I'd also take issue with the idea that anything which expands the pool of money available for lending is, ipso facto, a good thing. To the contrary, things which expand the pool of money available for lending can serve only to inflate credit bubbles. In general, lending shouldn't be easy to come by; and it should in principle always be just as easy to issue equity as it is to issue debt. We're nowhere near that point right now, and securitization only serves to drag us further away from it.
Read the whole thing. I'm not even sure I picked the best excerpt, although I really agree with the point that adding to the pool of money going into, say, housing indebtedness, is far from the obvious social good that Congress presumes it to be.
Salmon is criticizing Simon Johnson and James Kwak. I want to pile on James Kwak, because he has a couple of recent posts that set me off. First, He writes,
[Menzie] Chinn is not given to ideological ranting
Kwak goes on to endorse Chinn's ideological rant that the Bush tax cuts caused the financial crisis. Yes, I know that Chinn is speaking in the tone of economic analysis rather than a rant, but only a left-wing ideologue would take the thesis seriously. I bet Kwak cannot find a blog post of Chinn's where he made a policy point against Democrats/liberals or for Republicans/conservatives.
This reminds me of something Felix Salmon wrote about a while back: If profits and compensation in the financial sector go up and keep going up, that's a priori evidence of inefficiency, not efficiency. Those higher profits mean that customers are paying more for their financial services over time, not less, which means that financial services are imposing a larger and larger tax on the economy. Now, it is possible that they are also increasing in value fast enough to cover the tax, but that is something to be proven.
In other words, we should always second-guess markets. When profits and compensation are high, we need to look carefully to see whether they are adding enough value to cover the profits and compensation.
The implication is that government should be setting incentives, not markets. I have many problems with that, the main one being that government did create the incentives for creating the financial structure that produced the crisis. I have written a great deal on that, some of it published and some that has not yet appeared.
Finally, we have Paul Krugman going into typical contortions.
right now it's good to run a deficit. Consider what would have happened if the U.S. government and its counterparts around the world had tried to balance their budgets as they did in the early 1930s. It's a scary thought. If governments had raised taxes or slashed spending in the face of the slump, if they had refused to rescue distressed financial institutions, we could all too easily have seen a full replay of the Great Depression.
The evidence suggests that continental Europe--which generally adopted smaller stimulus programs--is recovering faster that the U.S. or the U.K. They might have been wise to resist the assertions of Paul Krugman and the Obama administration that they should be doing more.
Over the really long term, however, the U.S. government will have big problems unless it makes some major changes. In particular, it has to rein in the growth of Medicare and Medicaid spending.
That shouldn't be hard in the context of overall health care reform. After all, America spends far more on health care than other advanced countries, without better results, so we should be able to make our system more cost-efficient.
But that won't happen, of course, if even the most modest attempts to improve the system are successfully demagogued -- by conservatives! -- as efforts to "pull the plug on grandma."
The problem is Medicare and Medicaid, but the solution is overall health care reform. Krugman makes it sound as though health reform would have made the debt problem smaller, rather than larger. There are reforms that could make the debt problem smaller--raise the age of eligibility for Medicare, means-test Medicare, or convert Medicaid and Medicare to vouchers rather than open-ended reimbursements. I am not saying that such reforms would be painless. But if Krugman were being fair, he would be saying that nobody is putting forth solutions to the debt problem, rather than implying that the problem would go away if we all supported Obamacare.