Paul Paul

As a result, the odds are that the financial system won’t function normally until the crucial players get much stronger financially than they are now. Yet the Obama administration has decided not to do anything dramatic to recapitalize the banks.

Can the economy recover even with weak banks? Maybe. Banks won’t be expanding credit any time soon, but government-backed lenders have stepped in to fill the gap. The Federal Reserve has expanded its credit by $1.2 trillion over the past year; Fannie Mae and Freddie Mac have become the principal sources of mortgage finance. So maybe we can let the economy fix the banks instead of the other way around.

But there are many things that could go wrong.

It’s not at all clear that credit from the Fed, Fannie and Freddie can fully substitute for a healthy banking system. If it can’t, the muddle-through strategy will turn out to be a recipe for a prolonged, Japanese-style era of high unemployment and weak growth.

paul krugman.很多人说你是唱衰主义者，不是真本事，只有能够预测什么时候复苏才是真本事，只有能够彻底改变经济周期才是本事。其实，能够预测经济萧条多久，也是能够赚钱的。

我不知道，paul你是否卖空证券？如果你是一个政府的人，你不太可能能够这么说，如果你是一个企业的经济学家，那么你这么说也不得人心。

金融、石油、国防，三个遏制美国喉舌的关键，你不是研究这块的（你因国际贸易理论而获Nobel 经济学奖），但是你却一直在说金融，你说金融机构是国家担保的，这是肯定的；你说应该国有化现在的银行，怎么操作？你说应该政府再加大开支。

Crazy conspiracy theorists

So Rush Limbaugh, Bill O’Reilly, and Karl Rove all claim that the financial crisis was a liberal conspiracy, generated either by evil mastermind Chuck Schumer or by wily journalists.

Why does such stuff flourish? Probably because there is no punishment for it — as long as you’re on the right, and I mean right, side. Let Michael Moore point out, entirely correctly, the close ties between the Saudis and the Bush family, and he’s blasted as a crazy conspiracy theorist. On the other hand, let Donald Luskin suggest, in 2004, that George Soros is planning to engineer a financial crisis to defeat Bush, and he gets to publish front-page articles in the Washington Post Outlook section declaring that there isn’t a recession.

Latvia is the new Argentina (slightly wonkish)

I’ve been saying this for a couple of weeks, but Edward Hugh has the goods.

Hugh puts his finger, in particular, on one gaping hole in the logic of the opponents of devaluation. We can’t devalue, they say, because the Latvian private sector has a lot of debts in euros, and a devaluation would make it very hard for borrowers to service those debts. As Hugh points out, the proposed alternative — sharp wage cuts, and basically a major domestic deflation — will also make it hard to service those debts. In fact, I’d be a bit more specific than Hugh: other things equal, a nominal devaluation and a real depreciation achieved through deflation should have exactly the same effect on debt service (unless some of the debt is in lats rather than euros, in which case devaluation would do less damage.)

This looks like events repeating themselves, the first time as tragedy, the second time as another tragedy.

资本主义就怕别人不还钱。信用和委托代理关系。怕人不还钱，怕人不道德

Do we need the middle class?

Kevin Drum writes that

One way or another, there’s really no way for the economy to grow strongly and consistently unless middle-class consumers spend more, and they can’t spend more unless they make more.

This is a widely held view, and I’m as much in favor of a strong middle class as anyone. Nonetheless, I’d say that in terms of strict economics it’s wrong. There’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class — $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do. In fact, the prosperity of New York City in the last decade — largely supported off of super-salaried Wall Street types — is a demonstration that you can have an economy sustained by the big spending of the few rather than the modest spending of large numbers of people.

I DON'T AGREE WITH PAUL,beacause of OPPORTUNITY COST!

A whiff of inflationary grapeshot

Greg Mankiw suggests that the Fed respond to the crisis by committing to substantial inflation over the next decade. Great idea, wish I’d thought of it. Oh, wait …

Actually, Greg has arrived at the same conclusion I did more than a decade ago, when I tried to model the problems then facing Japan, and now facing us. As I pointed out back then, the essence of a liquidity trap is that the real interest rate is too high, even when the nominal rate is zero. So the theoretically “correct” answer, if you can swing it, is to create expected inflation, pushing the real rate down.

As I put it, perhaps too glibly, the central bank needed to “credibly promise to be irresponsible.”

The thing is, at the time my analysis was widely treated as somehow wild and crazy, even though it came straight out of an extremely buttoned-down theoretical model. Japan was supposed to suffer for its sins, not inflate its way out of them. I wonder if similar proposals for the United States will receive the same reception.

Update: I should add that my initial paper led to a fairly extensive literature on the subject of creating inflationary expectations. See, for example, the references here.