The Great Abdication
By PAUL KRUGMAN
Published: June 24, 2012
Among economists who know their history, the mere mention of certain years evokes shivers. For example, three years ago Christina Romer,
then the head of President Obama’s Council of Economic Advisers, warned
politicians not to re-enact 1937 — the year F.D.R. shifted, far too
soon, from fiscal stimulus to austerity, plunging the recovering economy
back into recession. Unfortunately, this advice was ignored.
Related News
-
Pressure for Action at Brussels Meeting (June 25, 2012)
But now I’m hearing more and more about an even more fateful year. Suddenly normally calm economists are talking about 1931, the year everything fell apart.
It started with a banking crisis in a small European country (Austria).
Austria tried to step in with a bank rescue — but the spiraling cost of
the rescue put the government’s own solvency in doubt. Austria’s
troubles shouldn’t have been big enough to have large effects on the
world economy, but in practice they created a panic that spread around
the world. Sound familiar?
The really crucial lesson of 1931, however, was about the dangers of
policy abdication. Stronger European governments could have helped
Austria manage its problems. Central banks, notably the Bank of France
and the Federal Reserve,
could have done much more to limit the damage. But nobody with the
power to contain the crisis stepped up to the plate; everyone who could
and should have acted declared that it was someone else’s
responsibility.
And it’s happening again, both in Europe and in America.
Consider first how European leaders have been handling the banking
crisis in Spain. (Forget about Greece, which is pretty much a lost
cause; Spain is where the fate of Europe will be decided.) Like Austria
in 1931, Spain has troubled banks that desperately need more capital,
but the Spanish government now, like Austria’s government then, faces
questions about its own solvency.
So what should European leaders — who have an overwhelming interest in
containing the Spanish crisis — do? It seems obvious that European
creditor nations need, one way or another, to assume some of the
financial risks facing Spanish banks. No, Germany won’t like it — but
with the very survival of the euro at stake, a bit of financial risk should be a small consideration.
But no. Europe’s “solution” was to lend money to the Spanish government,
and tell that government to bail out its own banks. It took financial
markets no time at all to figure out that this solved nothing, that it
just put Spain’s government more deeply in debt. And the European crisis
is now deeper than ever.
Yet let’s not ridicule the Europeans, since many of our own policy
makers are acting just as irresponsibly. And I’m not just talking about
Congressional Republicans, who often seem as if they are deliberately
trying to sabotage the economy.
Let’s talk instead about the Federal Reserve. The Fed has a so-called
dual mandate: it’s supposed to seek both price stability and full
employment. And last week the Fed released its latest set of economic
projections, showing that it expects to fail on both parts of its
mandate, with inflation below target and unemployment far above target
for years to come.
This is a terrible prospect, and the Fed knows it. Ben Bernanke, the
Fed’s chairman, has warned in particular about the damage being done to
America by the unprecedented level of long-term unemployment.
So what does the Fed propose doing about the situation? Almost nothing.
True, last week the Fed announced some actions that would supposedly
boost the economy. But I think it’s fair to say that everyone at all
familiar with the situation regards these actions as pathetically
inadequate — the bare minimum the Fed could do to deflect accusations
that it is doing nothing at all.
Why won’t the Fed act? My guess is that it’s intimidated by those
Congressional Republicans, that it’s afraid to do anything that might be
seen as providing political aid to President Obama, that is, anything
that might help the economy. Maybe there’s some other explanation, but
the fact is that the Fed, like the European Central Bank, like the U.S.
Congress, like the government of Germany, has decided that avoiding
economic disaster is somebody else’s responsibility.
None of this should be happening. As in 1931, Western nations have the
resources they need to avoid catastrophe, and indeed to restore
prosperity — and we have the added advantage of knowing much more than
our great-grandparents did about how depressions happen and how to end
them. But knowledge and resources do no good if those who possess them
refuse to use them.
And that’s what seems to be happening. The fundamentals of the world
economy aren’t, in themselves, all that scary; it’s the almost universal
abdication of responsibility that fills me, and many other economists,
with a growing sense of dread.
Some Comments
RT1
Princeton, NJ
So you're saying that the banking systems (which by design don't really have much money of their own) have to be given even more money (by national governments) with few strings attached in order to avoid a worldwide financial meltdown? And seeing as governments don't technically have any money of their own they'll borrow it paying for it with taxation of their citizens. At what point are the banks taken to task and the managers held personally accountable? Talk about Ponzi schemes. I don't see much difference between Madoff and the lions of the banking industry other than these brilliant money managers manage to stay right on the bright line of the law.
It strikes me that they are not too big to fail. They are too big to succeed.
June 25, 2012 at 3:31 p.m.
jb
Brooklyn
Here's my scenario of how this could play out in the US.
Romney gets elected.
GOP does an about face with regard to attitude on Fed policies.
Dems attempt for a short time to play the same game GOP has been playing, but eventually put the welfare of country above partisan interests.
Economy improves by essentially implementing strategy Obama briefly tried to push.
Deficit/debt hawks do an about face.
GOP gets credit for turning around economy.
June 25, 2012 at 3:31 p.m.
The Doctor
Vancouver BC
I am an outsider - I do not play the Republican vs Democrat game.
Mr. Krugman, day after day we have to read how you suggest that more Government spending is the solution. But where were you when the World economic prospects looked brighter - were you on your white steed cautioning social democracies to curtail chronic overspending? If the US did not already have massive debt prior to 2008, the great recession would never have happened.
The living standard of the West has artificially been elevated for decades by Government overspending, fueled by politicians reflecting the collective greed of the voters. That is the obvious problem here. And you keep on harping about the short term symptomatic solution, when a lot of us wish to hear about the cure on the long run. And we are not necessarily Republicans or Democrats.
June 25, 2012 at 3:31 p.m.
SP
Singapore
"Doctor," the Republican vs Democrat contest is not a game. It's deadly serious and it affects all of us. At this stage in U.S. politics, only completely ignorant people believe that the intellectually and morally superior pose is to stay above the fray and regard the two parties with equal disdain.
Your identification of the global financial crisis with social democracies and government spending is a dead giveaway that you are in that completely ignorant class. The traditional social democracies in Europe that right-wingers loved to ridicule were Germany, France and the smaller Northern Europe countries. Spain, on the other hand, had a right-wing government and Ireland was pursuing fiscal policies that were applauded by the conservatives before the crisis. Guess who's doing well and who's doing badly now? The euro crisis, and also the global financial crisis were the direct result of reckless lending and leveraging by banks. What on earth did U.S. government debt have to do with it?
June 25, 2012 at 9:19 p.m.
mannypons
Wilkes-Barre
What would you Mr. Krugman recommend to fix this crisis if you are the chairman of the FED?
June 25, 2012 at 3:31 p.m.
dsapp
Kentucky
Obama is part of the problem; he refuses to be part of the solution because he wants to continue his ridiculous scheme to redistribute the wealth.
June 25, 2012 at 3:31 p.m.
Sleater
Chicago
Round the carousel turns with the same plaints, but no discussion of what's really at stake. The rentier/asset-based class loves things as they are. They hold the power, and the money, and want more of both. Austerity is to their benefit, not the majority's. Destroying unions and the social safety net is to their benefit, not the majority's. Keep inflation low and unemployment high to depress wages and increase profits is to their benefit, because corporations are now sitting on record amounts of cash, but it's not benefitting the 99%. It isn't just about the Fed, or the GOP, or even those Democrats who collude to do nothing, or President Obama, who is terrified of angering his Wall Street backers (who've now abandoned him for the more eager puppet Mitt Romney), it's about the people who have power and wealth, and are willing to see the world pushed to the point of revolution because they are unwilling to share either. That's a morality play, but not the one we hear brayed about on the TV news day in and day out.
June 25, 2012 at 3:31 p.m.
Robert Baesemann
Los Angeles CA
Wait a minute, aren't we in a liquidity trap? Doesn't that mean the FED can do little or nothing to stimulate employment? The FED has committed to low for interest rates for the foreseeable future. Can it do anything more?
June 25, 2012 at 3:31 p.m.
Ion Lacatus
Romania
Regarding the paragraph:
"...Europe’s “solution” was to lend money to the Spanish government, and tell that government to bail out its own banks... and put Spain’s government more deeply in debt. "
I would rephrase that a little:
"... lend money to the Spanish government, and tell that government to bail out its own banks ... so that they can pay their debt to German banks".
For years the both Spanish and German banks made money hand over fist. For them prudence or even decency were strange words from another planet. Now the Spanish government will torture its own population to reward the bankers' greed. And the Spanish government is not the only one doing that. And we're told that doing otherwise would present a moral hazard.
Can these people even spell moral?
June 25, 2012 at 3:31 p.m.
Some Comments
RT1
Princeton, NJ
So you're saying that the banking systems (which by design don't really have much money of their own) have to be given even more money (by national governments) with few strings attached in order to avoid a worldwide financial meltdown? And seeing as governments don't technically have any money of their own they'll borrow it paying for it with taxation of their citizens. At what point are the banks taken to task and the managers held personally accountable? Talk about Ponzi schemes. I don't see much difference between Madoff and the lions of the banking industry other than these brilliant money managers manage to stay right on the bright line of the law.
It strikes me that they are not too big to fail. They are too big to succeed.
June 25, 2012 at 3:31 p.m.
jb
Brooklyn
Here's my scenario of how this could play out in the US.
Romney gets elected.
GOP does an about face with regard to attitude on Fed policies.
Dems attempt for a short time to play the same game GOP has been playing, but eventually put the welfare of country above partisan interests.
Economy improves by essentially implementing strategy Obama briefly tried to push.
Deficit/debt hawks do an about face.
GOP gets credit for turning around economy.
June 25, 2012 at 3:31 p.m.
The Doctor
Vancouver BC
I am an outsider - I do not play the Republican vs Democrat game.
Mr. Krugman, day after day we have to read how you suggest that more Government spending is the solution. But where were you when the World economic prospects looked brighter - were you on your white steed cautioning social democracies to curtail chronic overspending? If the US did not already have massive debt prior to 2008, the great recession would never have happened.
The living standard of the West has artificially been elevated for decades by Government overspending, fueled by politicians reflecting the collective greed of the voters. That is the obvious problem here. And you keep on harping about the short term symptomatic solution, when a lot of us wish to hear about the cure on the long run. And we are not necessarily Republicans or Democrats.
June 25, 2012 at 3:31 p.m.
SP
Singapore
"Doctor," the Republican vs Democrat contest is not a game. It's deadly serious and it affects all of us. At this stage in U.S. politics, only completely ignorant people believe that the intellectually and morally superior pose is to stay above the fray and regard the two parties with equal disdain.
Your identification of the global financial crisis with social democracies and government spending is a dead giveaway that you are in that completely ignorant class. The traditional social democracies in Europe that right-wingers loved to ridicule were Germany, France and the smaller Northern Europe countries. Spain, on the other hand, had a right-wing government and Ireland was pursuing fiscal policies that were applauded by the conservatives before the crisis. Guess who's doing well and who's doing badly now? The euro crisis, and also the global financial crisis were the direct result of reckless lending and leveraging by banks. What on earth did U.S. government debt have to do with it?
June 25, 2012 at 9:19 p.m.
mannypons
Wilkes-Barre
What would you Mr. Krugman recommend to fix this crisis if you are the chairman of the FED?
June 25, 2012 at 3:31 p.m.
dsapp
Kentucky
Obama is part of the problem; he refuses to be part of the solution because he wants to continue his ridiculous scheme to redistribute the wealth.
June 25, 2012 at 3:31 p.m.
Sleater
Chicago
Round the carousel turns with the same plaints, but no discussion of what's really at stake. The rentier/asset-based class loves things as they are. They hold the power, and the money, and want more of both. Austerity is to their benefit, not the majority's. Destroying unions and the social safety net is to their benefit, not the majority's. Keep inflation low and unemployment high to depress wages and increase profits is to their benefit, because corporations are now sitting on record amounts of cash, but it's not benefitting the 99%. It isn't just about the Fed, or the GOP, or even those Democrats who collude to do nothing, or President Obama, who is terrified of angering his Wall Street backers (who've now abandoned him for the more eager puppet Mitt Romney), it's about the people who have power and wealth, and are willing to see the world pushed to the point of revolution because they are unwilling to share either. That's a morality play, but not the one we hear brayed about on the TV news day in and day out.
June 25, 2012 at 3:31 p.m.
Robert Baesemann
Los Angeles CA
Wait a minute, aren't we in a liquidity trap? Doesn't that mean the FED can do little or nothing to stimulate employment? The FED has committed to low for interest rates for the foreseeable future. Can it do anything more?
June 25, 2012 at 3:31 p.m.
Ion Lacatus
Romania
Regarding the paragraph:
"...Europe’s “solution” was to lend money to the Spanish government, and tell that government to bail out its own banks... and put Spain’s government more deeply in debt. "
I would rephrase that a little:
"... lend money to the Spanish government, and tell that government to bail out its own banks ... so that they can pay their debt to German banks".
For years the both Spanish and German banks made money hand over fist. For them prudence or even decency were strange words from another planet. Now the Spanish government will torture its own population to reward the bankers' greed. And the Spanish government is not the only one doing that. And we're told that doing otherwise would present a moral hazard.
Can these people even spell moral?
June 25, 2012 at 3:31 p.m.
- R. Karch
- Silver Spring, Maryland
The
idea be behind doing 'stimulus' spending, also the idea of bailing out
the banking industry directly, instead of loaning money to governments,
either is correct in a way. But that is only because the economies need
help, are in special need of cash.
However we also know Europe lacks a Federal Reserve committed to helping toward full employment as well as restraining inflation. So even more than in U.S., Europe needs some kind of stimulus.
But in the U.S., the 'quantitative easing', the buying of T Notes and issuance of cash, may perhaps be done in a better way. And that better way should take account of the fact it is not the banks that need the money. The banks are already owed money, and bailing them out costs gov't money. Why not instead bail out directly the general population, by distributing money? Reason: it does nothing to relieve debts directly, since the general population cannot be directed how to spend.
And so if not to the banks, where? The money should go to holders of capital or land, and on condition that a portion of that money goes:
1) to repay bank loans ; 2) to forgive debts from all their debtors.
And unlike with direct 'stimulus', a 'fiscal' policy, this would require no expenditures by governments. It would be printing, creating new money, and would thus be: new 'monetary' policy, and a kind of 'quantitative easing' .
It needs being implemented as a solution to the economic perils confronting nations' economies today.
However we also know Europe lacks a Federal Reserve committed to helping toward full employment as well as restraining inflation. So even more than in U.S., Europe needs some kind of stimulus.
But in the U.S., the 'quantitative easing', the buying of T Notes and issuance of cash, may perhaps be done in a better way. And that better way should take account of the fact it is not the banks that need the money. The banks are already owed money, and bailing them out costs gov't money. Why not instead bail out directly the general population, by distributing money? Reason: it does nothing to relieve debts directly, since the general population cannot be directed how to spend.
And so if not to the banks, where? The money should go to holders of capital or land, and on condition that a portion of that money goes:
1) to repay bank loans ; 2) to forgive debts from all their debtors.
And unlike with direct 'stimulus', a 'fiscal' policy, this would require no expenditures by governments. It would be printing, creating new money, and would thus be: new 'monetary' policy, and a kind of 'quantitative easing' .
It needs being implemented as a solution to the economic perils confronting nations' economies today.
- N. Ray
- North Carolina
No
one will do anything about solving the problem because, so far, the
social safety nets are saving victims from the most extreme deprivation,
like starvation and widespread homelessness.
- SP
- Singapore
So we should shred the safety net and allow people to starve in order to reduce starvation?
- Neal Kluge
- Washington DC
PK
advocates borrowing from the Chinese and out great grandchildren so we
may live well now.He should use his intelligence and hard work to tell
us how to do well without borrowing.....
- LVL
- Maryland
Thank you Prof. Krugman, NY Times, and readers who comment.
I think that we need to introduce more understanding of the morality in our political and economic discussions. The new book "What money can't buy" by the author Michael J. Sandel argues that economists have largely missed the moral dimension of individual, corporate, and governmental policy choices.
The consequences are not just economic but moral too as more people lose lives and livelihoods.
I think that we need to introduce more understanding of the morality in our political and economic discussions. The new book "What money can't buy" by the author Michael J. Sandel argues that economists have largely missed the moral dimension of individual, corporate, and governmental policy choices.
The consequences are not just economic but moral too as more people lose lives and livelihoods.
- Free Bear
- NY
If
the re-enact of 1931 is going to happen, it is because this is fate. In
a democracy society like us, public get what they deserve for their
collective behavior.
I hope I am wrong but it looks like that the doomsday is inevitable.
I hope I am wrong but it looks like that the doomsday is inevitable.
- DannyK
- Hong Kong
Ben
Bernanke has certainly abdicated his leadership role to push for more
needed stimulus. This is unfortunate especially as he is a scholar of
the Great Depression and should know the lessons well. His support for
earlier stimuli was important but I don't know what has made him gun shy
these days.
I really hope he's not pulling back because he fears for his job. The job won't be worth a dime if he doesn't push for what he truly believes needs to be done.
I really hope he's not pulling back because he fears for his job. The job won't be worth a dime if he doesn't push for what he truly believes needs to be done.
- David H. Eisenberg
- Buchanan, Va.
Let
me guess - something kind of like a one world government (OWG) run by
philosopher-kings (resembling by eduation and inclination - the
professor) dedicated to selflessly acting on our behalf and making sure
that nothing which should fail, actually fails. They will be well versed
in the official interpretation of the "Great Depression" which does not
ever discuss Sec'y of the Treasury, Morgenthau's admission that they
spent and spent, but it didn't work. Yes, it will be necessary to borrow
your money to support the dignity of the selfless philosopher-kings'
(and staffs) so they can concentrate on deciding which industries get
supported and how much soda you should drink at one sitting in order
that everyone gets paid back. Well, not really your money - they mean
the portion of their money that is your "fair share" earned by
cooperation with OWG. If you dissent, well, then you are selfish and
only out for yourself. Of course, this is all only until the "financial
emergency" is over (archaic English - "never"). Fortunately, the
philosopher-kings will educate us so that we can understand the new
meaning of words like "policy abdication," "limit the damage," "contain
the crisis" or "assume some of the financial risks." Because, otherwise,
they might also "sound familiar" to us.
- greenie
- Vermont
I'm
not an economist, but to me it seems obvious that the euro was a
perhaps noble, but surely misguided idea. How can all of the euro
countries have different monetary policies, different financial
strategies and such different ways of handling debt yet use the same
currency? Oh yes, I forgot, it is quite the same here in the states. But
at least here we have the federal government who will bail out
individual states and their banks when necessary. And as we
theoretically are united under the same flag, such bailouts are "all in
the family". This is not the case in Europe.If Germany bails out Greece
or Spain, they are sending money to another country;part of the EU for
sure, but still not quite "family".
Please, Please, Please, keep talking about this. There is no excuse for this abdication of responsibility.