On Banks: Krugman vs. Krugman

In his latest op-ed, Krugman writes:

It’s not at all clear that credit from the Fed, Fannie Mae (FNM) and Freddie Mac (FRE) can fully substitute for a healthy banking system. If it can’t, the muddle-through strategy will turn out to be a recipe for a prolonged, Japanese-style era of high unemployment and weak growth.

But Krugman has argued on several occasions that Japan’s recovery had little to nothing to do with banking reform! Not long ago, he wrote:

I have a problem. You see, it’s hard, looking at the data, to see much role for bank reform in Japan’s recovery, such as it was.

A first read would be that recovery came from an export boom, which in turn fed a modest increase in consumption — full stop. What did banks have to do with it?

He followed that up with this:

But it’s true that I’m a bit puzzled by the attribution of Japan’s recovery to bank reform. If the bank-reform story were central, you’d expect to see some “signature” in the data — in particular, I’d expect to see an investment-led boom as firms found themselves able to borrow again. That’s not at all what one actually sees.

Kobayashi’s argument, as I understand it, was that in the 90s Japanese firms weren’t able to take advantage of export opportunities because of lack of access to credit. That’s a fairly exotic argument, and I’d like to see some supporting evidence.

If America can’t find new growth opportunities to replace housing and finance, then it may well muddle through the next few years, just as Japan muddled until export growth took off. But to paraphrase Krugman, what do banks have to do with it? I wish he’d reconcile these conflicting views.

Comments

[E Nuff Sed]

Krugman is pissed that Obama did not wipe out the shareholders of the banks as per is advise and they are turning out OK.

2009 May 09 09:09 PM

[MarkTwain]

I would agree that it's dangerous to follow the advice of economists as practical trading strategy. They operate in a different world from reality (like Plato's cave, they see images of what should be projected as shadows and disregard actual reality). Frankly if economists were so plugged into reality, why wouldn't they have been raising red flags sooner? Weather forecasting is a more exact science.

2009 May 09 09:44 PM

[Steven Vincent]

The transition from the Fear trade to the Inflation trade is in progress.

Markets are nearing a resolution which is graphically illustrated by the relationship between the 50 and the 200 EMA. Fundamentally, the economic news flow will either continue to support the recovery thesis or we will see renewed deterioration. The author's expectation is that the fundamentals will continue to show gradual improvement and the markets will manifest this with a bullish crossover of the 50 and 200 EMA.

Having largely completed its initial impulsive short covering rally off an historically oversold bottom produced by a generational Financial Panic, the nascent Bull Market will now consolidate during a transitional period technically characterized by the interplay between price and the 50 and 200 EMA's. Investors will use this period to buy the dips to accumulate positions. Bears will attempt to reposition for an anticipated decline by selling rallies. Trapped longs will also sell rallies into technical resisitance in the SPX 975-1015 range. The overall effect will be a range trade for several months with the eventual 50/200 EMA crossover indicating the longer term trend.

The BullBear Market Report
seekingalpha.com/insta...
www.TheBullBear.com

2009 May 09 09:46 PM

[Jasper M]

How on earth would one come to even Suspect that banks (which, one can hope, are Occasionally subject to market discipline) could be replaced by Government Sponsored Entities?

2009 May 09 10:11 PM

[Market Sniper]

Borrow your way to prosperity. Seems Krugman is as confused as Cetin. Seems Cetin has again confused a bear market rally with actual economic recovery.

2009 May 10 02:34 AM

[Ferdinand E. Banks]

What does bank reform in Japan - or any other reform or policy in that country - have to do with the United States? I spent a considerable amount of time in that country while in the army, and have been to half a dozen conferences there. They have their own way of doing things, and for the most part they are strictly not applicable to many other countries - to include the US.

2009 May 10 09:05 AM

[American in Paris]

One has to be very naive to think the banks "are turning out OK".

In 2008 and 2009 about $400 billion adjustable rate mortgages will reset (up).

The banks are insisting their assets are good.

Does anyone really believe that? No substantial losses in the second half of 2009?




On May 09 09:09 PM E Nuff Sed wrote:

> Krugman is pissed that Obama did not wipe out the shareholders of
> the banks as per is advise and they are turning out OK.

2009 May 10 01:34 PM

[VintonCounty]

This kind of discussion makes my head hurt. Experience tells me to step back from the data, analyses, and opinions and view a wider field. The purpose is recognizing applicable axions or salient facts about the situation that suggest actions without an analysis that is too complex for any mortal. When I did that I saw that America is drifting into fascism, particularly respecting the banking and auto industries. Politics substitutes for market forces, and consequently these industries are too dangerous. People who can predict political outcomes can make fortunes in short-term trades; but I can't, and I don't know anyone who can.

The insight about fascism guides the cautious investor to industries and countries in which government intervenes little.

2009 May 10 08:08 PM

[Northstar10000]

Market Sniper
Cetin is more than just confused. He is so lost he belongs on the Obma economic team.

2009 May 10 08:15 PM

[E Nuff Sed]

Not naive but pragmatic. The facts have changed.

Just because you are "insolvent" one day before your payday does not mean you are bankrupt.
Mark to market is now defanged. Banks are over capitalized.
With the yeild curve so steep banks will be making some much money that their stocks will triple or more in 3 years.

When the facts change I change my mind, what do you do sir?
----------------------...

On May 10 01:34 PM American in Paris wrote:

> One has to be very naive to think the banks "are turning out OK".
>
>
> In 2008 and 2009 about $400 billion adjustable rate mortgages will
> reset (up).
>
> The banks are insisting their assets are good.
>
> Does anyone really believe that? No substantial losses in the second
> half of 2009?
>
>

2009 May 11 10:17 PM