Great to hear from you - hope your summer is going well.
Krugman articulates one view (relatively extreme) that argues that government can improve outcomes in society and that the recession of 2007-9 and slow recovery are due to the government: a. acting incorrectly prior to the recession and b. not doing enough during/after the recession. While his view is extreme, it is shared by a minority of economists and reflects a popular believe in the majority of the American public's mind that life can be improved by sacrificing some level of individualism in return for a collectivist or populist control of the economy by the state. This view has its roots in the 19th century progressive movement and, some scholars (Schumpeter, North et al) argue is an inevitable by product of expanding wealth in society. That is, as GDP per capita increases, there is an emergent evolution toward the welfare state based upon popular views of risk and the "responsibility" of the state.
Greg Mankiw and other mainstream or middle of the road social scientists do not have Krugman's confidence (hubris?) in state action - they point to the costs of central planning and to history as a cautionary tale when considering a strong state as a stabilizing force in society. That said, Mankiw et al would suggest that, while confidence in the efficiacy of state intervention has been a partial cause of the current "crisis" in deficits and debt at the federal level, the state can work toward stabilization through consistent and clear actions - for example, using rules rather than discretion in monetary and fiscal policy.
On the opposite end from Krugman would be social scientists who follow in the steps of Hayek and Friedman. They argue that the "knowledge problem" is a constraint that the state cannot overcome and that, in most cases, the discovery activities of individuals acting on their own knowledge to their own goals, will lead to problem resolution far more successful than centrally planned actions. I tend, as you know, to have sympathy with this view - that sympathy is in the sense that Adam Smith used the word in his seminal book - The Theory of Moral Sentiments.
All this said, there is an understandable, albet unfortunate, tendency to rush to the state for help in times of crisis. Bob Higgs has spent a great deal of his career looking at this tendency, I recommend his book Crisis and Leviathan for an accessible analysis of both this tendency by members of society and, more importantly, the consequences of this rush to seek help from the state.
In this piece Krugman, accurately makes the observation:
"The big drag on the economy now is the overhang of household debt, largely created by the $5.6 trillion in mortgage debt that households took on during the bubble years. "
The three points of view I outline above (a clear oversimplification, but useful I think to flush out opposing points of view) might agree on the statement but disagree on what lead to this creation of debt.
I suspect you could summarize Krugman's view of the cause - the alliance between large business and the government.
I would argue that this is an incomplete view. The incentives that lead to individual borrowers to eagerly signing mortgages that were dangerous were a long time in developing and, based to a large extent in my view, on the emergent populist view that shaped their assessements of: a. what would happen to asset prices (the value of their home) b. who would "help" if their was a problem with their mortgage. The help, in the form of a myriad of state actions ranging from Freddie and Fannie Mae, to the community reinvestement act to consumer "protections" provided a textbook example of a bubble that included toxic levels of moral hazard and systemic risk. These preverse and unintended consequences are reflective of the knowledge problem that Hayek articulated and, more importantly, the inevitable result (in my view) when collectivism replaces individualism. Hayek's two essays - The Use of Knowledge in Society and Competition as a Discovery Procedure are available online, accessible to all readers and, in my view very, very helpful in providing information that you could use to evaluate or reevaluate the views of Krugman (and Mankiw and Friedman, for that matter).
Krugman, of course, disagrees and, while he holds a Nobel, it is for work in trade theory, not public choice. For a nuanced view the work of James Buchanan and Thomas Sowell would leave one unsurprised by the 2007-9 recession, the current debt "crisis" and the near future solvency (or insolvency) of entitlement programs.
Krugman, unintentionally, articulates the most important take away from the current crisis as well as reading history when he admits (unintentionally I suspect aligning himself with Hayek)
"The answer is that we don’t know."
Perhaps more than you were interested in . . . but an important topic and question for those of the generations that will follow.
Greg
--------------------------------------------------------------------------------
To: "Gregory Pratt"
Sent: Monday, July 18, 2011 6:55:19 AM
Subject: Would Love Your Take
This is P Krugman:
July 17, 2011
Letting Bankers Walk
By PAUL KRUGMAN
Ever since the current economic crisis began, it has seemed that five words sum up the central principle of United States financial policy: go easy on the bankers.
This principle was on display during the final months of the Bush administration, when a huge lifeline for the banks was made available with few strings attached. It was equally on display in the early months of the Obama administration, when President Obama reneged on his campaign pledge to “change our bankruptcy laws to make it easier for families to stay in their homes.” And the principle is still operating right now, as federal officials press state attorneys general to accept a very modest settlement from banks that engaged in abusive mortgage practices.
Why the kid-gloves treatment? Money and influence no doubt play their part; Wall Street is a huge source of campaign donations, and agencies that are supposed to regulate banks often end up serving them instead. But officials have also argued at each point of the process that letting banks off the hook serves the interests of the economy as a whole.
It doesn’t. The failure to seek real mortgage relief early in the Obama administration is one reason we still have 9 percent unemployment. And right now, the arguments that officials are reportedly making for a quick, bank-friendly settlement of the mortgage-abuse scandal don’t make sense.
Before I get to that, a word about the current state of the mortgage mess.
Last fall, we learned that many mortgage lenders were engaging in illegal foreclosures. Most conspicuously, “robo-signers” were attesting that banks had the required documentation to seize homes without checking to see whether they actually had the right to do so — and in many cases they didn’t.
How widespread and serious were the abuses? The answer is that we don’t know. Nine months have passed since the robo-signing scandal broke, yet there still hasn’t been a serious investigation of its reach. That’s because states, suffering from severe budget troubles, lack the resources for a full investigation — and federal officials, who do have the resources, have chosen not to use them.
Instead, these officials are pushing for a settlement with mortgage companies that, reports Shahien Nasiripour of The Huffington Post, “would broadly absolve the firms of wrongdoing in exchange for penalties reaching $30 billion and assurances that the firms will adhere to better practices.”
Why the rush to settle? As far as I can tell, there are two principal arguments being made for letting the banks off easy. The first is the claim that resolving the mortgage mess quickly is the key to getting the housing market back on its feet. The second, less explicitly stated, is the claim that getting tough with the banks would undermine broader prospects for recovery.
Neither of these arguments makes much sense.
The claim that removing the legal cloud over foreclosure would help the housing market — in particular, that it would help support housing prices — leaves me scratching my head. It would just accelerate foreclosures, and if more families were evicted from their homes, that would mean more homes offered for sale — an increase in supply. An increase in the supply of a good usually pushes that good’s price down, not up. Why should the effect on housing go the opposite way?
You might point to the mortgage relief that would supposedly be extracted as part of the settlement. But if mortgage relief is that crucial, why isn’t the administration making a major push to reinvigorate its own Home Affordable Modification Program, which has spent only a small fraction of its money? Or if making that program actually work is hard, why should we believe that any program instituted as part of a mortgage-abuse settlement would work any better?
Sorry, but the case that letting banks off the hook would help the housing market just doesn’t hold together.
What about the argument that getting tough with the banks would threaten the overall economy? Here the question is: What’s holding the economy back?
It’s not the state of the banks. It’s true that fears about bank solvency disrupted financial markets in late 2008 and early 2009. But those markets have long since returned to normal, in large part because everyone now knows that banks will be bailed out if they get in trouble.
The big drag on the economy now is the overhang of household debt, largely created by the $5.6 trillion in mortgage debt that households took on during the bubble years. Serious mortgage relief could make a dent in that problem; a $30 billion settlement from the banks, even if it proved more effective than the government’s modification program, would not.
So when officials tell you that we must rush to settle with the banks for the sake of the economy, don’t believe them. We should do this right, and hold bankers accountable for their actions.
No comments:
Post a Comment