Paul Krugman’s Absurd Prescription for Spain’s Economy

ECB

Paul Krugman writes in his New York Times column:

Oh, wow — another bank bailout, this time in Spain. Who could have predicted that?

The answer, of course, is everybody. In fact, the whole story is starting to feel like a comedy routine: yet again the economy slides, unemployment soars, banks get into trouble, governments rush to the rescue — but somehow it’s only the banks that get rescued, not the unemployed.

So he’s against the Spanish bailout, right? Um, no. He also says:

Just to be clear, Spanish banks did indeed need a bailout….

So there’s nothing necessarily wrong with this latest bailout…

Krugman also supported the TARP bailouts in the U.S., it might be remembered. Now, for a bit more context here, we can turn to another Times article, the title of which sums up the situation nicely: “Bailout in Spain Leaves Taxpayers Liable for the Cost”. The report explains (emphasis added):

On Tuesday, Spain’s long-term borrowing costs soared to their highest level since the country joined the euro zone. Investors have apparently concluded that the rescue is potentially a much better deal for the banks and their shareholders than for the government, its taxpayers and bondholders.

Many details of the banking bailout remain to be resolved — including which of Europe’s rescue funds will supply the money. The one thing that is clear is that even though the money will be funneled to the banks, the government in Madrid will ultimately be responsible for guaranteeing that $125 billion, adding to the Spanish government’s already rising debt load.

That fact, more than any other, probably explains why there was heavy selling of Spanish government bonds on Monday and Tuesday.

So notice that what got Spain into this mess in the first place was too much borrowing and too much spending, too much debt. The Times offers a bit more on that:

The full bailout loan would add 10 percentage points to Spain’s debt, raising it to about 90 percent of gross domestic product this year.

And Fitch, the credit rating agency that downgraded Spain’s government debt nearly to junk status last week, warned Tuesday, that even if Spain used only 60 billion euros of the bailout loan, that would put Spain’s debt “on a trajectory to peak at 95 percent of G.D.P. in 2015.”

The article closes with by providing a view of the bailout from a person on the street:

“I don’t understand whether such a rescue will really save the banks, but what I do know is that the only ones who will be forced to tighten their belt again will be ordinary taxpayers,” Cristina Senac Amigo, a 42-year-old hairdresser, said Tuesday.

So coming back to Krugman, notice that while he is expressing his supposed concern for the ordinary citizens of Spain, he is openly proclaiming is his support for a bailout that puts these same citizens on the hook for the losses of the banks. Hmm…

So how does Krugman propose to help out the working class? Why, by offering the only thing he knows, of course! Inflation. He continues:

What’s striking, however, is that even as European leaders were putting together this rescue, they were signaling strongly that they have no intention of changing the policies that have left almost a quarter of Spain’s workers — and more than half its young people — jobless.

Most notably, last week the European Central Bank declined to cut interest rates.

Cutting interest rates, of course, means running the printing presses. And why do that? So Spain can borrow more at lower rates and go even further into debt.

Now, let’s review Paul Krugman’s record—which I review in my book Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis—and think about this a bit more. Following the collapse of the dot-com bubble, Krugman repeatedly called for the Fed to cut interest rates in order to create a housing bubble to replace it, which is exactly what happened. The bubble then burst, precipitating the financial crisis the world is still struggling to make its way out of, including by creating massive unemployment.

Another Times article reports on how the crisis precipitated by the bursting of the Fed-created housing bubble was responsible for “erasing almost two decades of accumulated prosperity” in the U.S. “The crash of housing prices directly accounted for three-quarters of the loss.” Family incomes “also continued to decline”. The brunt of it was born by “middle-class families”, who “had sustained the largest percentage losses in both wealth and income during the crisis”.

We witness the consequences of the monetary policy Paul Krugman advocated.

The banks, meanwhile, were bailed out, which Krugman supported. And now he repeatedly calls for more of the same policies that caused the crisis in order to cure it. More inflation. More debt. This, Krugman insists, will be good for the little people. He comments:

Put all of this together and you get a picture of a European policy elite always ready to spring into action to defend the banks, but otherwise completely unwilling to admit that its policies are failing the people the economy is supposed to serve.

Still, are we much better? America’s near-term outlook isn’t quite as dire as Europe’s, but the Federal Reserve’s own forecasts predict low inflation and very high unemployment for years to come — precisely the conditions under which the Fed should be leaping into action to boost the economy. But the Fed won’t move.

Isn’t it sweet how Krugman cares so much about “the people”? I’ve written previously on how

He’s a master of sounding like a critic of the banks while at the same time defending the institutionalized Federal Reserve monetary system and fractional-reserve banking system and arguing in favor of the status quo rather than serious reform….

Krugman is a shill for the banks, but he really is brilliant because he always manages to make it sound like he is their biggest critic. The man is a con artist whose whole purpose in life seems to be to maintain the status quo and protect the institutionalized confidence game that is our monetary and banking system from any serious scrutiny or reform.

As I’ve also commented previously:

In his blog yesterday, Paul Krugman wrote about how it isn’t the financial sector calling for QE3, because printing money to keep interest rates down isn’t beneficial to the banks, and how claims to the contrary are Orwellian because it is really the people calling for more inflation at the expenseof the financial institutions, because we understand how inflation good for us.

Read the whole post for context, but some relevant portions:

First, notice that Krugman basically admits that inflation hurts people on a fixed income from their retirement savings or a pension. Okay, so no argument there. Rather, his argument is most retired Americans rather depend on Social Security checks that are adjusted for inflation. Okay, so even if this argument convinced us that it was totally cool—or at least really no big deal—to rob old ladies living off of their retirement savings, where does the money come from upon which the larger number of people who collect Social Security depend come from? Does it grow on trees? Ultimately, of course, it must come from the taxpayers, who have to pay more taxes so those checks can keep up with inflation while their own purchasing power declines, who are, like the old ladies living off of their retirement savings, being robbed. Krugman’s argument is thus just an example of the broken window fallacy (one of those “agonizingly dumb, pound-your-head-on-the-table economic fallacies”).

Notice also that Krugman makes absolutely no attempt to actually refute the argument that the privileged sectors that receive the newly counterfeited money first benefit because they are able to spend it before the resulting rise in prices, while the rest of us (the 99%) don’t receive such a benefit, but rather must suffer the disadvantage of having our purchasing power eroded. Notice that Krugman doesn’t actually deny this, presumably because he can’t, since it is an accurate observation. Instead, his argument, where it is actually valid, basically just boils down to saying that the detriment to the 99% isn’t “enormous”. Well, okay, choose your adjective, but a benefit to the financial elite is still a benefit and a detriment to the rest of us is still a detriment, and this does not exactly lead to the conclusion that it’s the poor banks (sob) that are the “victims” of the Fed’s inflationary monetary policy (boo hoo).

So, to sum up, Krugman complains that the banks are getting bailed out but “the people” are not, and yet he supports the bailouts that puts the same taxpayers he says he wants to help on the hook for the losses of the banks while perpetually arguing for more inflation to solve the devastating consequences of the Fed’s inflationary monetary policy that he advocated that created the housing bubble that precipitated the global financial crisis in the first place.

Somebody give this man a Nobel Prize. Oh, wait, he’s already got one…