Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Krugman Responds to Bernanke Letter

 Paul Krugman responds to the Ben Bernanke letter in the previous post with “Liquidationists of the World, Unite!”:

OK, so now it’s official: conservatives aren’t just against any effort to boost demand with fiscal policy, they don’t want the Fed doing anything positive, either.

This open letter to Ben Bernanke is a remarkable document, not least for who signed it. Who knew that William Kristol was an expert on monetary policy? And who thought they’d gain credibility by adding someone who declared in 2005 that we needn’t worry about low savings, because Americans were doing fine thanks to rising home prices, then declared in 2007 that there was no reason to worry about the credit market?

But the real question is, what is their model of the mess we’re in? What do they think is happening?

I know what my model is: I believe we’re suffering from a severe deleveraging shock, in which the immediate problem is to get someone to make up for the loss of debtors’ spending. (The Greek-letter and funny diagram version is coming soon.) According to that view, the Fed needs to do all it can to reduce the real rates unconstrained borrowers face, and could badly use help from fiscal policy, too. Quantitative easing is literally the least the Fed can do.

Obviously, these guys disagree. But what is their model? How do they think we got into a crisis that has depressed employment all around the advanced world?

I don’t think they have an answer; I think all they have are wild stories about how Obama’s Sharia-law Marxism has unnerved business, or something, with the effects mysteriously spreading to Spain and Latvia.

And in the name of whatever it is they believe, they’re doing their best to ensure that the slump goes on.

I have a picture in my head of Krugman pacing in his office, muttering to himself like Queeg, “Where’s your model? You can’t argue with me without a model. Where’s your model? You don’t have a model like I do. Model…model…”

One thing Krugman fails to mention is that his model wasn’t any better than these guys at predicting the crisis. Why his model deserves any more respect than anyone else is a question only he and the sycophant readers of his blog can answer.

By the way, Cliff Asness, the first signer of the letter, is a particular favorite of mine. He runs a quant shop called AQR Management and blogs occasionally - very occasionally - at Stumbling On Truth and gained some notoriety for his attacks last year on the Obama administration. He is quite a character but he also makes a hell of a lot of sense. And best of all, his sense of humor is just as warped as mine. This is the disclaimer he put at the bottom of one of his Op-Ed pieces:

“AQR’s legal department would like me to add that I am criminally insane and barred by an order of rhetoric protection from speaking on AQR’s behalf. Anyone trading on my advice, or a client, consultant, employee or Iraqi insurgent thinking he has been wronged by my attitudes or opinions can have a $250 out-of-court settlement right now if you’ll sign a waiver, otherwise we’ll break you. Oh, and we lied about the $250, but seriously, we will break you. Please note, nobody can predict where markets will go in the short-run and sometimes even the long-run. When I point out individual things in the marketplace that I think are strange, or wrong, it doesn’t mean I have the perfect answer or can easily make money from it for my clients, for myself, or certainly for you reading this essay! Furthermore, if you read one guy’s opinion and do anything based solely on that, you are an idiot. Next, as the legalese above alludes to, the actual funds and accounts AQR manages are run using models that may or may not agree with what I’m writing herein, particularly as our models will generally have a shorter time horizon than the things I’ll be writing about. Listen to me at your own risk! “

That is absolutely priceless.