Paul Krugman: Liquidity trap makes future ‘more or less speculation’

Will Hutton has a pretty good interview with Paul Krugman in the Guardian newspaper.  The exchange is quite long, so it gives you a fairly broad understanding of Krugman’s view on the global economy and specific country economies.  What I found especially interesting was Krugman’s admission that we are essentially flying blind.

The Federal Reserve has hit the zero bound just as Japan had done nearly a decade earlier.  At this point, traditional monetary policy has no effect – we are pushing on a string.  What comes next, nobody knows and Krugman has said as much.

The thing about Japan, as with all of these cases, is how much people claim to know what happened, without having any evidence. What we do know is that recessions normally end everywhere because the monetary authority cuts interest rates a lot, and that gets things moving. And what we know in Japan was that eventually they cut their interest rates to zero and that wasn’t enough. And, so far, although we made the cuts faster than they did and cut them all the way to zero, it isn’t enough. We’ve hit that lower bound the same as they did. Now, everything after that is more or less speculation.

Read the rest here.

  1. Adam says

    Krugman: “And, so far, although we made the cuts faster than they did and cut them all the way to zero, it isn’t enough”

    “Isn’t enough”… hmmm. What bothers me about Krugman is that he never seems to consider the possibility that we’re doing far too much intervention, instead of too little.

    He always starts at “we need to spend a ton, but need to do it better”, and never considers that the best remedy might be not interfering at all.

    Every day I’m leaning more towards the Austrian school. Their answer to Japan seems to be the most obvious and make the most sense: The banks and economy never recovered because the government intervened, never allowing the market to bottom as required by the invisible hand. Inefficiency and moral hazards have been rampant ever since.

    1. Graphite says

      Of course, Krugman conveniently leaves out the part where Japan ran their public debt up to 100% of GDP with a lot of Keynesian-style public works spending (which Krugman recommends for the current crisis, natch), none of which got them anywhere either.

      In fact, this little inconvenient artifact of history may be precisely the reason why Krugman seems to be starting to try and spin Japan’s fate as actually “the best outcome that could be have been achieved.” Voltaire’s Pangloss certainly has his modern-day adherents in the field of economics.

      1. Edward Harrison says

        Graphite, Krugman does argue a very one-sided position that leaves out salient points like the ones you and Adam mention and I’m sure aitrader agrees. If you look at it from a Richard Koo “Balance Sheet recession” point of view, then the huge spending by Japan was necessary to prevent a repeat of the 1930s there. So, one could argue – and I would agree – that some increase in fiscal spending is necessary to prevent a spiral down for an economy caught up in the dynamics of debt deflation.

        This is where I have parted company with the Austrians. Really, there are few good policy alternatives here. The moral, of course, is that we should never allow such a massive build-up in debt to start with.

  2. aitrader says

    And the crowd roars and the markets skyrocket. Jesus returns, walks on water, turns it into wine and everyone parties. Good times are here again. Quantitative easing begets a liquidity bounty that floats the S&P and every other index through the roof. Cars run on soda pop and bubble gum. Everyone gets their own personal TARP program and becomes an instant gazillionaire!

    Or is it all just a dream…?

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