Monday, October 22, 2007

Krugman on H. Paulson's financial market rescue plan (amv)

Usually, I disagree with Princton's Paul Krugman ... especially when it comes to macroeconomics and his reluctance to abandon Keynes' Titanic even decades after it had hit the iceberg (This of course is just my highly incompatible way of thinking about Keynes & Co. Unfortunately, Keynes is still with us ... he is in all three basic equations of modern monetary economics, even though his contribution is mixed with other strands - thereby only increasing inconsistency and confusion - but this is quite another story ... or drama.) Yet, this time I partly agree with Krugman on the rescue plan suggested by Henry Paulson, Secretary of the Treasury and former chairman and CEO of Goldman Sachs (so much for vested interest). Krugman begins with Alan Greenspan who in fact stated the critique against Paulson earlier:

It pains me to say this, but this time Alan Greenspan is right about housing. Mr. Greenspan was wrong in 2004, when he sang the praises of adjustable-rate mortgages. He was wrong in 2005, when he dismissed the idea that there was a national housing bubble, suggesting that at most there was some “froth” in the market. He was wrong last fall, when he suggested that the worst of the housing slump was behind us. (Housing starts have fallen 30 percent since then.)

But his latest pronouncement — that the market rescue plan being pushed by Henry Paulson, the Treasury secretary, is likely to make things worse rather than better — looks all too accurate.

Krugman's reason to reject Paulson's rescue plan is neatly summarized:
"Investors aren’t putting their money to work because they don’t know where the bad debts are. And when investors need clarity, the last thing you want to be doing is pumping out more smoke."
But read the whole thing. I just wonder why Krugman in all other cases I know of supports the pumping out of more smoke ... that is of more money? Is Paul Krugman not the high priest of 'easy money'-economics? The orthodoxy before Keynes, for sure, would have argued that it was smoke in the first place that created the bubble. Do not produce smoke and you do not need a rescue plan for anybody.