The other day, Paul Krugman commented on the recent Stan Druckenmiller interview circuit, in which the hedge fund legend has been blaming Fed interest rate policy over the past 20 years for the boom/bust cycles that we've experienced. Krugman basically says that financial regulation (or rather, deregulation) was the much more important input in this whole mess -- then proceeds to take a moralistic stance about how it seems incredibly unfair that the majority should suffer a deeper recession (i.e., the "automatic" result without monetary and fiscal accommodation) because the yahoos on Wall Street are so reckless. We've heard this story from Krugman before.
But, he had one throwaway line at the beginning that caught my attention, and which speaks to his glossing over of the facts when they don't fit his preferred narrative (my bolding for emphasis):
"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)."
As someone who has read some Minsky, my objection always has been that he never identified the mechanism that encouraged greater risk taking over time, it just seemed to happen -- a very convenient assumption given the outcome that he was solving for. From my seat, when the ability to borrow is easy and rates are cheap, people are more apt to speculate and bid up asset prices to unsustainable levels. And, the primary driver of low interest rates is the Fed. So, Krugman (channelling Minsky) makes a statement that sounds good and certain, but is anything but, and then finds it better not to discuss the nuance and counter-points that exist.
Krugman, convenience is thy name.
