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Friday, April 8, 2016

Paul Krugman, "Sanders Over the Edge": Krugman Sinks into a Chasm of Hypocrisy



In a New York Times op-ed entitled "Sanders Over the Edge," Paul Krugman criticizes Bernie Sanders's hostility to big banks. Krugman writes:

"The easy slogan here is 'Break up the big banks.' It’s obvious why this slogan is appealing from a political point of view: Wall Street supplies an excellent cast of villains. But were big banks really at the heart of the financial crisis, and would breaking them up protect us from future crises?

Many analysts concluded years ago that the answers to both questions were no. Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial; the crisis itself was centered not on big banks but on 'shadow banks' like Lehman Brothers that weren’t necessarily that big."

Wrong. As observed by Ron Hera in a May 11, 2010 Business Insider article entitled "Forget About Housing, The The Real Cause Of The Crisis Was OTC Derivatives" (my emphasis in red):

"The global financial crisis that began in 2008 has been attributed to sub-prime mortgage lending and mortgage backed securities (MBSs), such as collateralized debt obligations (CDOs), which were revealed as toxic assets. While the root cause of the financial crisis is assumed to have been the residential real estate asset price bubble, the underlying systemic risk, and the primary reason for the 'too big to fail' doctrine whereby governments were compelled to save financial institutions at any cost, lies in over the counter (OTC) derivatives. The suspension of the US Financial Accounting Standards Board (FASB) mark-to-market rule in 2009 preserved the value of bank balance sheets, i.e., of their mortgage portfolios, but what was of far greater importance was that it prevented triggering the conditions of thousands of OTC derivatives contracts, such as credit default swaps (CDS), that would have wiped out virtually all of the largest banking institutions in the world.

. . . .

In August 2007, central banks took emergency action to head off a global credit crisis, but their efforts were in vein. By June 2008, the notional value of OTC derivatives was more than $683 trillion, after more than doubling in the preceding two years. The event that Warren Buffett anticipated in 2002 occurred on Sunday, September 14th, 2008, when Lehman Brothers filed for bankruptcy, the largest corporate bankruptcy in US history. The failure of Lehman Brothers set off a derivatives chain reaction affecting Lehman’s counterparties and directly caused the credit crisis. Since it is impossible for market actors to know what risks or how much leverage their counterparties have, OTC derivatives render credit ratings meaningless. The flow of credit and lending activity halted on a worldwide basis, causing sharp contractions in economic activity and deflation."

The 2008 crisis was not centered on big banks? Apparently Krugman has forgotten what happened to Citigroup and Wachovia as a consequence of this disaster.

Krugman goes on to say in his opinion piece:

"It’s one thing for the Sanders campaign to point to Hillary Clinton’s Wall Street connections, which are real, although the question should be whether they have distorted her positions, a case the campaign has never even tried to make."

Well, if Clinton were to disclose the transcripts of her speeches to some of the world's largest financial institutions, maybe we would be better able to understand her positions, which, owing to her lack of transparency, remain unknown.

By the way, a pity Krugman does not relate in his opinion piece to the testimony two days ago of Gene L. Dodaro, Comptroller General of the United States, before the US Senate's Committee on the Budget:

"Over the long term, at the federal level, the imbalance between spending and revenue that is built into current law and policy is projected to lead to continued growth of debt held by the public as a share of GDP. This situation—in which debt grows faster than GDP—means the current federal fiscal path is unsustainable. Today, debt held by the public as a share of GDP remains well above the post-war historical average of 43 percent since 1946. At the end of fiscal year 2015, it reached about 74 percent of GDP—the second highest (after fiscal year 2014, when it was slightly higher) since 1950."

Needless to say, I have never been awarded a Nobel Prize in economics, but unless I am entirely mistaken, it seems that the Comptroller General is hinting that the US is headed for insolvency. But why should that worry Paul, who would only have the federal government continue its deficit spending spree.

1 comment:

  1. Did Krugman ever criticize the nomination of Tim Geithner as SecTreas?

    Geithner had oversight of Lehman Bros and completely failed to stop that tipping point...

    I just wish someone would point out the big banks have had zero percent interest rates while still charging 20% on credit cards to the most credit-worthy consumers. Reason enough to re-instate Glass-Steagall, which is what Bernie might actually be trying to say, except his way is more likely to draw the Ron Paul faction...has Bernie yet said (while wondering where his subway tokens are stashed) "the Fed is secretly owned by foreign bankers"?

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