Monday, July 5, 2010

Paul Krugman vs Niall Ferguson: You Decide

Here is a great debate that was on CNN that featured Princeton's Paul "Keynesian" Krugman versus Harvard's Niall Ferguson.

There are basically two options that Congress has when it comes to fighting our own version of The Great Depression.

The first one is the "Keynesian" approach where we continue to throw money out of helicopters hoping that it will somehow stimulate the economy.

The second option is the "austerity" approach that Niall Ferguson so brilliantly explains below.  This option includes massive spending cuts combined with tax reform that will help stimulate businesses to start hiring again.

We have seen 3 years of the Keynesian approach and it's become clearly evident that the stimulus approach been a catastrophic failure.  As Ferguson explains:  We tried this Keynesian approaching the 1970's and we ended up with a lost decade. 

Niall also worries that continued "Keynesian" spending will force the world to demand higher interest rates on their treasury holdings. 

When risk rises(in treasuries the risk would be a US default) you are forced to pay buyers a premium for taking the risk.  This is how markets work.  This is why many risky corporate bonds pay 8% interest rates.

Ferguson had an excellent analogy on the "safe haven" status of US Treasuries.  He explains that treasuries are a safe haven just like Pearl Harbor was in WWII meaning things are safe until something changes. 

Greece and Spain were safe until one day the bond market decided that their soaring deficits made them unsafe.  This change in perception happened practically overnight.  Pearl Harbors "safe haven" status was destroyed in a matter of hours.

There is no reason to think "it's different here".  Realtors told us the same thing about real estate and we all know how that worked out. 

If we continue to increase our deficits buyers of our treasuries will demand higher rates to hold them.  This is a fact if we continue down our bailout path.

Paul argues that the $800 billion bailout was too small and calls for another one before we give up on the Keynesian approach.

Hey Paul you know what?  I am tired of bailouts and cheap money: 

I am tired of making 0% on CD's. 

I am tired of watching my tax dollars get used to bailout billionaire bankers. 

I am tired of worrying that the banking system is going to fail because we are spending too much.

I am tired of worrying about how much my taxes will rise next year in order to pay for this Keynesian mess.

In fact, I am just plain tired of all of it!

Remember Albert Einstein's famous quote: "Doing the same thing over and over again and expecting different results is the definition of insanity."

Maybe it's time for Krugman to check himself into an insane asylum. 

Enjoy the video:

4 comments:

Anonymous said...

Whine, whine, whine. Basically what you've said is "I wanna keep my money and certainly don't want it to be used to inprove the roads and bridges, or help an artist or single parent get insulation in their house" - 2 projects being funded by the stimulus.

"I certainly don't want to make sure I'm informed about just what the stimulus money is doing."

What a jerk. I suppose you go to church on Sunday, too?

Jeff said...

Ha!

First of all we can't afford any stimulus but I won't even go there.

Second of all:

I am all for money being used to create jobs via construction.

However, you forget about where most of the money went.

What about all of the backdoor bailouts to Goldman Sachs via AIG?

Those artists shouldn's have bought the house if they couldn't afford it.

Why should I have to pay for other peoples mistakes?

You are way out of line with your thinking and I will whine until I see reform.

Without dissent there is never change.

You are pretty wharped if you think what the government is doing is the right thing to do.

Do you go to church on Sunday or are you too busy looking for your handout?

getyourselfconnected said...

What could stimulus money do when not stolen by the states through unions and public worker payouts? Don't get me started, here in Mass we got billions in "put america to work" funds and only about 4 projects were even put in place as their price tag, surprise!, ballooned sky high when free money is involved. I would perhaps be moved to support government spending for various crap, but thats not how the real world works.

Jeff said...

Get

Yep.

The money just fuels more corruption and greed.

Can't wait until it all comes to an end when the bank account is dry.