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Krugman Vs. Feldstein on Interest Rates and the Fed
Paul Krugman has been taken shots at Martin Feldstein over this article (Link). Feldstein made the case that the Fed is keeping interest rates artificially low - and sooner or later this will cause a problem. The issue is whether the Fed is creating a new bubble. Feldstein says, "Yes". Krugman says "N0". A few lines from PK on this topic:
I really don’t understand how Marty Feldstein can look at these facts and conclude that the only way to explain low interest rates is to imagine that the Fed is imposing massive market distortions.
(Feldstein) then grabs hold of an answer to his imagined puzzle — it must be the quantitative easing! — that assigns vastly more importance to Fed bond purchases than I think can be justified by any evidence I see.
The notion that rates are low only because the Fed is holding them down by “gobbling” up debt is clearly refuted by international evidence, clearly refuted by the behavior of rates over time, and logically flawed.
This is a very important debate. Either Krugman is right, or Feldstein is. IMHO Krugman is ignoring the laws of supply and demand, and also the laws of gravity. The Fed's ZIRP policy anchors the short end of the curve at 2% below the rate of inflation. The long end of the curve is a function of the base cost of money, adjusted for supply from Treasury of new paper, and the demand that the Fed is creating with $85b a month of POMO.
If Feldstein can't convince Krugman, I doubt my thoughts will either. But I'll try.
Krugman provided a chart in this post (Link) that he maintains proves his point - QE has little consequence on the shape and level of the yield curve. PK's comments and the chart:
You can see a couple of pauses in the Fed’s expansion of its holdings — and no relationship at all to rates.
A different way to track the relationship between the Fed's balance sheet and interest rates comes from the folks at BMO Capital. Read the full report here. The author, Dimitri Delis, looks at the Fed's POMO buys (QE) under a different light than PK. BMO measures the Fed's purchases based on the 10-year equivalent duration (If the Fed buys 3 year bonds it has less "consequence" than an equal $ amount of 30-year bonds) and looks at real interest rates as opposed to PK's nominal. Delis concludes that the relationship between QE and real interests rates line up nearly perfectly (.94 correlation).
Krugman compared apples to oranges to make his point. BMO's look of the same data, makes an apples to apples comparison, and comes to a different conclusion.
So Mr. K, whatdaya think of those apples?
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Wait until the mass of global creditors Treasuries come circling back to the Fed for regurgitation.
Chew on that.
"I can't understand how he can look at these low rates and conclude that the Fed is causing massive market distortions:; but's that's the whole point of the Fed. in the first place; is to control interest rates, AKA "money supply"; plus which Bernanke has anounced over and over again that he will "keep ZIRP, for a long time". How could Bernanke "keep" interest rates low, or at zero, for ANY TIME; except through massive market distortion? Does Krugman not understand the most basic facts of the situation? What is the althernative thesis? Interest Rates are at zero because of market forces? This is a co-incidence? What kind of drooling idiot is Krugman?
I didn't know there were different kinds of drooling idiots. Thanks for the heads-up on that.
Nice work Bruce.
Good one Bruce... but of course, PK's response to your post will likely ensure we all recognize that bloggers are not economists "honored" by the Sveriges Riksbank.
No, PK will just state that Zero Hedgers are right wing extremists.
I've been called that after explaining "fiat money"
Incredible!
At least we got a mention in his reply to Stockman's article. A few moar may well get curious and take a peak at this site preaching monetary herecy.
Unfortunately that will mean more of the newbee trolls joining the debate. As they are in complete denial we have to read their nonsense. At least we are seeing, real time, their complete mental breakdown.
The Hedge is pretty tough on the weak mind :/
Under the Krugman view it seems the Fed could go to $170B per month or $0 per month and it would not materially impact rates. So why doesn't the Fed do much more or much less PK??
+1
If Krugman truly believes that the impact of QE on interest rates is so minimal then why do it all? The Fed and numerous economists have provided estimates to the public quantifying the reduction in interest rates as a result of QE. Therefore, Krugman's criticism only confirms that he talks out of both sides of his mouth and is full of malarky.
The Kunt Krugman believes that the printing funds all the good the goverment can spend it on, or really he is just a fucking communist shill working for the collapse of capitalism (or what he wants to call capitalism). Got to build a boogeyman to blame otherwise the anger might be directed where it actually belongs. To the authoritarians, that is Kunt Krugman's value.
Yowza, boss!
Exactly, and yet Krugman doesn't criticize Bernanke for doing useless things.
There would be no market for debt securities at these interest rates if the Fed wasn't propping things up. How can anyone actually think lending money is as riskless as those 1-2% rates would make it seem?
What do quaint ideas like "laws" of supply and demand or gravity mean when you have nobel level economic theory on your side? /s
Misleading, invalid comparisons are Krugman's stock in trade.
Yep, meanwhile suckers like Bruce continue to fall for his troll bait.
The more one writes about Krugspam, the more he grows in stature, simply by being important enough to write about.
DO NOT FEED THE FUCKING TROLLS!
As always, this shit ain't that hard. If everyone stopped paying attention to him, the NYT would have to find one better.
I'd agree with you in principle -- if only Krugman were not already a known entity by all those in power.
Any attempt to discredit him, therefore, is important. Just think of Bruce's article as a public service.
You were quite elegant in your analysis.
Yes, he's always twisting logic in his attempts to shoehorn reality into his worldview. Here's another example:
You are just another clueless individual when invoking "iowahawk". Go get a copy of How To Lie With Statistics. Liberals and Fascists are just one in the same.
Krugman never does get the digits .... ESPECIALLY when it comes to apples
http://www.youtube.com/watch?v=sf0OFZexRGs
No wonder Krugman has such a difficult time moving on to advanced topics such as lemonade .. or frozen concentrate OJ for that matter
http://www.youtube.com/watch?v=7EjdC0pjo1A
KRUGMAN DOESN'T EVEN MAKE ANY FUCKING SENSE!
Jesus, and there are scads and scads, dozens and dozens, oodles and oodles and gobs and gobs of Neo-Keynesian uber-liberal dimwits who grasp on every word of the man because it "justifies" the statist big government expansive interference of the federal agenda of tax, spend and encroach.
The man is by his own support of failed policies (Whatcha think got us here in the first place?) is aiding and abetting the economic decline of the USA (and by extension rest of the world) and the stripping of personal freedoms from the middle classes "yearning to be free."
He is the antithesis, the Anti-Christ of the concept of Natural Laws embedded in the Declaration of Independence with the phrase "the separate and equal station to which the Laws of Nature and Nature's God entitle us".
The man is dangerous.
God will judge him harshly.
He will be judged like all other witchdoctors before him, as venal and corrupt.
... and it will end with his burning at the stake.
I am sure, even at that point, has the flames lick his fat piggy ankles Krugman will imagine it is not really happening :)