posted by TFF | Report as abusive

My principal issue with Krugman’s argument is that he seems to believe that just because the market is sanguine today, it will also be so tomorrow and/or that there will be time to make adjustments after the market gets spooked. All one has to do is look where CDS on CDOs were trading in late-2006 and where European sovereign CDS were trading prior to the financial crisis or even as late is the winter of 2009.

Fixed Income and derivative markets often stick at irrationally tight levels for long enough that the issuer is allowed to over-issue. Then when sentiment turns, the weight of the outstanding liabilities crushes the issuer. It is unfathomable to me that this would even need to be explained to a Nobel prize winner.

Posted by ryanmburke19 | Report as abusive
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