Chicken Little Krugman

If I had $10 for every time Paul Krugman had called a recession or now a depression, I would be a very rich man. I wonder whether Mr. Krugman believes that instead of aerobic exercise he can keep fit by periodically hyperventilating. In a column published in the Bee today, Mr. Krugman yammered that conditions of today are closely parallel to (shudder) 1929 or more appropriately 1930-31. He goes on to bloviate the banking crisis (which he attributes as the real source of the depression of the 1930s) "showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure." Krugman forgets that a good part of the cause of the depression was misdiagnosis of the problem. At a time when most economic historians argue that the money supply was going in one direction, the economic experts of the day reacted in exactly the opposite way they should have, it is odd for him to make this case. A good part of the blame that can be directed for the 1930s depression can be directed to the supervisors. Milton Friedman and more recently Amity Schlaes explain those failures in pretty vivid detail. Krugman should understand that a diagnosis of inflation in a deflationary period might cause some problems in the economy. Arthur Schlesinger described the "technique of the New Deal was improvisation and experiment." In this case, based on the evidence of Friedman and Schlaes, the improvisation and experiment were mostly in the wrong direction.

Indeed, part of the depth of the problem of the 1930s was caused by bank runs. But Krugman, who seems to have never met a government regulation he did not like, goes on to argue that the creation of asset backed securities has allowed banks to upset the balance between savers and borrowers and that somehow more government regulation in this area will stabilize the markets. That is nonsense. His solution, surprise, is to get the financial system back "under control." Remember that the massive new interventions that happened in the 1930s first with Hoover and then with Roosevelt, allowed a significant economic downturn to last for almost a decade. The numbers which Schlaes presents in her book suggest that almost a decade later all of the "controls" helped to extend the problem not abate it.

Krugman is not alone in his view of the financial markets. Several leaders in Congress, on both sides of the aisle, seem to argue that any movement is better than allowing the markets to sort themselves out. But if we learned anything from the New Deal it should be that any movement, is not always positive.