October 12, 2009

The Doppelganger Seizes Krugman's Keyboard

Nothwithstanding his Nobel Prize in Economics (and let's face it, the Nobel Committees in Oslo and Stockholm are getting pretty whimsical these days), sometimes I think the problem with Paul Krugman is that he's just not very smart. He's ambitious, obviously, since you can see him opinionating on the Op-Ed pages of the New York Times, on Real Time with Bill Maher, and on George Steph's snoozefest on Sunday mornings, where you can also listen to the Climate Change Deniers' Champion, George Will.

To account for my ambivalence about Krugman's true intelligence, I have invented the literary conceit of the Doppelganger, a mysterious (but still bearded) phantom who periodically takes over Krugman's spot at the Times and writes his column for him. I think the DG was keeping Krugman's seat warm over the weekend and wrote his column appearing today, in which Krugman (?) argues that the falling value of the dollar against international currencies is an unequivocally good thing. It's simple, according to Professor K: it makes American exports more attractive, and the reason the dollar is actually falling is because foreign banks have relaxed as they bask in the warm glow of the obvious economic recovery and have retreated from the safe haven of the dollar into their domestic currencies.

Meanwhile, back in the real world, Romania's government just collapsed because they're broke. California, which would be in the G-8 if it were a country (its economy is/was that large), is on budgetary life support, and if it crashes (it might) then the state which produces half the country's food (including all those exports) will come asunder.

I just figured out who's writing Krugman's columns! I don't why it never occurred to me before. It's Ben Bernanke. All the details fit. Faculty of Princeton's economics department? Check. Beard? Check. Refusal to confront reality? Check.

It's him alright. Look, Paul, Ben, Doppel, whoever you are: it's obvious to us why you're printing money (monetizing the debt, though you refuse to admit it), keeping interest rates at the "zero lower bound" (fancy Fed talk for not charging interest at all), and maintaining all the happy talk about the economic recovery. Politically speaking, it's just not possible anymore to face the truth. The Bubble-Built-On-Debt Economy is over, but the problem is that the bubbles in that economic champagne we were drinking have left us with a helluva hangover. To wit, to keep the party going during the Bush years, and to funnel the remaining notional wealth of the United States into the accounts of about four or five large investment banks on Wall Street who were well-connected in Washington, American consumers took on residential, commercial real estate and credit card debts they could not pay with existing incomes. They could not pay the present value (factoring in the interest increases built into such loans) of the loans even at the moment when the ink was still wet. The vaults of large banks (Bank of America, Wells Fargo, Citi, Wachovia, Washington Mutual, Indy Mac) became stuffed with these dodgy pooled mortgages, and hundreds of billions more were sold to fixed-income investors. The cream (the commissions) was skimmed at the front end by Goldman Sachs, Bear Stearns, JP Morgan Chase, et al., and they all got very rich.

Then sunrise came. The world at large is now looking askance at the epic scene of wreckage in America stretching from sea to shining sea, the hundreds of thousands of houses owned by banks representing the worthless collateral of all those failed loans. At the specter of America borrowing 40 cents of every dollar its government spends, yet that government is unable to stop itself from expensive foreign wars. At the Federal Reserve's hypertrophied balance sheet, heavy with all those toxic loans it traded for Treasuries during its "cash for trash" triage operations. And the world is saying: WTF?

There's the true story of the dollar's decline. The FDIC is broke and afraid to declare any more banks insolvent, although hundreds of banks are in that condition. The Treasury is holding huge auctions on practically a daily basis to raise cash to meet the inexorable needs of Congress for more dough to keep the game going.

This is all about improving our export position? I doubt that, just a little. The real purpose of zero interest loans and the Fed's ravenous appetite for all the crap on the books of the banking system is the hope, however faint, that the real estate bubble can be reinflated so that, voila!, all those loans become good again. That's the game, that's the prayer. It's the only way out, short of doing something politically impossible, such as telling the truth.

A weak dollar is very scary, because the ability to decide how much money we have (by virtue of our status as the printer of the world's fiat currency) is mostly what we have left. Krugman says the weak dollar is "good news." It is what's new, but I don't know how good it is.

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