Bubbles Everywhere: Krugman Wrong Again; Austrians and the BIS Are Correct
Paul Krugman is at it again – distorting or misinterpreting work by other economists to attack critics of today’s central bank driven low interest rate environment and to defend policy status quo or to push for even more stimulus. This time the economist is Knut Wicksell whose work in both monetary theory and capital theory was part of foundation for Mises’s development of Austrian business cycle theory (ABCT). Krugman’s rant is in response to Neil Irwin’s commentary on booms and bubbles in asset prices driven by central bank policy and his target is Austrian influenced economists and Wall Street analysts and pundits with a pointed jab at recent work from the Bank for International Settlements (BIS). From Krugman:
The proximate cause is obvious: policy interest rates are very low, and expected to remain low, so money is pouring into alternative assets, driving their yields down too. The question is what you think about this situation.
Quite a few people — including a lot of people on Wall Street, at the BIS, and so on — look at this and say that it’s terrible: the Fed is keeping interest rates “artificially low” and thereby distorting asset prices across the board, and it will all end in grief.
But for Krugman there is no reason to panic, rates are not too low and there are no asset price bubbles:
Mainly, though, there simply isn’t any macroeconomic case for claiming that interest rates are wildly depressed relative to fundamentals, and not much reason to believe that assets in general are overvalued.
Robert Murphy at Mises Canada exposes the fallacy of Krugman’s argument:
Krugman is supposed to be a technical wizard who throws up an impressive array of mathematical models to justify his policy conclusions. Well, in this case he tries to get his readers to accept first derivatives in place of levels. Nope: However you slice it, central banks have pushed interest rates artificially low. That’s why their balance sheets have exploded. It is astonishing that Krugman is trying to justify this outcome as “natural.”
What I find interesting here is Krugman’s explicit attempt to discredit the recent BIS warning, based on the work of Mises and Hayek, of Central bank excesses. As reported by the Wall Street Journal, (“Stop Us before We Kill Again”):
The Bank for International Settlements issued a report warning that global monetary policies are reaching their useful limit and may be contributing to financial excesses that could turn out badly if central bankers aren’t careful.
“Financial markets are euphoric, in the grip of an aggressive search for yield,” Claudio Borio, head of the monetary and economic department at the BIS in Basel, Switzerland, said as the club issued its annual report. “And yet investment in the real economy remains weak while the macroeconomic and geopolitical outlook is still highly uncertain.”
Austrian influenced work by current BIS economist Claudio Borio and former Head of Monetary and Economic Department of the BIS, William R. White is highlighted here. As a side note, I would like to think work by Fred Glahe and I perhaps planted a seed for some of this work as White often cites our Keynes-Hayek Debate when he introduces Hayek. A more detailed list and discussion of recent mainstream work on ABCT is developed Nicolas Cachanosky can be accessed from links provided here.
Andreas Hoffmann, co-winner of the 2014 Lawrence W. Fertig Prize in Austrian Economics for Monetary Nationalism and International Economic Instability, has had his paper “Zero-Interest Rate Policy and Unintended Consequences in Emerging Markets” has been accepted for publication in The World Economy (pdf upon request). The abstract:
Since 2009, central banks in the major advanced economies have held interest rates at very low levels to stabilize financial markets and support the recovery of their economies. This paper outlines the unintended consequences of the prolonged period of very low world funding interest rates in emerging markets. The paper is informed by a Mises-Hayek-BIS view on credit booms and Mises’ law of unintended consequences. Consistent with the presented credit boom view, the paper shows that the period of low world funding interest rates is associated with a rise in volatile capital flows and asset market bubbles in fast-growing emerging markets. As suggested by Mises’ law, the unintended consequences give rise to a new wave of interventionism as policymakers in emerging markets increasingly reintroduce financially repressive measures to isolate the economies from foreign capital inflows.
Interesting addition illustrating the renewed influence of Hayek and Mises is the reference to this increasingly influential emphasis on credit booms as Mises-Hayek-BIS view.