Guest Post: Of Krugman And Minsky

Tyler Durden's picture

Submitted by John Aziz of Azizonomics blog,

Paul Krugman just did something mind-bending.


In a recent column, he cited Minsky ostensibly to defend Alan Greenspan’s loose monetary policies:

Business Insider reports on a Bloomberg TV interview with hedge fund legend Stan Druckenmiller that helped crystallize in my mind what, exactly, I find so appalling about people who say that we must tighten monetary policy to avoid bubbles — even in the face of high unemployment and low inflation.


Druckenmiller blames Alan Greenspan’s loose-money policies for the whole disaster; that’s a highly dubious proposition, in fact rejected by all the serious studies I’ve seen. (Remember, the ECB was much less expansionary, but Europe had just as big a housing bubble; I vote for Minsky’s notion that financial systems run amok when people forget about risk, not because central bankers are a bit too liberal)

Krugman correctly identifies the mechanism here — prior to 2008, people forgot about risk. But why did people forget about risk, if not for the Greenspan put? Central bankers were perfectly happy to take credit for the prolonged growth and stability while the good times lasted.

Greenspan put the pedal to the metal each time the US hit a recession and flooded markets with liquidity. He was prepared to create bubbles to replace old bubbles, just as Krugman’s friend Paul McCulley once put it. Bernanke called it the Great Moderation; that through monetary policy, the Fed had effectively smoothed the business cycle to the extent that the old days of boom and bust were gone. It was boom and boom and boom.

So, people forgot about risk. Macroeconomic stability bred complacency. And the longer the perceived good times last, the more fragile the economy becomes, as more and more risky behaviour becomes the norm.

Stability is destabilising. The Great Moderation was intimately connected to markets becoming forgetful of risk. And bubbles formed. Not just housing, not just stocks. The truly unsustainable bubble underlying all the others was debt. This is the Federal Funds rate — rate cuts were Greenspan’s main tool — versus total debt as a percentage of GDP:

fredgraph (18)

More damningly, as Matthew C. Klein notes, the outgrowth in debt very clearly coincided with an outgrowth in risk taking:

To any competent central banker, it should have been obvious that the debt load was becoming unsustainable and that dropping interest rates while the debt load soared was irresponsible and dangerous. Unfortunately Greenspan didn’t see it.
And now, we’re in the long, slow deleveraging part of the business cycle. We’re in a depression.

In endorsing Minsky’s view, Krugman is coming closer to the truth. But he is still one crucial step away. If stability is destabilising, we must embrace the business cycle. Smaller cyclical booms, and smaller cyclical busts. Not boom, boom, boom and then a grand mal seizure.

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Ahmeexnal's picture

The truth revealed:

Did Rat-zinger work on one of those camps?

The camps began appearing in Germany almost as soon as the Nazis came to power in 1933. The sheer number of them – 3,000 in Berlin and 1,300 in Hamburg alone – meant there could be no doubt that the Germans had known about their existence at the time, head researcher Dean told the New York Times.

“You literally could not go anywhere in Germany without running into forced labour camps, POW camps, and concentration camps,” said Dean. “They were everywhere.”

idea_hamster's picture

IMHO, the real issue here is not (only) central bank largess, but the overall volume of money -- including shadow banking liabilities.

Bernanke may be technically correct that the ECB printed less, but EU banks also run at higher leverage and London's infinite rehypothecation rules mean that their actual credit growth may have been equally large and fast.

Show me the total reserves plus shadow banking graphs for the US and the EU, and then tell me that there's no effect -- I suspect we'll see where the souce was.

TruthInSunshine's picture

Sorry about the OT below (couldn't edit fast enough), but here's some DISSONANCE for all of you:  On the same day Krugman again heaps praise on one Ben S. Bernanke, his perpetual money losing Proxy Propagandizing employer, The New York Times, published this article, which I will exercpt from in pertinent part:

Recovery in U.S. Is Lifting Profits, but Not Adding Jobs Published: March 3, 2013

These factors, ***along with the Federal Reserve’s efforts to keep interest rates ultralow and encourage investors to put more money into riskier assets***, prompted traders to send the Dow past 14,000 to within 75 points of a [NOMINAL] record high last week [a nominal record high, equal to roughly 45% down from the real high, that only required the destruction of the actual, real economy by central banking monetary policy].


While buoyant earnings are rewarded by investors and make American companies more competitive globally, they have not translated into additional jobs at home.


Dr. Richard Head's picture

Well twist my nipples and call me Krugman.  The Fed should then just print a million notes for EVERYONE and all will be well in the land. 

Great find on the article excerpt by the way.

All Risk No Reward's picture

Krugman, a hatchet man for the international banking cartel, is preying on peoples' ignorance of the system.

The Fed is controlled by the same people who control the mega banks and who control government.  Keep following the money and they all lead to the Debt Money Tyrant class - and they couldn't lead any place else since they have more money than any other group by a country mile.

When Krugman blames the excessive risk, he's trying to lump in the mega bank (total control o fthe system) agenda of societal debt saturation with the borrower (zero control of the system) irresponsibility.

The mega banks and the Fed are front corporations controlled by, and for the benefit of, an international banking cartel that Eisenhower referred to as the "power of money" that should be "gravely regarded."  This isn't discussed in the media because that will simply end funding for whomever dares mention it.

This is what Vichy Krugman doesn't want the proles to know...

Debt Money Tyranny - the monetary system is engineered fraud design with the express purpose to bankrupt society and turn control of it over to the criminal international banking cartel class (Rothschilds, Rockefellers, financial oligarchs)

Weapons of Mass Debt - The Fed and government monitored and aided and abetted the criminal activity of their allied mega-banks - all designed to saturate society with debt, send it into receivorship and then hand over control the criminal international banking cartel that will claim ownership over it.  The Vichy government will hand it over simply because that's why they were funded and promoted into office by the oligarchs.

Red alert - this is no joke and this is how it is going down.  Krugman is a sociopath who has sold his soul to the devil in the hopes that his efforts to lock the common folks down in steerage will get him a seat on one of the life boats.

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. The one aim of these financiers is world control by the creation of inextinguishable debt.”
- Henry Ford

“We are grateful to the Washington Post, the New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost 40 years......It would have been impossible for us to develop our plan for the world if we had been subjected to the lights of publicity during those years. But, the world is more sophisticated and prepared to march towards a world government. The supernational sovereignty of an intellectual elite and world bankers is surely preferable to the national autodetermination practiced in past centuries.”
- David Rockefeller

“For more than a century ideological extremists at either end of the political spectrum have seized upon well-publicized incidents such as my encounter with Castro to attack the Rockefeller family for the inordinate influence they claim we wield over American political and economic institutions. Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as 'internationalists' and of conspiring with others around the world to build a more integrated global political and economic structure--one world, if you will. If that's the charge, I stand guilty, and I am proud of it.”
- David Rockefeller

“The supranational sovereignty of an [criminal, sociopathic] intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries.”
- David Rockefeller, Memoirs

Ignatius's picture

"Get your head out, new guy."

Feels like a 'wave the Nazi' distraction.  Terrible wars crimes, absolutely, but to draw our collective attention away from ______________?  Etc..

TruthInSunshine's picture

Oh Noes!!!  Warren "Let's Plow Taxpayer Up Their Asses Some More Charlie Munger Since BenBernank Already Saved Us 17 Billion USD" Buffett is worried about how The Bernanke will "unwind" the Fed's balance sheet!!!!!!!!!

Buffett sees 'hair trigger' when Fed ups rates

Buffett is worried about Fed policy


Really, Warren? You are so sincere & on top of things!


yogibear's picture

Warren and Charlie are shrewed greedy old men that would stop at nothing to keep their game going.

Dirty uncle Warren wouldn't think twice about raping all those college kids with student loans.


Charles Nelson Reilly's picture

Does this mean he's gonna send his lap dog assistant Charlie out to go buy some gold at the local coin shop?

All Risk No Reward's picture

The plan all along has been to...

1. Leverage up and blow a bubble

2. Loot the monetary Christmas out of society once the bubble has finally topped (current phase coming to an end).  Of course, they won't tell you the real reason, so they came up with a good reason - to save the economy a 5th grader knows can't be saved.  Not because they are evil, mind, because they are intellectuals...  because the liars said so.  They also proclaimed their front corporations as TBTF&Jail - and the sheeple bought it.  Asset prices no longer matter for "inner party" corporations.  Their competition, however, look lame, fat and juicy.

3. Drive everyone into assets before divesting and pulling the plug on credit creation.

4. Contract credit and convert debt paper into physical holding.  Use trillions in looted cash from society and mop up the rest of society's physical assets for pennies on the dollar.  They will also bust their competition and roll up their business under their own.  They might not change the name, the average Muppet might not even know what happened.  The media sure won't tell them because it is already owned and controlled.

5. Once society is looted and almost all physical assets are rolled up under the money definer / creator class' front corporations, they will inflate and balance their own books.  The debt money international bond market will be broken - but the money power that is gravely to be regarded (Eisenhower, Farewell Speech) woon't care because they will essentially own and control the world through their front corporations.  Governments will be subjected to the supernational sovereignty of criminal international banking cartel types.

The oligarchs will show up and snatch your wife on demand - watch the original Rollerball movie for one vision of the future.

This is easy, easy, easy to predict, but ZH makes me feel like a darn rocket scientist.  It might be true that I wa sa rocket scientist if it wasn't simply the obvious conclusion of applying 5th grade math and simple cost / benefit analysis from the perspective of the oligarchs.


whatsinaname's picture

Something fishy about the first chart ? - that debt to GDP shows up as declining in the last 4 years ? How is that ?

On the other hand the government is right about the savings rate declining and spending rising last month. My savings did decline thanks to the drop in gold prices - I was able to use "spend" some savings to get some of the metal. 

ironymonger's picture

Not sure but it looks like two scales are flipped; ie (right) should be (left).

mjorden's picture

If only consumers and corporations could switch interest rates ... that would be fantastic.

yogibear's picture

No worry about auto sales down 10% in Europe and the coming of more defaults from Europe.

Just hand over more and more bailouts to Greece Spain and now Italy.  Infinite bailouts to go with infinite printing.

Keep the dead alive and the live dead.

InTheLandOfTheBlind's picture

I thought on keeping the dead alive:


The following artist inspired me:


what about grannie copters and/or drones?  This way grannie can serve her country even after death

Confundido's picture

Good economic data = stocks up, gold down Explanation? rotation, no need to own the "safe haven" asset


Bad economic data = stocks down, gold down Explanation? Margin calls, liquidity needs


So so economic data = dividend stocks, bonds up, gold down Explanation? Gold doesn't pay a dividend


More QE? Gold down! Explanation? Why own gold when stocks will outperform? Or another one: Deflation is coming. No need to own gold


No QE? Gold down! Self explanatory

rubearish10's picture

Feel your pain. Owning gold can feel regretful.

DoChenRollingBearing's picture

Ud. sabe que es paciencia, Confundido.

Algun dia, van CORRER a comprar el ORO FISICO!


And there won´t be much, if any, left...  

Buzzworthy's picture

Who cares what Paul Krugman says anymore?  It is so detached from reality that its not worth listening to.

_ConanTheLibertarian_'s picture


Charles Nelson Reilly's picture

the fact that Krugman mentions it means it absolutely drives him crazy.  He is a horribly insecure person, see here - 

SleepingBear's picture

Yes anyone who holds a Nobel prize in economics and decries anyone who effectively destroys his arguement as "slandering his credentials" clearly has some deep-seeded insecurities

DoChenRollingBearing's picture

I wave my silver cross and my Gold Eagle at you, Krugman, you worthess scum.  Go crawl back into your NYT corner office...



cougar_w's picture

"Not boom, boom, boom and then a grand mal seizure."

The rich make tons of money on the booms, and they don't do too bad during the seizures either. Lately, they get public money. That's good stuff.

So boom boom boom is what we get.

fonzannoon's picture

rally time bitches. lets knock down metals and crude and then spike those indices. unreal.

tony bonn's picture

"...we must embrace the business cycle..."

bullshit. we must repudiate it as a relic of fractional reserve policy and plutocratic central planning, along with repudiation of quack economists like you.

q99x2's picture

DHS just purchased 2,100 approx light weight tanks and mine resistant tanks. We're going to be ok even if there is a collapse. It's only those with money that have to worry.

Hohum's picture

Mr. Aziz,

You are missing the bigger picture.  Total credit market debt has grown faster than output for 40+ years (maybe August 15, 1971).

You're in good company, though.  Krugman, Greenspan, Bernanke...

NoDebt's picture

I have to laugh when I see an article arguing from a purely economic point of view.  This isn't economics any more.  This is monetization of government over-spending and has been for years.  In short, it's a financial necessity to support political expediency.

When this one blows it's gonna blow big.  It's the MOAB (Mother of All Bubbles).  There is no higher level to which this can be kicked unless they hurry up and get that "one world government" or "new world order" thing done right quick.  At present, there is nothing above the sovereign nation level.  That's the level of the problem has moved to.  Nobody to turn to for a bailout when this one pops.  And when they go they'll take as many of us with them as they can in their desperation to sustain the unsustainable.



css1971's picture

The BIS, The IMF, The World Bank, The UN.

They put the infrastructure in place a long time ago.

donsluck's picture

I would disagree with your thesis of "nothing above national...". The Euro is above national. This is why it will survive longer than the national currencies. Upon further thought, we may be headed towards a north american, or maybe american (north and south) currency.

NoDebt's picture

Yeah, yeah, yeah.  I figured I would get that comment.  Reason I didn't count them is because they only work if you're talking about a little country that the rest of the world can support through those instituations (and it's voluntary, not sovereign- they have no "teeth").  If a major gets in trouble it's all over.  Even a semi-major.

Not a perfect analogy, I admit, but reality is there's not much but talk and vapor above the sovereign nation level.  Nothing with real teeth.  "Real teeth" I would define roughly as fiscal union + monetary union + ability to enforce those rules everywhere.  In other words, real sovereignty at a supra-national level.  Pretty damned far from the Euro or IMF, etc.

Sorry for any confusion.

Dr Paul Krugman's picture

This article presupposses that the difference between cause and effect are not differences at all, but merely replacements for each other.  The fact that there were risks heading into the crisis does not mean that proper monetary policy should be thrown into the wind like dust from an outdated book. 

Obviously (if you read the quote proper) you will note that the lead in points to how the reference to Minksy was in context to Europe, not the policies of the U.S. Fed. 

akak's picture

Your standing as a professor of economics (sic) presupposes a history of honest academic achievement, an open-minded questioning of statist orthodoxy, a rigorously analytical intellect unbeholden to the pro-status-quo powers that be, and a knowledge and appreciation of the works of real, free market economists, such as Von Mises and Rothbard, all of which are conspicuously and self-evidently lacking in the person of Paul Krugman.

Dr Paul Krugman's picture

Substance aside — not that substance isn’t important — Austrian economics very much has the psychology of a cult. Its devotees believe that they have access to a truth that generations of mainstream economists have somehow failed to discern; they go wild at any suggestion that maybe they’re the ones who have an intellectual blind spot. And as with all cults, the failure of prophecy — in this case, the prophecy of soaring inflation from deficits and monetary expansion — only strengthens the determination of the faithful to uphold the faith.

It would be sort of funny if it weren’t for the fact that this cult has large influence within the GOP.

- Paul Krugman, February 20th, 2013

And I'll stick to what I wrote while you doomers clutch your guns and gold while the U.S. economy recovers (albeit slowly) and dutiful investors increase their wealth while owning index funds invested in firms who benefit from said recovery...

DRT RD's picture

Krugman. my ole man says, "that a bit dog always hollers." 

My spiritual teachers always says,"you never have to defend the truth."

You sir, are hollering and defending.  South Georgia translation = your a lying dog!

monad's picture

You ignore the fact that the Keynesian bubbles were intentionally engineered. You taunt, you mock, you jeer, can it be that this is all you've got? "Neener neener neener, kiss my ass" said Nobel laureate economist Krugman. The kleptocrats use you for cover, and willingly you take their money. You are a paid disinformation stoolie. Uncle Joe would be proud.

NoDebt's picture

Spending all afternoon trolling the kids on ZH are we, Doc?  You have time for this?  Perhaps you are on vacation and just having a little fun.

If you're the real Paul Krugman I'll eat my old Macro Econ 101 textbook one page at a time.


Dapper Dan's picture

Dr Krugman,

Are you a closet Doomer?  I see you post here quite often.

Do you own any physical gold or silver?  tell the truth : ) 

Do you own a gun?  or do you live in a gated community with armed security.


"index funds invested in firms who benefit from said recovery"

Be so kind as to provide us a short list of the FIRMS you refer to. Help a brother out!

(don't list any banks, I already know about them)


** found a gem here**

"You just paid people with tax dollars"

Jeff Semon June 6, 2011





nightshiftsucks's picture

Yeah we're recovering just like we recovered from the tech bubble and grew into the housing bubble. So Krugman what's this bubble ? The govt debt bubble ? Hey Krugman anyone ever tell you that "you have a pretty mouth" well you don't but when this shit crashes I'm going to fuck you.

myne's picture

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Krugman - 2002


While this statement was defended some 7 years later as using a different tone, I find the sheer length of time suspect.

WTF2's picture

The good Professor stirring the ZH pot is always amusing.  Until proven otherwise his mantra has been correct.  The US is near new market highs with very tame inflation, thanks to helecopter Ben.  The perminent nature of high unemployeement sucks but clinging to gold and guns will not change that. Never dig your heels into a losing arguement  or a losing trade.

BigJim's picture

Funny, when shopping for groceries or gasoline or paying my power bills, I haven't noticed inflation to be 'very tame'.

PS - I don't recall hearing the Austrians saying that hyperinflation from endless QE was imminent. I recall them saying it was inevitable.

smacker's picture

Why do socialists always project?

archon's picture

I dunno... this guy talks like the real Krugman, but his appearance here at Zerohedge, where his ideas will face honest, full-throated opposition, is very uncharacteristic for an economist of his stripe, most of whom prefer to voice their beliefs unopposed in the Keynesian echo chamber.

So, "Paul", the fact that inflation hasn't happened yet is no indicator that it won't - just give it time.  An economist like yourself who chooses to believe that we didn't "End This Depression Now" because we needed to spend a few trillion more, and who also believes that an invasion by space aliens would stimulate demand and revive the economy, should not be troubled by Austrians who choose to believe that inflation will happen when central banks print trillions of dollars, just because it hasn't happened yet.

Bunga Bunga's picture

Don't worry, a lot of this "Science" will throw itself onto the dump soon.

auric1234's picture

Proper monetary policy means realizing you're not smart enough to tell millions of people how to run their lives.

If they don't trust the bank to lend it money, then so be it. Maybe the bank should improve to gain people's trust instead of asking for bailout.

If they don't trust the government to lend it money, then so be it. Maybe the government should stop pretending it is a profitable "investment" instead of asking for bailout.

Just take it like a man and stop whinning.