Monday, December 24, 2012

A Very Poor Economic Decision By Paul Krugman

In March 2003, Paul Krugman wrote:

 [...]last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.... 
How will the train wreck play itself out? Maybe a future administration will use butterfly ballots to disenfranchise retirees, making it possible to slash Social Security and Medicare. Or maybe a repentant Rush Limbaugh will lead the drive to raise taxes on the rich. But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. 
Here are fixed rate mortgage interest rates in March 2003:

30 year rate 5.75%, 10 year rate 5.07%

In December 2012:

30 year rate 3.34%, 10 year rate 2.66%

Ouch.  He made his interest payments much more expensive than they needed to be by misunderstanding the 10-year direction of interest rates.

Krugman did leave himself a bit of an out, he went on to say:
With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.
So he might argue that we are in a Japanese-style deflation, even though we haven't actually had a deflation, just a slowdown in price inflation (remember, this is Krugman)---but ultimately what this means is that Krugman wasn't only wrong about the long-term direction of interest rates (over 10 years), but he did not in 2003 see the major downturn in the economy that would develop a few years later. Even though he has taken Peter Schiff to task on his forecasting skills, despite Schiff in 2003 warning about the  developing crisis---and Krugman clearly not having a clue how things would develop.

(ht Greg Mankiw)


  1. That's a pricey mistake when your mortgage is nearly $2 million:

  2. There's a good chance that he has refinanced at a lower rate unless he really is as stupid as some of us think.

  3. So he was terrified about what would happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits under a Republican, but now that a Democrat is in office, and the deficits are twice as big, he thinks that government spending and the budget deficits should be BIGGER? Does anybody still take this partisan hack seriously?

  4. The man is a walking contradiction and an obvious political hack. The way he bends and contorts economics to form into his liberal bias is anything but professional. In '03 he warns of large deficits and government spending and today he's all the rave about them. What a loon. But, he'll probably be the next Fed chairman.

  5. I love the quote about "irresponsible governments" printing money to "pay current bills and to inflate away debt." Yeah, Krugman is a political hack alright.