Arnold Kling  

Minsky vs. Krugman

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Paul Krugman writes,


So I'd suggest that what we did between 1980 and 2008 was to replace a financial system in which profits were created by lack of competition with a system in which profits were created by misinformation and misperceptions -- a giant, if mostly (not entirely) unintentional Ponzi scheme, which finally went bust.

And without strong reform, it will happen again.

I would fix the last sentence to read:

With or without strong reform, it will happen again.

I would also point out that Freddie Mac and Fannie Mae had lack of competition and franchise value up the wazoo, but that did not lead them to stay out of trouble.


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COMMENTS (7 to date)
steve writes:

They lost market share until they were allowed into the subprime market. They had more competition than some thought.

Steve

floccina writes:

Doesn't Krugman's position assume that people/society cannot learn. I would not worry about another realestate bubble anytime soon and I would certainly not worry about people 40 years form now. Who knows what kind of technology will be available 40 years from now.

For a group of people who like to say "in the long run we are all dead" they seem to worry too much about what will happen many years from now. The bust should cause more caution and it should lead to some evolution in the Finance independent of Gov. regulation.

Arnold Kling writes:

Steve,
They had no viable competition in the market for high-quality mortgages. They lost market share in a market that they should have stayed out of.

Ezra writes:

It also was the only market a mortgage lender could make that much money in.

Boonton writes:

Doesn't Krugman's position assume that people/society cannot learn. I would not worry about another realestate bubble anytime soon and I would certainly not worry about people 40 years form now.

How could society learn in this sense? Bubbles seem to come from unpredictable corners. People thought a global real estate bubble was impossible....hundreds of years after a famous bubble in tulips! Yes tulips! It's the idea that society can learn that is the problem. People think bubbles were impossible today because we are smart, unlike those fellows a few centuries ago who bet the farm on tulips! Hahah, silly Dutch people!

But I think Krugman's point is valid. We've had a virtual deregulation of the banking sector as 'non-bank banks' have found methods to dodge things like deposit insurance, reserve ratios and such because they aren't technically taking deposits but simply 'borrowing short and lending long'. We seem to have seen quite a few frothy bubbly things happen (see Michale Lewis's Collapse) It's not clear to me that since our 'virtual deregulation' made banking less boring that the massive profits generated by finance has been coupled with better asset allocation.

steve writes:

"They lost market share in a market that they should have stayed out of."

Agreed, and FTR, I would like to see them go. Still, they were relatively late to the subprime action. Was it a bad management decision or rational behavior considering the markets at that time? Maybe we can get rid of the home mortgage deduction when we get rid of Fannie and Freddie. Besides the government guarantees, they would also seem to be a beneficiary of Too Big To Fail.

Steve

José Costa writes:

Yes, there will be economic crisis with or without reform.

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