Tuesday, September 22, 2015

Multiple Levels of Krugman Confusion

I am really trying to wrap my head around this Paul Krugman comment.

 He writes:
Incidentally, this also means that the common claim that QE is a giveaway to bankers is the opposite of the truth; to the extent that journalists with close ties to bankers spread this story, it’s Orwellian. Remember, the Fed isn’t lending money at low interest to banks — banks, with their $2.5 trillion (!) of excess reserves, are lending vast sums at low interest to the Fed.
Why would "journalists with close ties to bankers" spread the story that QE is a giveaway to bankers?

Krugman has this completely backwards.

 "Journalists with close ties to bankers" spread the opposite, that QE was necessary to save the financial system.

But, it is a giveaway. Krugman is just looking at one sliver of a much wider story. The full story is that banks received money from the Fed for junk mortgage security paper and other paper that was often worth close to nothing and then deposited the proceeds with the Fed where they earn, without risk (and capital charges), a rate far higher than the Fed funds rate.

 If I was a bank, I would do that trade every day, which is exactly what Lloyd Blankfein and Jamie Dimon did.



  1. I think the format of your excellent explanation should precede every Austrian explanation. Cutting through the purposeful complexity of the system, we find the ubiquitous a) transfer of purchasing power/subsidy and b) price distortions. People simply do not get this about either the system or what Austrians are saying about it. People need to get this. The subsequent "macro" impact of a particular event is important but the moral outrage of "a" and "b" is always present and needs to be understood by all. It is not.

  2. Progressives always struggle to explain away the reality that to keep their policies working, crony capitalism and policies favoring capital is a required element. Large enterprises have known this for over century now.

  3. Did you see what he did with his argument? He said that the people telling the truth are "Orwellian". In the next breath, he tells us that giving to the bankers is really taking from the bankers. Next he will tell us that ignorance is strength, and war is peace. Or has he already said those things, just in different words? ( ie his promoting of the broken window fallacy)