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Posted at 11:23 AM ET, 11/19/2010

An unnecessary, inevitable slump

By Ezra Klein

Alongside Gauti Eggertsson of the New York Fed, Paul Krugman has been spending some time on a longer paper looking at debt, deleveraging, and liquidity traps. Building the model for it, he says, has helped him see the crisis more clearly. And what he's seen has depressed him:

If our view of the current crisis as largely a deleveraging shock is correct, and if our basic outline of how things work in the aftermath is also correct — both of which I believe — then the gods really hate us. For the slump that follows a deleveraging shock is simultaneously gratuitous and almost impossible to avoid.

What do I mean by that? The model, and more broadly overall logic, suggests that there is good no reason why the economy has to suffer a large loss of output and employment after a Minsky moment. The capacity is there, and nothing about the fact that some people have too much debt makes it impossible to use that capacity to produce goods and services for other people.

But the policies that can prevent that gratuitous slump — a commitment to higher inflation over the medium term, and/or deficit spending — run right up against ingrained prejudices. The foundations for the shock were laid by a long period of relative stability, especially low inflation; it’s very hard for policy makers to accept that what was good in 2000 or even 2007 is no longer at all good now that Minsky has struck. And everyone has just seen the punishment for too much debt; asking others to run up debt to help fix the problem, even though it’s right, is unavoidably a tough sell.

By Ezra Klein  | November 19, 2010; 11:23 AM ET
Categories:  Economics  
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Comments


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Posted by: richardbeckley | November 19, 2010 11:43 AM | Report abuse

What you HAVE to like about Krugman is that his post analysis judgement always agrees exactly with his pre-analysis judgement, only more so.

In fact nothing tells us what a genius Paul Krugman is, better than the models that Paul Krugmann constructs!

Posted by: 54465446 | November 19, 2010 1:10 PM | Report abuse

"The capacity is there, and nothing about the fact that some people have too much debt makes it impossible to use that capacity to produce goods and services for other people."

Nothing except the fact that people who have too much debt aren't going to buy those goods and services no matter how much capacity we have.

Sheesh. That guy is a total moron.

Posted by: bgmma50 | November 19, 2010 7:59 PM | Report abuse

A good slide show & audio from Prof. Steve Keen, on this very topic, using his non-traditional economic analysis and tools:

http://www.debtdeflation.com/blogs/wp-content/uploads/talks/KeenWhyCreditMoneyFails.flv

He integrates a lot of different economic thoughts, including Minsky, and live-demos his model explaining the great depression and current 'great recession' dynamics, with debt as the central actor, and banks as the main villain.

A bit long, but _well_ worth a listen. If you don't have the time to sit through the entire Flash stream, you can try fast-reading through his slides in PowerPoint:

http://www.debtdeflation.com/blogs/wp-content/uploads/talks/KeenHowCreditWorksWhyItFails.ppt

Posted by: terryh1 | November 20, 2010 7:27 AM | Report abuse

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