Published on Alternet (http://www.alternet.org)
Home > Krugman Attacks on Bernie's Agenda Called 'Highly Misleading' by a
Leading Progressive Economist
________________________________________
Krugman Attacks on Bernie's Agenda Called 'Highly Misleading' by a Leading
Progressive Economist
By Gerald Epstein [1] / Dollars and Sense [2]
April 15, 2016
In his recent New York Times opinion column, "Sanders Over the Edge [3]"
(4/8/16), economist Paul Krugman offers his readers a basketful of
misinformation on important economic matters about which he should - and
probably does - know better. The column contains a large number of snipes
and a great deal of innuendo against Bernie Sanders and his supporters, but
here I focus on his claims about "Too Big To Fail" (TBTF) banks, their role
- non-role, according to Krugman - in the financial crisis, and Sanders'
understanding of the policy tools available to deal with them. Krugman's
claims about these issues are misleading, almost certainly wrong, and, in my
view, call into question the credibility of his New York Times column as a
source of economic information and analysis.
Krugman starts here:
"Bernie is becoming a Bernie Bro." I'll leave it to others to dissect this
one. Moving on:
"Let me illustrate the point . by talking about bank reform.
"The easy slogan here is `Break up the big banks.' It's obvious why this
slogan is appealing from a political point of view: Wall Street supplies an
excellent cast of villains. But were big banks really at the heart of the
financial crisis, and would breaking them up protect us from future crises?
Many analysts concluded years ago that the answers to both questions were
no."
As you can see by following Krugman's link here, this is not, what Krugman
suggests it is: it is not a link to an article quoting multiple analysts
presenting strong arguments with evidence that large banks were not
responsible for the crisis. It is a link to an opinion piece by Paul Krugman
himself. Period.
And, moreover, in this linked piece, Krugman is far more circumspect and
uncertain of the answers than if implied in his statement "that many
analysts concluded years ago." So, who are these "many analysts"? On what
basis did they reach their conclusions?
Certainly, we can find some analysts who argue ("conclude" is a word that
suggests an answer based on a comprehensive analysis of the facts) that the
financial crisis was the result of government mismanagement [4], or was
simply a textbook example of a bank run and not due to the actions of large
financial institutions per se, or were the result of the decisions of a
bunch of sub-prime mortgage providers - like Angelo Mozilo Countrywide
Financial [5] that operated more or less independently, and were outside of
strict government regulation, that is they were in the "shadows."
Krugman opts for this explanation: "Predatory lending was largely carried
out by smaller, non-Wall Street institutions like Countrywide Financial."
But, you don't have to have seen "The Big Short" to know that the sub-prime
lenders like Countrywide Financial [6] were just one set of players along a
powerful supply-chain that contained multiple links. This chain was geared
toward creating and selling structured, securitized financial products like
collateralized debt obligation (CDOs) and CDO-squared's, mostly produced,
financed and sold by the largest (now former) investment banks, J.P. Morgan,
Goldman Sachs, Lehman Brothers and commercial banks including Bank of
America, Citibank. Contrary to Krugman, the U.S. government authorized
Financial Crisis Inquiry Commission [7](FCIC) reports :
"We conclude dramatic failures of corporate governance and risk management
at many systemically important financial institutions (italic added) were a
key cause of this crisis .. They took on enormous exposures in acquiring and
supporting subprime lenders and creating, packaging, repackaging, and
selling trillions of dollars in mortgage-related securities, including
synthetic financial products. Like Icarus, they never feared flying ever
closer to the sun." (pp. XVIII-XIX)."
The FCIC, thus, puts a central part of the blame squarely on the, so-called
"systemically important financial institutions", which Federal Reserve Bank
President Neel Kashkari [8] and former Goldman Sachs banker calls "Too Big
to Fail Banks," and which economist Bill Black, more appropriately calls
"systemically dangerous banks." I have read much of the academic literature
on the financial causes of the great financial crisis and I think it is safe
to argue that most experts agree with the FCIC and not Paul Krugman.
Paul Krugman, of course, is entitled to his views. But the point here is
that it is highly misleading for Krugman to imply that the consensus among
economists is quite the opposite of what it is in fact.
Who does Krugman blame in addition to the sub-prime lenders?
". the crisis itself was centered not on big banks but on "shadow banks"
like Lehman Brothers that weren't necessarily that big."
This again is highly misleading. First of all, Lehman Brothers was very big
indeed. More important, this statement implies that there were "shadow
banks" that were involved in the sub-prime debacle that were somehow
distinct from the household name Wall Street banks like Citibank, Bank of
America, Goldman Sachs, and J.P. Morgan, that Bernie Sanders, Elizabeth
Warren and everyone else who talks about TBTF mean.
If these banks were not at the center of the crisis, then why, according the
Congressional Oversight Panel [9], did the massive and "non-shadowy"
Citibankget a tax payer bail-out in the amount of $476.2 billion in cash
and guarantees. Why did similarly placed Bank of America get $336.1 billion?
"Little Lehman" didn't bring these behemoths down. Their central role, and
those of other TBTF banks - in financing, buying and selling toxic mortgage
products put them - and the economy - into free-fall.
Paul Krugman didn't inform his readers that important economists [10] who
study shadow banking do not exclude these massive banks from key aspects of
this shadow banking system. Far from it: these TBTF banks are increasingly
seen by experts to be at the center of this global shadow finance
eco-system.
Krugman similarly misinforms his readers in discussing Bernie Sanders'
command over the details of the Dodd-Frank law and what it has to say about
dealing with too-big-to-fail-banks. In a widely reported - and misreported -
interview with the Daily News [11], Sanders was asked how he would break up
the big banks. Krugman was only slightly more polite than Vanity Fair
Magazine which proclaimed that the interview proved that "Sanders Doesn't
Know Diddly Squat About Wall Street [12]". Krugman referred to the "recent
interview [13] of Mr. Sanders by The Daily News [13], in which he repeatedly
seemed unable to respond when pressed to go beyond his usual slogans."
To sort this out, let's look at the relevant part of the transcript:
Daily News: Okay. Well, let's assume that you're correct on that point. How
do you go about doing it?" (That is: break up the big banks.)
Sanders: How you go about doing it is having legislation passed, or giving
the authority to the secretary of treasury to determine, under Dodd-Frank,
that these banks are a danger to the economy over the problem of
too-big-to-fail.
Daily News: But do you think that the Fed, now, has that authority?
Sanders: Well, I don't know if the Fed has it. But I think the
administration can have it.
Daily News: How? How does a President turn to JPMorgan Chase, or have the
Treasury turn to any of those banks and say, "Now you must do X, Y and Z?"
Sanders: Well, you do have authority under the Dodd-Frank legislation to do
that, make that determination.
Daily News: You do, just by Federal Reserve fiat, you do?
Sanders: Yeah. Well, I believe you do."
The relevant facts are these: Under Section 121 of the Dodd-Frank Act [14]
the Board of the Governors of the Federal Reserve has the authority, subject
to a 2/3 vote of the Financial Stability Oversight Council [15] (FSOC) to
take a range of actions, including (as a last resort) to "require the
company to sell or otherwise transfer assets of off-balance-sheet-items to
unaffiliated entities", that is, to shrink the size of the bank in question.
Note that the Chair of the FSOC is the Secretary of the Treasury. So,
Sanders is correct that the Federal Reserve and the Secretary of the
Treasury are the key players here. To be sure, Sanders' last statement
above, that Federal Reserve could break up the banks just by fiat - whatever
that means - is not true under section 121.
Still, the Federal Reserve has more tools under its control through
Dodd-Frank. For example, under section 619 (one of the key sections
outlining the so-called Volcker Rule that tries to ban proprietary trading),
states that for these financial institutions "no transaction, class of
transaction, or activity may be deemed a permitted activity..(iv) would pose
a threat to the financial stability of the United States." The Federal
Reserve would have significant power to issue regulations in this situation.
More generally, the goal of Dodd-Frank, as stated in Section 112 in
describing the mission of the newly created Financial Stability Oversight
Council (FSOC) is "eliminating expectations on the part of shareholders,
creditors, and counterparties of such companies that the Government will
shield them from losses in the event of failure." That is, end too big to
fail.
In the end, Dodd-Frank does provide tools and responsibilities to the Fed
and to the Secretary of the Treasury, along with other financial regulators,
that can be used to break up the banks. Sanders' answer was inelegant, to be
sure, but, in reality, his answer reflects the fact that the law is on
unchartered territory and in places is vague and would certainly be
contested by the banks. So Bernie's first answer is also the cleanest. "How
you go about doing it is having legislation passed ."
In short, Sanders' answers are way beyond "his usual slogans" as Krugman
claims.
Is it possible that Krugman doesn't understand these points. Seems very
unlikely. I cannot begin to imagine his motives, but that is not the main
issue here.
What it brings into question is Paul Krugman's credibility as a New York
Times commentator on these issue. Krugman's credibility does not stem from
his political analysis. Krugman is not a Political Scientist. Krugman's
"brand" is that he is a "brilliant, Nobel Prize winning economist." In fact,
much of his early research was brilliant; and, to be sure, Krugman did win
the Nobel Prize. BUT, the misleading discussion of economics contained in
his piece, "Sanders Over the Edge" does raise this question in my mind: Is
Paul Krugman still qualified to write an economics opinion column for the
New York Times?
Gerald Epstein is an economist at U-Mass Amherst specializing in
macroeconomic and financial issue including federal reserve policy,
proprietary trading and global finance. He and Jane D'Arista are
co-coordinators of SAFER-- a coalition of economists for Stable,
Accountable, Fair and Efficient Financial reform.
Share on Facebook Share
Share on Twitter Tweet
Report typos and corrections to 'corrections@xxxxxxxxxxxx'. [16]
[17]
________________________________________
Source URL:
http://www.alternet.org/election-2016/krugman-attacks-bernies-agenda-called-
highly-misleading-leading-progressive-economist
Links:
[1] http://www.alternet.org/authors/gerald-epstein-0
[2] http://www.dollarsandsense.org
[3]
http://www.nytimes.com/2016/04/08/opinion/sanders-over-the-edge.html?_r=0
[4] http://www.wsj.com/articles/SB123414310280561945
[5] http://www.nytimes.com/topic/person/angelo-mozilo
[6] http://fortune.com/2010/12/23/how-the-roof-fell-in-on-countrywide/
[7] https://fcic.law.stanford.edu/report
[8]
https://www.minneapolisfed.org/news-and-events/presidents-speeches/lessons-f
rom-the-crisis-ending-too-big-to-fail
[9]
https://www.gpo.gov/fdsys/pkg/CHRG-112shrg64832/pdf/CHRG-112shrg64832.pdf
[10] http://www.voxeu.org/article/global-financial-ecosystem-0
[11]
http://www.nydailynews.com/opinion/transcript-bernie-sanders-meets-news-edit
orial-board-article-1.2588306
[12]
http://www.vanityfair.com/news/2016/02/bernie-sanders-doesnt-understand-wall
-street
[13]
http://www.nydailynews.com/opinion/transcript-bernie-sanders-meets-news-edit
orial-board-article-1.2588306?cid=bitly
[14] https://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW-111publ203.htm
[15]
https://www.treasury.gov/initiatives/fsoc/studies-reports/Documents/2015%20F
SOC%20Annual%20Report.pdf
[16] mailto:corrections@xxxxxxxxxxxx?Subject=Typo on Krugman Attacks on
Bernie's Agenda Called 'Highly Misleading' by a Leading
Progressive Economist
[17] http://www.alternet.org/
[18] http://www.alternet.org/%2Bnew_src%2B
Published on Alternet (http://www.alternet.org)
Home > Krugman Attacks on Bernie's Agenda Called 'Highly Misleading' by a
Leading Progressive Economist
Krugman Attacks on Bernie's Agenda Called 'Highly Misleading' by a Leading
Progressive Economist
By Gerald Epstein [1] / Dollars and Sense [2]
April 15, 2016
In his recent New York Times opinion column, "Sanders Over the Edge [3]"
(4/8/16), economist Paul Krugman offers his readers a basketful of
misinformation on important economic matters about which he should - and
probably does - know better. The column contains a large number of snipes
and a great deal of innuendo against Bernie Sanders and his supporters, but
here I focus on his claims about "Too Big To Fail" (TBTF) banks, their role
- non-role, according to Krugman - in the financial crisis, and Sanders'
understanding of the policy tools available to deal with them. Krugman's
claims about these issues are misleading, almost certainly wrong, and, in my
view, call into question the credibility of his New York Times column as a
source of economic information and analysis.
Krugman starts here:
"Bernie is becoming a Bernie Bro." I'll leave it to others to dissect this
one. Moving on:
"Let me illustrate the point . by talking about bank reform.
"The easy slogan here is `Break up the big banks.' It's obvious why this
slogan is appealing from a political point of view: Wall Street supplies an
excellent cast of villains. But were big banks really at the heart of the
financial crisis, and would breaking them up protect us from future crises?
Many analysts concluded years ago that the answers to both questions were
no."
As you can see by following Krugman's link here, this is not, what Krugman
suggests it is: it is not a link to an article quoting multiple analysts
presenting strong arguments with evidence that large banks were not
responsible for the crisis. It is a link to an opinion piece by Paul Krugman
himself. Period.
And, moreover, in this linked piece, Krugman is far more circumspect and
uncertain of the answers than if implied in his statement "that many
analysts concluded years ago." So, who are these "many analysts"? On what
basis did they reach their conclusions?
Certainly, we can find some analysts who argue ("conclude" is a word that
suggests an answer based on a comprehensive analysis of the facts) that the
financial crisis was the result of government mismanagement [4], or was
simply a textbook example of a bank run and not due to the actions of large
financial institutions per se, or were the result of the decisions of a
bunch of sub-prime mortgage providers - like Angelo Mozilo Countrywide
Financial [5] that operated more or less independently, and were outside of
strict government regulation, that is they were in the "shadows."
Krugman opts for this explanation: "Predatory lending was largely carried
out by smaller, non-Wall Street institutions like Countrywide Financial."
But, you don't have to have seen "The Big Short" to know that the sub-prime
lenders like Countrywide Financial [6] were just one set of players along a
powerful supply-chain that contained multiple links. This chain was geared
toward creating and selling structured, securitized financial products like
collateralized debt obligation (CDOs) and CDO-squared's, mostly produced,
financed and sold by the largest (now former) investment banks, J.P. Morgan,
Goldman Sachs, Lehman Brothers and commercial banks including Bank of
America, Citibank. Contrary to Krugman, the U.S. government authorized
Financial Crisis Inquiry Commission [7](FCIC) reports :
"We conclude dramatic failures of corporate governance and risk management
at many systemically important financial institutions (italic added) were a
key cause of this crisis .. They took on enormous exposures in acquiring and
supporting subprime lenders and creating, packaging, repackaging, and
selling trillions of dollars in mortgage-related securities, including
synthetic financial products. Like Icarus, they never feared flying ever
closer to the sun." (pp. XVIII-XIX)."
The FCIC, thus, puts a central part of the blame squarely on the, so-called
"systemically important financial institutions", which Federal Reserve Bank
President Neel Kashkari [8] and former Goldman Sachs banker calls "Too Big
to Fail Banks," and which economist Bill Black, more appropriately calls
"systemically dangerous banks." I have read much of the academic literature
on the financial causes of the great financial crisis and I think it is safe
to argue that most experts agree with the FCIC and not Paul Krugman.
Paul Krugman, of course, is entitled to his views. But the point here is
that it is highly misleading for Krugman to imply that the consensus among
economists is quite the opposite of what it is in fact.
Who does Krugman blame in addition to the sub-prime lenders?
". the crisis itself was centered not on big banks but on "shadow banks"
like Lehman Brothers that weren't necessarily that big."
This again is highly misleading. First of all, Lehman Brothers was very big
indeed. More important, this statement implies that there were "shadow
banks" that were involved in the sub-prime debacle that were somehow
distinct from the household name Wall Street banks like Citibank, Bank of
America, Goldman Sachs, and J.P. Morgan, that Bernie Sanders, Elizabeth
Warren and everyone else who talks about TBTF mean.
If these banks were not at the center of the crisis, then why, according the
Congressional Oversight Panel [9], did the massive and "non-shadowy"
Citibankget a tax payer bail-out in the amount of $476.2 billion in cash and
guarantees. Why did similarly placed Bank of America get $336.1 billion?
"Little Lehman" didn't bring these behemoths down. Their central role, and
those of other TBTF banks - in financing, buying and selling toxic mortgage
products put them - and the economy - into free-fall.
Paul Krugman didn't inform his readers that important economists [10] who
study shadow banking do not exclude these massive banks from key aspects of
this shadow banking system. Far from it: these TBTF banks are increasingly
seen by experts to be at the center of this global shadow finance
eco-system.
Krugman similarly misinforms his readers in discussing Bernie Sanders'
command over the details of the Dodd-Frank law and what it has to say about
dealing with too-big-to-fail-banks. In a widely reported - and misreported -
interview with the Daily News [11], Sanders was asked how he would break up
the big banks. Krugman was only slightly more polite than Vanity Fair
Magazine which proclaimed that the interview proved that "Sanders Doesn't
Know Diddly Squat About Wall Street [12]". Krugman referred to the "recent
interview [13] of Mr. Sanders by The Daily News [13], in which he repeatedly
seemed unable to respond when pressed to go beyond his usual slogans."
To sort this out, let's look at the relevant part of the transcript:
Daily News: Okay. Well, let's assume that you're correct on that point. How
do you go about doing it?" (That is: break up the big banks.)
Sanders: How you go about doing it is having legislation passed, or giving
the authority to the secretary of treasury to determine, under Dodd-Frank,
that these banks are a danger to the economy over the problem of
too-big-to-fail.
Daily News: But do you think that the Fed, now, has that authority?
Sanders: Well, I don't know if the Fed has it. But I think the
administration can have it.
Daily News: How? How does a President turn to JPMorgan Chase, or have the
Treasury turn to any of those banks and say, "Now you must do X, Y and Z?"
Sanders: Well, you do have authority under the Dodd-Frank legislation to do
that, make that determination.
Daily News: You do, just by Federal Reserve fiat, you do?
Sanders: Yeah. Well, I believe you do."
The relevant facts are these: Under Section 121 of the Dodd-Frank Act [14]
the Board of the Governors of the Federal Reserve has the authority, subject
to a 2/3 vote of the Financial Stability Oversight Council [15] (FSOC) to
take a range of actions, including (as a last resort) to "require the
company to sell or otherwise transfer assets of off-balance-sheet-items to
unaffiliated entities", that is, to shrink the size of the bank in question.
Note that the Chair of the FSOC is the Secretary of the Treasury. So,
Sanders is correct that the Federal Reserve and the Secretary of the
Treasury are the key players here. To be sure, Sanders' last statement
above, that Federal Reserve could break up the banks just by fiat - whatever
that means - is not true under section 121.
Still, the Federal Reserve has more tools under its control through
Dodd-Frank. For example, under section 619 (one of the key sections
outlining the so-called Volcker Rule that tries to ban proprietary trading),
states that for these financial institutions "no transaction, class of
transaction, or activity may be deemed a permitted activity..(iv) would pose
a threat to the financial stability of the United States." The Federal
Reserve would have significant power to issue regulations in this situation.
More generally, the goal of Dodd-Frank, as stated in Section 112 in
describing the mission of the newly created Financial Stability Oversight
Council (FSOC) is "eliminating expectations on the part of shareholders,
creditors, and counterparties of such companies that the Government will
shield them from losses in the event of failure." That is, end too big to
fail.
In the end, Dodd-Frank does provide tools and responsibilities to the Fed
and to the Secretary of the Treasury, along with other financial regulators,
that can be used to break up the banks. Sanders' answer was inelegant, to be
sure, but, in reality, his answer reflects the fact that the law is on
unchartered territory and in places is vague and would certainly be
contested by the banks. So Bernie's first answer is also the cleanest. "How
you go about doing it is having legislation passed ."
In short, Sanders' answers are way beyond "his usual slogans" as Krugman
claims.
Is it possible that Krugman doesn't understand these points. Seems very
unlikely. I cannot begin to imagine his motives, but that is not the main
issue here.
What it brings into question is Paul Krugman's credibility as a New York
Times commentator on these issue. Krugman's credibility does not stem from
his political analysis. Krugman is not a Political Scientist. Krugman's
"brand" is that he is a "brilliant, Nobel Prize winning economist." In fact,
much of his early research was brilliant; and, to be sure, Krugman did win
the Nobel Prize. BUT, the misleading discussion of economics contained in
his piece, "Sanders Over the Edge" does raise this question in my mind: Is
Paul Krugman still qualified to write an economics opinion column for the
New York Times?
Gerald Epstein is an economist at U-Mass Amherst specializing in
macroeconomic and financial issue including federal reserve policy,
proprietary trading and global finance. He and Jane D'Arista are
co-coordinators of SAFER-- a coalition of economists for Stable,
Accountable, Fair and Efficient Financial reform.
Error! Hyperlink reference not valid.
Error! Hyperlink reference not valid.
Report typos and corrections to 'corrections@xxxxxxxxxxxx'. [16]
Error! Hyperlink reference not valid.[17]
Source URL:
http://www.alternet.org/election-2016/krugman-attacks-bernies-agenda-called-
highly-misleading-leading-progressive-economist
Links:
[1] http://www.alternet.org/authors/gerald-epstein-0
[2] http://www.dollarsandsense.org
[3]
http://www.nytimes.com/2016/04/08/opinion/sanders-over-the-edge.html?_r=0
[4] http://www.wsj.com/articles/SB123414310280561945
[5] http://www.nytimes.com/topic/person/angelo-mozilo
[6] http://fortune.com/2010/12/23/how-the-roof-fell-in-on-countrywide/
[7] https://fcic.law.stanford.edu/report
[8]
https://www.minneapolisfed.org/news-and-events/presidents-speeches/lessons-f
rom-the-crisis-ending-too-big-to-fail
[9]
https://www.gpo.gov/fdsys/pkg/CHRG-112shrg64832/pdf/CHRG-112shrg64832.pdf
[10] http://www.voxeu.org/article/global-financial-ecosystem-0
[11]
http://www.nydailynews.com/opinion/transcript-bernie-sanders-meets-news-edit
orial-board-article-1.2588306
[12]
http://www.vanityfair.com/news/2016/02/bernie-sanders-doesnt-understand-wall
-street
[13]
http://www.nydailynews.com/opinion/transcript-bernie-sanders-meets-news-edit
orial-board-article-1.2588306?cid=bitly
[14] https://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW-111publ203.htm
[15]
https://www.treasury.gov/initiatives/fsoc/studies-reports/Documents/2015%20F
SOC%20Annual%20Report.pdf
[16] mailto:corrections@xxxxxxxxxxxx?Subject=Typo on Krugman Attacks on
Bernie's Agenda Called 'Highly Misleading' by a Leading
Progressive Economist
[17] http://www.alternet.org/
[18] http://www.alternet.org/%2Bnew_src%2B
