Paul Krugman Has His Ming the Merciless Attitude on This Morning…
Needless to say, he has good reason:
Paul Krugman: Gross Gone: “I don’t know anything about what’s been going on internally at Pimco…
I just read the same stories as everyone else. I have, however, written a lot about Pimco’s macroeconomic analysis (which drove its bond-investment decisions). The interesting thing is the Pimco was initially a bond bull, based on the correct understanding that deficits don’t crowd out lending when the economy is in a liquidity trap; but it then went off the rails, with Bill Gross insisting that rates would spike when the Fed ended QE2. I tried to explain why this was wrong, and got a lot of flak from people insisting that the great Gross knew more than any ivory-tower academic. But I knew what I was talking about!
Nobody Understands the Liquidity Trap, Still: A correspondent points me to Bill Gross in 2010, declaring that we are in a liquidity trap–and that therefore the Fed’s expansionary policies won’t create jobs, but will simply cause inflation. There’s only one thing to say: AAUUGGHHHH! But a lot of people seem to have fallen into that curious fallacy, as I pointed out in the same year…. The liquidity trap… is a situation in which increasing the monetary base has no effect on aggregate demand, because you’re substituting one zero (or very low) interest asset–monetary base–for another…. Conventional monetary policy is completely sterile on all fronts. I don’t know why this very simple point is so hard to grasp, but people keep making a hash of it. I have no idea why Cullen Roche thinks that the TED spread has anything at all to do with the question of whether we’re in a liquidity trap; nor do I know what I can do, after all the times I’ve written about it, to make the point more clearly.
Bill Grosses, Idealized and Actually Existing: “Brad DeLong tries at some length to rationalize Bill Gross’s insistence in 2011 that interest rates were about to spike. But while it’s nice to be charitable, to attempt to put the best face on someone else’s arguments, it’s also important to look at the argument someone was actually making. And the reasoning of Gross and others was much cruder and a lot more foolish than Brad acknowledges. I know because I was involved in the debate in real time…”
2011 and All That: “All would have been forgiven, indeed never mentioned, but for [Bill Gross’s] utter misjudgment of the bond market in 2011–a misjudgment based on his failure, or more accurately refusal, to acknowledge the realities of a liquidity trap world…. Gross was by no means alone… 2011 was a sort of banner year for bad macroeconomic analysis by people who had no excuse for their wrong-headedness. And here’s the thing: aside from Gross, hardly any of the prominent wrong-headers have paid any price for their errors…. BS are still given reverent treatment…. Paul Ryan warned Ben Bernanke that he was ‘debasing’ the dollar, arguing that rising commodity prices were the harbinger of runaway inflation; the Bank for International Settlements made a similar argument, albeit with less Ayn Rand. They were completely wrong, but Ryan is still the intellectual leader of the GOP and the BIS is still treated as a fount of wisdom. The difference is, of course, that Gross had actual investors’ money on the line.”
The Pimco Perplex: “It’s fairly clear that the events of 2011 are a large part of the story of Bill Gross’s abrupt departure…. But why was Gross betting so heavily against Treasuries? Brad DeLong tries to rationalize Gross’s behavior in terms of a coherent story about an impending U.S. recovery, which would lift us out of the liquidity trap. But Gross wasn’t saying anything like that. Instead, he was claiming that the Fed’s asset purchases–QE2–were holding rates down…. So why did he believe all that? It all comes down, I’d argue, to liquidity trap denial. Since 2008 the basic logic of the economic situation has been that the private sector is trying to run a huge surplus, and the public sector isn’t willing to run a corresponding deficit. The result is an economy awash in desired savings with nowhere to go. This in turn means that budget deficits aren’t competing with private borrowing, and therefore need not drive up interest rates. This isn’t hindsight; it’s what I and others have been saying since the very beginning. But a lot of people–politicians, of course, but also a lot of people in finance–have just refused to accept this account. They have clung to the view that budget deficits must lead to higher interest rates. You might think the failure of higher rates to materialize, year after year, would cause them to reasses–indeed, would have caused them to reassess years ago. Instead, however, many of them made excuses. Above all, the big excuse was that rates would have gone higher if only the Fed weren’t buying up the stuff. So QE2 acquired a much bigger role in their thinking than it deserved…. And he was wrong. QE2 ended, and nothing happened to rates.”
The Pimco Perplex: You can see why I found Gillian Tett’s apologia for Gross–that he was blindsided by central bank intervention–frustrating. For one thing, that’s accepting a model that has failed with flying colors; but beyond that, Gross’s really bad call was almost exactly the opposite, his claim that rates would soar when the Fed’s intervention ended. As I’ve said, Gross of all people shouldn’t have fallen into this trap, since his own chief economist understood liquidity trap logic better than almost anyone. But finance people seem weirdly determined to believe in a macro canon whose hold on their perceptions appears to be completely unbreakable, no matter how much money it causes them to lose.”
Nobody Could Have Predicted, Bill Gross Edition: “Gillian Tett feels sorry for BIll Gross, who was caught unaware by the sudden shift in bond market behavior. Who could have predicted that interest rates would stay low despite large budget deficits? Um, how about Pimco’s own chief economist, Paul McCulley?… The truth is that the quiescence of interest and inflation rates was predicted by everyone who understood the obvious–that we had entered a liquidity trap–and thought through the implications. I explained it more than five years ago…. And Paul McCulley understood all this really well…. Strikingly, Tett’s version of what went wrong with Gross’s predictions makes no mention of deleveraging and the zero lower bound; it’s all a power play by central banks, which have been ‘intimidating’ bond investors with unconventional monetary policy. This is utterly wrong, and in fact Gross’s own mistakes show that it’s wrong: one of his big failures was betting that rates would spike when the Fed ended QE2, which they predictably didn’t. As an aside, whenever I hear people explaining away the failure of interest rates to spike as the result of those evil central bankers artificially keeping them down, I want to ask how they think that’s possible. Surely the same people, if you had asked them a few years ago about what would happen if the Fed tried to suppress interest rates by massively expanding its balance sheet, would have predicted runaway inflation. That didn’t happen, which should make you wonder what exactly they mean by saying that rates are artificially low. Oh, and Tett ends the piece by citing the Bank for International Settlements as a voice of wisdom. That’s pretty amazing, too; the sadomonetarists of Basel have a remarkable track record of being wrong about everything since 2008, but always finding some reason to call for higher rates. The thing is, Tett is a smart observer who talks to a lot of people in finance; seeing her present a discredited theory as obviously true, without so much as mentioning the kind of analysis that has been worked all along, says bad things about the extent to which anyone who matters has learned anything.”
Knaves, Fools, and Quantitative Easing: “When the going gets tough, the people losing the argument start whining about civility. I often find myself attacked as someone who believes that anyone with a different opinion is a fool or a knave; as I’ve tried to explain, however, that’s mainly selection bias. I don’t spend much time on areas where reasonable people can disagree, because there are so many important issues where one side really is completely unreasonable…. There are a lot of bad people engaged in economic debate–and I don’t mean that they’re wrong, I mean that they argue in bad faith. Which brings us to today’s installment of oh-yes-they’re-that-bad, courtesy of Bloomberg… the infamous open letter to Ben Bernanke warning that his efforts to boost the economy ‘risk currency debasement and inflation’…. Bloomberg… ask[ed] the signatories whether they would concede that they were wrong. Not a chance…. And this is far from the only example of inflationistas and bond worriers bobbing and weaving, refusing to acknowledge having said what they said, being completely unwilling to admit mistakes. I try hard not to behave that way…. No doubt there have been times when I rewrote history to make myself look better, but I try to avoid that–it’s a major intellectual and moral sin. And boy are there a lot of sinners out there.”
Ordoarithmetic: “Francesco Saraceno is furious and dismayed at Hans-Werner Sinn, who says among other things that deflation in southern Europe is necessary to restore competitiveness. Why not inflation in Germany, he asks? But Saraceno fails to understand German logic here. As they see it, their economy was in the doldrums at the end of the 1990s; they then cut labor costs, gaining a huge competitive advantage, and began running gigantic trade surpluses. So their recipe for global recovery is for everyone to deflate, gaining a huge competitive advantage, and begin running gigantic trade surpluses. You may think there’s some kind of arithmetic problem here, but in Germany they have their own intellectual tradition.” * Charlatans and Cranks Forever: “Back when Paul Ryan released his first big-splash budget–the one that had the commentariat cooing over its “seriousness”–it included a link to an absurd Heritage Foundation analysis claiming, among other things, that the plan would drive the unemployment rate down to 2.8 percent. (Heritage then tried, unsuccessfully, to send its nonsense down the memory hole and pretend it never happened.) Ryan defenders tried to claim that the plan didn’t actually rely on that Heritage stuff; but as some of us tried to explain, the plan actually didn’t add up, relying on a multi-trillion-dollar magic asterisk on tax receipts. And we predicted that sooner or later Ryan would embrace magical theories about how tax cuts increase revenue. And here we are. One disturbing effect if Republicans take the Senate, by the way, may be that the Congressional Budget Office becomes a purely partisan operation–effectively a department of Heritage.”
And needless to say, Paul Krugman knows what he is talking about. In general:
- Paul Krugman is right.
- If you think Paul Krugman is wrong, refer to (1)