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Stagnation Hysterics

Blowing Bubbles With Paul Krugman


America’s “highest profile economist” thinks we need more asset bubbles to battle negative real interest rates and persistent secular stagnation.

In a controversial post on his blogsite, New York Times columnist Paul Krugman argues that bubbles may be necessary to make up for insufficient demand, high unemployment, and sluggish growth.  Here’s the clip from his blog “The Conscience of a Liberal”:

“We now know that the economic expansion of 2003-2007 was driven by a bubble. You can say the same about the latter part of the 90s expansion; and you can in fact say the same about the later years of the Reagan expansion, which was driven at that point by runaway thrift institutions and a large bubble in commercial real estate…

So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest…” (“Secular Stagnation, Coalmines, Bubbles, and Larry Summers”, Paul Krugman, New York Times)

So, absent bubbles, there’s no credit expansion, no full employment, no strong recovery? That sounds a lot like an excuse for keeping the current policy (QE and zero rates) in place, doesn’t it?

But what an audacious claim, and what a sad reflection on the economics profession when its most celebrated spokesmen throws up his hands in despair  and says, ‘That’s the way it is, folks. Deal with it’, instead of offering constructive alternatives.  Isn’t that what economists are supposed to do, figure out how to get us off life-support and back to full employment and growth?  Here’s another clip from his post:

“…we are an economy in which monetary policy is de facto constrained by the zero lower bound …, and that this corresponds to a situation in which the “natural” rate of interest – the rate at which desired savings and desired investment would be equal at full employment – is negative… this situation the normal rules of economic policy don’t apply. As I like to put it, virtue becomes vice and prudence becomes folly.” (NYT)

Okay. So if the Fed’s main policy tool,  the Feds Funds Rate, isn’t doing the trick and stimulating demand,   what do you do?  Keep rates locked at zero for 5 or 10 years while the Fed pumps trillions into bank reserves sending stocks into the stratosphere and inflating bubbles in all types of financial assets?

Krugman seems to think so. And so does his buddy, Larry Summers, whose presentation at a recent IMF conference was the catalyst for Krugman’s musings.

So let’s ask the obvious question first: Would Summers be equally enthusiastic about asset bubbles if his rich banker friends had felt the full impact of the last bubble, that is, if the 9 biggest banks in the country had been nationalized, shareholders wiped out, bondholders given haircuts, management replaced, and toxic assets sold off in public auctions to the highest bidder? Or has Summers opinion been shaped by the fact that the banks were bailed out and only the “little people” suffered in terms of lost home equity ($8 trillion), lost jobs (14 million), record foreclosures (6 million), and a decimated US economy?

My guess is that Summers feelings about asset bubbles have nothing to do with economics and everything to do with outcomes. It’s all a matter of whose ox is gored. And we all know whose ox took the biggest goring in the financial crisis; ordinary working people.

And, why does Krugman pretend like it just dawned on him that asset bubbles might be a good thing?  Here’s a quote from his post:

“I’m pretty annoyed with Larry Summers right now. His presentation at the IMF Research Conference is, justifiably, getting a lot of attention. And here’s the thing: I’ve been thinking along the same lines, and have, I think, hinted at this analysis in various writings. But Larry’s formulation is much clearer and more forceful, and altogether better, than anything I’ve done. Curse you, Red Baron Larry Summers! (Paul Krugman, The Conscience of a Liberal”, NYT)

Krugman makes it sound like the whole asset bubble thing just occurred to him which is a load of malarkey.  Krugman’s been a bubble-pusher from the beginning. Here’s an excerpt from an article he wrote in 2002 saying that Greenspan should inflate a housing bubble to offset the fallout from the bust:

  “…. the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” (Dubya’s Double Dip?”, Paul Krugman, New York Times)

Well, that’s pretty clear, isn’t it? So if Krugman was a proponent of bubblemaking way back in 2002,  why does he act like it never dawned on him until he heard Summer’s speech?

Could it be because Krugman is a trusted establishment liberal whose job is to shape public opinion? Is that it?  In this case, Krugman is trying to dignify the means by which more wealth is transferred to the Wall Street kleptocrats via asset bubbles. He’s also laying the groundwork for keeping the same thieving policies in place for as long as possible, which makes him an ardent defender of the status quo.

Keep in mind, this is the same guy who, for the last 5 years, has been telling us that the only thing we needed  to “End this Depression Now” (Krugman’s book) is to widen the budget deficits, increase government spending, and launch another round of fiscal stimulus. Now he’s done a complete 180 and is pushing a policy that–according to Naked Capitalism’s Yves Smith–“depicts asset bubbles as necessary and desirable” That’s quite a reversal, don’t you think?

Krugman again:  “If you take a secular stagnation view seriously, it has some radical implications …. that even improved financial regulation is not necessarily a good thing – that it may discourage irresponsible lending and borrowing at a time when more spending of any kind is good for the economy….”(NYT)

That’s the GOP’s view of things anyway, isn’t it? “What do we need regulations for,” they say. “They just put a damper on growth.” Krugman’s approach is a bit subtler, but it amounts to the same thing.  By suggesting that beating stagnation is the highest priority, he  implicitly legitimizes everything from mega-leverage at the banks to liar’s loans. This is about as close as you’ll get to economic malpractice without the Nobel Committee storming to your front door and demanding their statue back.

Krugman again: “Of course, the underlying problem in all of this is simply that real interest rates are too high. But, you say, they’re negative – zero nominal rates minus at least some expected inflation. To which the answer is, so? If the market wants a strongly negative real interest rate, we’ll have persistent problems until we find a way to deliver such a rate.” (NYT)

“Negative real interest rates!” “Persistent secular stagnation!” “Liquidity trap, liquidity trap, liquidity trap”!

Are you scared yet? You should be, after all, that’s what all this alarmist BS is all about. It’s just more fearmongering. In effect, what Krugman is saying is, ‘This is really awful, guys. The world is going to end if we don’t deal with negative rates fast!…Don’t say I didn’t warn you.’

But, wait a minute; wasn’t QE supposed to fix the problem? Isn’t that why the Fed is loading up on $85 billion in USTs and MBSs per month, because rates are stuck at zero and asset purchases are supposed to push the policy rate into negative territory easing the burden of debt and lowering the price of credit?

Sure, it is, but  Krugman’s hysterics just underscores the fact that the program is a big, fat fraud that’s done nothing except boost reckless speculation while allowing the crooked banks to roll over their massive debtpile at zero-cost to themselves. (A quick look at the Fed’s latest credit report shows that credit is only expanding in student loans and ripoff “subprime” auto loans which extend the length of the loan to a whopping 84 months! Another QE success story!)

As far as stagnation, well, it’s been around for a long time now, Paul, and precious few economists see asset bubbles as a way out. And while some attribute the problem to demographics,(like Krugman) others think it’s more closely connected to wage suppression, crappy wealth distribution,  taxes, the rise of financialization, or capitalism itself.  According to authors  John Bellamy Foster and Fred Magdoff, the rise of financialization  in the US was actually a response to stagnation which was causing a steady decline in the rate of accumulation.  Check out this blurb in Monthly Review where the authors explain the origins of the phenom and how it paved the way for the oversized financial system we have today:

 “It was the reality of economic stagnation beginning in the 1970s, as heterodox economists Riccardo Bellofiore and Joseph Halevi have recently emphasized, that led to the emergence of “the new financialized capitalist regime,” a kind of “paradoxical financial Keynesianism” whereby demand in the economy was stimulated primarily “thanks to asset-bubbles.” Moreover, it was the leading role of the United States in generating such bubbles—despite… the weakening of capital accumulation proper—together with the dollar’s reserve currency status, that made U.S. monopoly-finance capital the “catalyst of world effective demand,” beginning in the 1980s.

But such a financialized growth pattern was unable to produce rapid economic advance for any length of time, and was unsustainable, leading to bigger bubbles that periodically burst, bringing stagnation more and more to the surface.

A key element in explaining this whole dynamic is to be found in the falling ratio of wages and salaries as a percentage of national income in the United States. Stagnation in the 1970s led capital to launch an accelerated class war against workers to raise profits by pushing labor costs down. The result was decades of increasing inequality….a sharp decline in the share of wages and salaries in GDP between the late 1960s and the present.” (“Financial Implosion and Stagnation”,  John Bellamy Foster and Fred Magdoff, Monthly Review)

Krugman knows all of this. He’s done the research.  Like we said earlier, he’s just trying to trying to dignify the means by which the plutocrats are ripping us off while preparing us for more of the same for the foreseeable future.  That makes him an asset bubble defender in my book.

Krugman’s “negative rates-secular stagnation” theory is pure bunkum. The problem is not a liquidity trap at all, but what economist Heiner Flassbeck calls an “income trap”, where falling incomes and flat wages have led to droopy demand and weak investment. Here’s an excerpt from a recent article by Flassbeck:

 “….the US today …. is restricted by demand and demand is restricted by income expectations of private households at very high levels of unemployment….. It is a story of a dysfunctional labour market…….High unemployment depresses wages, depressed wages depress private consumption and depressed consumption does not allow the economy to recover despite enormous profits in the company sector and desperate attempts of monetary policy…..

…..even well-intended policies may lead to questionable results if the underlying analysis is flawed. Abenomics and most of its academic followers like Paul Krugman regard a protracted liquidity trap as the main reason for the Japanese weakness ….The diminished expectations and the uncertainty of Japanese private households concerning their future income and deflation as such prevent private consumption from taking a lead role in a recovery. To call that constellation a liquidity trap is misleading. In fact, the trap is a wage or income trap much more than a liquidity trap.”  (“Japan: Why Paul Krugman doesn’t get it right and Martin Wolf has to move on“, Heiner Flassbeck, Flassbeck-Economics)

Bingo. We have a winner!

The problem is not negative rates, secular stagnation, or liquidity traps. It’s demand, it’s wages, and it’s distribution. If you pay people a decent wage, they have more money to spend, activity increases, unemployment drops, sales pick up, businesses recycle their profits into investment, earnings improve, the demand for funds (loans) pushes rates higher, the economy grows and the world is a happy place. But if you keep crushing labor with numbskull austerity, offshoring jobs, perennial high unemployment, regressive free trade agreements,  cutbacks to vital safetynet programs, and bogus monetary policies that only serve the rich; then demand weakens, people’s expectations for the future dims, and the economy grinds to a halt…which it has.

The good news is, fixing for the economy is within our grasp. US workers just need a raise in pay and a bigger share of productivity gains. Putting money in the hands of the people who will spend it, is the fastest way to strengthen the recovery.

The bad news is, the big money guys who call the shots, like the way things are now. Which means that this stinking near-Depression will probably drag on for a long time to come.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at