The "Maestro" is Back!!!

Alan Greenspan was called "the Maestro" because his 20 year reign as chairman of the Federal Reserve overlapped the great run-up in stock prices as the economy healed from the stagflation era of the 1970s to just before the Great Recession, the economic calamity that his policies of deregulation and willful ignoring of growing bubbles created. Greenspan is one of the quartet that made sure that Brooksley Born's attempt to regulate the derivatives market was quashed (click here for the PBS Frontline interview with Born about this).

Now Greenspan is back with more bad advice. This is from a posting by Paul Krugman on his NY Times blog:

There are many things to say about Alan Greenspan’s op-ed yesterday, none of them complimentary. But what struck me is the passage highlighted by Tim Fernholz:

Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

You know, some people might take the fact that what’s actually happening is exactly what people like me were saying would happen — namely, that deficits in the face of a liquidity trap don’t drive up interest rates and don’t cause inflation — lends credence to the Keynesian view. But no: Greenspan KNOWS that deficits do these terrible things, and finds it “regrettable” that they aren’t actually happening.

The triumph of prejudices over the evidence is a wondrous thing to behold. Unfortunately, millions of workers will pay the price for that triumph.

It is incredible that "insiders" who created the mess still hold the podium while outsiders like Paul Krugman who has been like an ancient Israelite prophet warning people of the evils about to descend on them are ignored and reviled. Krugman has been consistently right. Yet he continues to be ignored. Unbelievable!

And Paul Krugman continues his prophetic warnings...

Fiscal Fantasies

It’s really amazing to see how quickly the notion that contractionary fiscal policy is actually expansionary is spreading. As I noted yesterday, the Panglossian view has now become official doctrine at the ECB.

So what does this view rest on? Partly on vague ideas about credibility and confidence; but largely on the supposed lessons of experience, of countries that saw economic expansion after major austerity programs.

Yet if you look at these cases, every one turns out to involve key elements that make it useless as a precedent for our current situation.

Here’s a list of fiscal turnarounds, which are supposed to serve as role models. What can we say about them?

Canada 1994-1998: Fiscal contraction took place as a strong recovery was already underway, as exports were booming, and as the Bank of Canada was cutting interest rates. As Stephen Gordon explains, all of this means that the experience offers few lessons for policy when the whole world is depressed and interest rates are already as low as they can go.

Denmark 1982-86: Yes, private spending rose — mainly thanks to a 10-percentage-point drop in long-term interest rates, hard to manage when rates in major economies are currently 2-3 percent.

Finland 1992-2000: Yes, you can have sharp fiscal contraction with an expanding economy if you also see a swing toward current account surplus of more than 12 percent of GDP. So if everyone in the world can move into massive trade surplus, we’ll all be fine.

Ireland, 1987-89: Been there, done that. Let’s all devalue! Also, an interest rate story something like Denmark’s.

Sweden, 1992-2000: Again, a large swing toward trade surplus.

So every one of these stories says that you can have fiscal contraction without depressing the economy IF the depressing effects are offset by huge moves into trade surplus and/or sharp declines in interest rates. Since the world as a whole can’t move into surplus, and since major economies already have very low interest rates, none of this is relevant to our current situation.

Yet these cases are being cited as reasons not to worry as austerity becomes the rule.

You know what? I’m worried.

Go read the original post to get the embedded links.