Paul Krugman, Nobel Prize winner, columnist for the New York Times and Princeton professor, has a problem, and its name is Alan Greenspan. For years now, Krugman has used his column as a launching site for attacks on Greenspan which are more noted for their outright ad hominem animosity than their substance. What’s with that?
First of all, Krugman quarrels with Greenspan’s somewhat restrained approach to government intervention. Currently, Krugman still touts the idea that stimulus spending should have been tripled — to $2.7 trillion instead of less than $900 billion. He also scoffs at what he calls “deficit hawks” who warn of the inevitability of higher US interest rates when the full effect of the Fed’s printing press comes home to roost, insisting that such a reckoning will be deferred by the enormous global appetite for US government securities. His “you’re not broke if you can still borrow” is somewhat tempered by his demands for higher taxes — on “the rich,” of course, whom he defines as anyone making ends meet without selling their children.
One of Krugman’s more bizarre idea has been his notion, along with another Nobel winner, Joe Stiglitz, to impose a tiny “transaction tax” of 0.05% on all financial trades to assist the world’s poor. How this aid would be administered, and why it would succeed any more than current efforts aimed at the same admirable objective, he cannot say. (Perhaps it would be a fund managed by Nobel Prize winners, whose majestic moral sway would deter kleptocrats and overcome corruption.) But 0.05% doesn’t sound like much — until you calculate the actual sum, which is estimated at roughly $400 billion. It would be folly to expect that extracting a bite of this magnitude on markets would go unnoticed, but the price of altruism is not cheap, even though Krugman may wish you to think it so.
But Krugman’s chief quarrel with Greenspan centers on Krugman’s perception that Greenspan did not do enough to prevent the credit and housing bubbles. Krugman writes:
Until now I’ve managed to avoid reading Alan Greenspan’s Brookings Paper (pdf). But I finally took the plunge — and discovered that he’s still not a mensch, a person of integrity willing to take responsibility for his own actions.
Here’s the passage that got me:
“Similarly in 2002, I expressed my concerns before the Federal Open Market Committee that “. . . our extraordinary housing boom . . . financed by very large increases in mortgage debt – cannot continue indefinitely.” It lasted until 2006.
Ah, wise Alan warned us, but you know, it takes time for things to mature …
We’re not sure what Krugman is objecting to here — that Greenspan was right, but that it took awhile, or just that he was right. What about this statement makes him “not a mensch?”
He then complains:
“Strangely, he fails to mention such pearls of wisdom as his assurances, in 2004, that we needn’t worry about a national housing bubble:
Overall, while local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity.
“Or his wise assessment, in late 2005, of the state of our financial system:
These financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago.
Again, what’s the problem? In 2004, Greenspan does not foresee the extraordinary expansion of credit — driven in large part by Fannie Mae and Freddie Mac — that financed the housing bubble? Is this the same Paul Krugman who insists today that we need a much bigger credit expansion, in the form of “stimulus spending,” to avert certain catastrophe? Nemo is confused. And does Krugman wish to dispute that the “increasingly complex financial instruments” referred to by Greenspan have not in fact contributed to a much more effective management of risk than we have enjoyed previously? Does Mr. Krugman wish to dismantle the global derivatives market because mortgage lenders in the US abused mortgage-backed obligations? No more swaps? No more futures? No more options?
But Krugman’s chief complaint is more complex:
Greenspan writes in characteristic form: other people may have their models, but he’s the wise oracle who knows the deep mysteries of human behavior, who can discern patterns based on his ineffable knowledge of economic psychology and history.
Sorry, but he doesn’t get to do that any more. 2011 is not 2006. Greenspan is an ex-Maestro; his reputation is pushing up the daisies, it’s gone to meet its maker, it’s joined the choir invisible.
And now we get it.
First of all, Greenspan’s reputation is, if anything, more formidable than it ever was, and Krugman knows it. That’s what galls him. People pay attention to Alan Greenspan, especially important people — decision makers, corporate chieftains, global bankers. says that because he tells them what they want too hear. And he’s right. They want to hear common sense. The actually value his perceptions on “the deep mysteries of human behavior.” They want to hear someone “who can discern patterns based on his ineffable knowledge of economic psychology and history.” What they don’t do is listen to Krugman. Perhaps this is what drives his remarkable hostility for those who prosper.
Krugman’s angry dismissal of these perceptions is understandable. His Nobel was awarded to him for his econometric models. Krugman disdains the “ineffable;” for him, the hard certainties of mathematical “realities” form the basis for informed perception. History? Bah. Psychology? Humbug. The fact is, Krugman cannot compete in Greenspan’s world, which is a world of ideas, not numbers, and of perceptions, not the almost always-fallible security of models. And this provokes him to a level of irascibility that should embarrass him.
Come now, Mr. Krugman. This kind of nastiness hardly becomes you. You dismiss Greenspan’s recent analyses as the “rantings of an ex-maestro.” But who is actually “ranting” here? The “ex”-maestro, or the maestro that never was?