Category: Paul McCulley

Be careful what you wish for

In August, 2002, nineteen months into Alan Greenspan’s experiment in easing credit to contain the fallout from a bursting tech bubble, a New York Times columnist and so-called economist weighed in with this bit of wishful thinking:

The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Although the Maestro was optimistic, our economic guru had his doubts:

Despite the bad news, most commentators, like Mr. Greenspan, remain optimistic. Should you be reassured?

[W]ishful thinking aside, I just don’t understand the grounds for optimism. Who, exactly, is about to start spending a lot more? At this point it’s a lot easier to tell a story about how the recovery will stall than about how it will speed up. And while I like movies with happy endings as much as the next guy, a movie isn’t realistic unless the story line makes sense.

If you haven’t guessed, our opinion writer was Paul Krugman and he managed to get it wrong on two counts. First, the Greenspan medicine was successful in stimulating consumption and blowing a housing bubble for the ages. Second, Krugman’s recommended cure ended up being much worse than the disease.

Has Mr. Krugman (and Messrs. McCulley and Greenspan for that matter) faded into oblivion for his fatal advice? Not exactly. Last October, in the depths of a stock market collapse he failed to forecast, Paul Krugman received the Nobel Prize in Economics. (The award is given by Sweden’s central bank and by coincidence Krugman is a long-time supporter of fiat money.)

Krugman’s modus operandi is simple: during the bust always advocate “stimulus” in the form of government spending and cheap credit via the Fed. When the artificial boom arrives, take credit and assume it rests on a solid foundation. When the fake boom inevitably turns to bust, blame it on lax regulation and “greed.”

On March 20 of this year, Krugman cheered the Fed’s herculean attempts to inflate at any cost:

In effect, [the Fed’s] printing $1 trillion of money, and using those funds to buy bonds. Is this inflationary? We hope so! The whole reason for quantitative easing is that normal monetary expansion, printing money to buy short-term debt, has no traction thanks to near-zero rates. Gaining some traction — in effect, having some inflationary effect — is what the policy is all about.

Memo to all interventionists and inflationists: Be careful what you wish for.

Memo to fellow contrarians: When the bubble blowers and their apologists are still employed and appearing in the Mainstream Media, the secular bear market remains in its early stages.

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