Friday, January 30, 2015

A Question of Prof. Krugman's Integrity

Economics not being an exact science, one has no choice but to accept certain unprovable arguments even though common sense might suggest that they are wrong. This contest between unprovable arguments and common sense I experience quite often when reading columns and/or blogposts by Prof. Paul Krugman.

In this piece in the NYT Krugman has, so I believe, overdone it and one is inclined to question his integrity. And one is reminded of Prof. Niall Ferguson who once wrote several articles attempting to prove Krugman's lack of integrity.

Krugman, off the bat, aims at destructing the myth that the rescue loans which Greece has received since 2010 have been subsidizing Greek spending. Well, if that is a myth to Krugman, then he is probably the only one to whom this is a myth. The figures have been public knowledge for everyone who ever took the time to look at IMF reports on Greece. From 2010-12, rescue loans totalled 247 BEUR, of which 206 BEUR went to debt service. A whopping 83% of rescue loans only served the creditors. However, there were still 41 BEUR which stayed in Greece to finance the primary deficit. How would Krugman call that other than 'subsidizing Greek spending'?

But Krugman's real fast one is yet to come. He says that "it’s true that Greece (or more precisely the center-right government that ruled the nation from 2004-9) voluntarily borrowed vast sums. It’s also true, however, that banks in Germany and elsewhere voluntarily lent Greece all that money. We would ordinarily expect both sides of that misjudgment to pay a price. But the private lenders have been largely bailed out (despite a “haircut” on their claims in 2012). Meanwhile, Greece is expected to keep on paying".

Excuse me, Prof. Krugman, was Prof. Ferguson perhaps right when he accused you of a serious lack of integrity?

Whether or not the private lenders paid a price or the European tax payers bailed them out (which I argued at the time was the prodigal sin) has absolutely zero bearing on Greece as the borrower. All it did to Greece was that it changed its obligors from private lenders to the Troika. Had the private lenders not been bailed-out by the tax payers and had they all gone bankrupt, it wouldn't have made one cent worth of difference to Greece as the borrower. On the contrary, the insolvency judge of those lenders might have radically called all those loans in order to maximize cash. To suggest that it was the other way around is simply unacceptable.

Krugman essentially suggests what the EU has signalled that it is willing to do: reduce the debt service burden by lowering rates, extending maturities and installing longer grace periods for interest and by lowering the primary surplus requirement. What Krugman ignores is that SYRIZA is not satisfied with what Krugman suggests and what the EU has signalled it would be prepared to do. SYRIZA wants a straight-forward haircut for demagoguery reasons. They are so fanatic about their dogma that they don't even realize that the Krugman proposal (like the EU plan) would be much more beneficial to Greece than a haircut.


  1. Let's not forget that Greece is a net beneficiary of EU money to the tune of $4 billion euros per year. If Greece defaults, will they still get their agricultural subsidies and structural funds money? If not, bang goes their primary surplus?

    1. The default is a technical issue within the eurozone. The CAP and structural funds are part of the EU and Greece would probably be entitled to more payments from them! unless...

      Since there is no legal mechanism for a country to exit the eurozone, the Commssion and the Germans are claiming that they would force Greece to quit the EU. In that case, Greece would be fucked. However...

      A Greece outside the EU would form a political alliance with Russia, which has already been hinted at. The USA would not stand for this, and all Hell would be let loose. So, either the USA would block German and EU ideas about expelling Greece, or there would be a likely scenario including a world war.

      The Germans are playing with fire. They seem, as always, to be stupid enough not to have noticed.

  2. Chill. Here's the exact quote: "The truth, however, is that the great bulk of the money lent to Greece has been used simply to pay interest and principal on debt. In fact, for the past two years, more than all of the money going to Greece has been recycled in this way"

    83% IS the same as the "great bulk" and the quote about recycling more than 100% relates to the last two years, not to 2010-12. You're saying the same thing.

    I know you bankers hate Krugman, but he is extremely punctual and accurate in what he says. Ferguson could not bring anything on him, and ended with egg on his face.

    1. It is certainly not my intent to claim more expertise in economics than a professional economist, much less a Nobel Prize winner. All I claim knowledge of is to spot inconsistencies. I don't know why bankers should hate Krugman when it is his policy recommendations that make bankers rich (more Tresasuries to issue and trade, more QE, etc.). Krugman is much more convincing when he writes about things which he has intensively analyzed. Every since he started writing about Greece, it was quite noticeable - at least to me - that he never 'dug' himself into the Greek issues. That's why he predicted, without a proviso, a Grexit.

  3. I believe you are so biased that you are trying to make a point out of something that Krugman never said (as rightfully mentioned above). This is really embarrassing for someone when actually misinterpreting others thoughts or even using third's quotes in order to express his own opinion.

    It is actually a shame that intellectual people like you do not want to understand the fact that "41 BEUR which stayed in Greece to finance the primary deficit" is not subsidizing of spending rather covering the devastating effects of the implemented program that lead to a cumulative GDP contraction of more than 25%, unemployment rates above 26%, the collapse of tax receipts and a humanitarian crisis.
    These loans were used in order to pay for the effects of the program that Troika designed for Greece and every common sense unbiased person (does not need to be Krugman) says that has failed.

    1. First, the 41 BEUR financed more than just the primary deficit. For the sake of argument, let's assume that the 41 BEUR only financed the primary deficit.

      If you have a primary deficit of 41 BEUR, that means that you spend 41 BEUR more than you receive. If you receive nothing, then you have to cut expenses by 41 BEUR. If you receive 41 BEUR, whoever gives you the 41 BEUR is subsidizing spending which you couldn't have had otherwise. So much for that.

      Now to this other issue of the 25% drop in GDP. 25% relative to what? To 2008 perhaps? Well, maybe the 2008 GDP was totally inflated by the debt-induced consumption spree and the 25% drop only re-introduced reality? A poor man who hits a 10 MEUR jackpot and decides to spend 1 MEUR a year for consumption will run out of money 10 years later. And then he has to return to the living standard he had before the jackpot (unless he finds another source of revenue). Greece’s trouble is that it didn’t hit a jackpot but borrowed the money instead. From 2001-10, Greece had an average inflow of net foreign debt of about 30 BEUR annually. When so much money flows into an economy the size of Greece's, no wonder that there is boom. The water level rises and all ships with it. When the money flow stops (it's called 'sudden stop' in financial language), then the water retreats and - to use Warren Buffett's phrase - you can see who is naked. The net inflow of debt had become the gasoline which drove the Greek engine and when the engine ran out of gasoline, it stopped. In actual fact, the gasoline flow never stopped altogether; it was only reduced relative to previous levels (that's why Greece's foreign debt is now higher than then).

      How much unemployment would there have been before 2010 if the state, throughout the 2000s, hadn't hired all those people who could no longer be employed in a non-competitive private sector?

      I have always been very critical about how the austerity was implemented in Greece. Had it been implemented optimally, the unemployment would still have increased substantially but not as much as it actually did.

      No economic program can ever guarantee success from the start because any such program depends on the reaction and behavior of the socalled 'economic agents', i. e. all the people in the economy. If a society responds to an austerity program like the Chileans did in the 1970s, then you have a turn-around within 5 years at the most. When a society responds like the Argentines did in the 1980s, then you get the mess which the Argentines got. The Greeks responded more like the Argentines than the Chileans.

    2. Dear philosophers "observing" Greece from thousands of kilometers away, brainstorming and preaching...

      I am a Greek citizen standing naked in front of your wisdom to tell you that my 55 years old brother in law, father of 3 kids is a stage 4 cancer patient.

      A good father, a great friend, a proud man, a human being above everything else... A man who can not get his medicine to leave another day and see his kinds grow up. Because IKA does not have the resources to buy the medicine and equipment, because THE PROGRAM requires a number.

      The "structural reforms", the deficit reduction targets, do not care for people dying, lives destroyed, kids left without parents.

      And I loudly ask you: Is there any humanity within you?
      How do you feel punishing a society for the faults of the past? Is there any LIMIT to this?

      Are you "observing Greece" as a scientist observes his experiment? Do you care for people? Do you have friends here?

      Do something..

    3. @ Anonymous at 9.49
      SYRIZA has committed to raise 12 BEUR from tax cheaters, smugglers and other parasites of Greece in a hurry. The question is: if that's so easy, why wasn't it done before? Why blame the tax payers of other countries while letting the parasites at home go free? I maintain: no one from outside of Greece has done damage to Greece as much as some Greeks have done to others. What we have seen in the last 3-4 decades, with special emphasis on the period since the Euro, is that one part of Greeks (the smaller one, I presume) has taken the other part for a ride of unbelievable proportions. I spend close to half the year in Greece since being retired. When I see how what I would call "the upper one-third" lives and spends money, I get sick. Those are the ones to whom you should address the very sad story about your brother! And support SYRIZA so that they will collect the 12 BEUR soon!

  4. As I have stated in comments several times, here, at Krugman's blog and elsewhere, you simply can't trust him on Eurozone issues! I generally like and respect him, but it's obvious to me that his irrational hatred of the Euro (he never did get over that his advice against it was ignored) and maybe Germany, too (just guessing) clouds his otherwise good judgment every single time. There's lots of incidents when he ignored facts and even deliberately misrepresented them, in graphs, numbers and arguments, in order to make his anti-Euro points. Nobody is perfect, of course, and this is Prof Krugman's major weakness.

  5. Well said Klaus. Krugman's argument is null and void because Greece's creditworthiness was dead in the water. The bailout saved Greece from a hard default which would have been, well, hard. A common mistake people do is to assume that a default of the Greek government wouldn't affect the functioning of the private economy (i.e. that the government would be able to gather the same money in taxation, and thus balance it's budget easily). That is simply not true. The private sector's interactions with foreigners would change completely following a default. For a country that is so dependent on imports, that is a serious constraint, one that the Syriza government should have clearly thought out more.

    1. I couldn't find much in any of the 3 manifestos of SYRIZA about the private sector. They seem convinced that what really matters is the public sector. It seems like they mistrust private enterprise. I once sent Yanis Varoufakis this quote by Churchill:

      "Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon".

  6. Having studied physics, I always wonder what funny assumptions are taken for granted by some famous economist regardless of an eventual Nobel price... This so called 'science' more often resembles to religious believe systems. Therefore I tend not to associate it to integrity or character traits of the persons involved. But all too often an agenda is clearly visible behind the scenes ;-)
    From that perspective, our esteemed owner of this blog might consider, that not only Krugman, but quite an important number of exponents, seems to have lulled by the shawm played by Varoufakis. They all do not analyse it in the same sufficient detail as he did it. This whole cacophony is essentially made to influence the west European population.
    In part of one sentence I agree with Krugman: "That way, all too easily, lies a forced exit of Greece from the euro", but the second part "with potentially disastrous economic and political consequences for Europe as a whole" seems blatantly exaggerated.



    1. GREECE defaults to official sector (issues IOU currency, Greeks repatriate capital from abroad)

      ECB : QE fails as questionable if (a) legitimate to buy negative yielding german sovereign bonds (would that constitute direct financing?)
      (b) non effective yields already at zero

      EUR plummets (how does that feel for hard-DEM lovers)

      Deflationary spiral european periphery debt unsustainable

      GERMANY leaves the EUROZONE (bibi) and everyone is happy again with a soft EUR and growth friendly policies

      And a reference to a URL

  7. In the meantime there are several "Anonymous" people commenting here, in this blog. "Anonymous" has many different meanings on internet, however, and it seems to be even a real name for an organisation, a film, a group.
    The original meaning is: without a name.
    When answering, commenting, without a name, one hides behind personal views and statements, (semi) scientific approaches, critics, and/or vague commenting. One cannot lose one's face because one does not have a face.

    It is a cowardly act to comment "anonymous". Nobody can check the CV, the real knowledge, the studies, the degrees in studies, and well, in a way it is not needed because a real studied/educated mind is recognizable in the text. Characteristic for a studied mind however is that one dares to speak without any mask.

    Because of the overload of empty phrases and lack of quotes in the comments of this blog, the readers have to guess what the level of intelligence is, or might be. If I am wrong: prove it, by adding some links, to website, blogs, posts, articles, books, etc.
    That is not meant to be humiliating: my mind is clever, but I do not know anything about economy and politics, so don't feel ashamed to be a simple mind, DARE to be simple, more than anonymous! My mind is more related with philosophy and deep ecology, aesthetics. (And because of the last interest it might be clear WHY I cannot think as a politician, or an economist.)

    I dare to write here anyway, showing my full name and profile. I share my personal thoughts, also about Greece. You can name me stupid, not intelligent, and I do not mind, at least you know now where you maybe judge me for, or accuse me for. I cannot judge you, Anonymous 1, 2, 3 etc. because I do not see any website mentioned.

    Your comments remind me of the never ending debates on the Greek TV: empty, without or hardly any reasonable intelligent comment or question of not any guest, or TV host: they are talking about nothing.

    It reminds me also of the too many blog posts of the Greek minister of finances, filled with semi (fake?) logic answers on questions, even showing formulas, that none of his followers can ever check for its mistake(s) in thinking, (but they look very impressive, and that is the only reason they are published, I am sure: the longer he is in the picture as a Greek minister the more I am convinced about his narcissism, and that is the great danger of the moment: narcissism does not bend the head for wisdom). He himself can never have dreamed to get the possibility once in the soap of real life to make his theories to become true, and IF: he would have closed his blog: that day will come. Life is going to prove that his theories are just theories. He plays with economy as if it is a game. What will he do when the world discovers via his Greek politics his lack of real insight? Dancing the Zalongo dance and taking all his followers with him?

    As Herr Kastner starts this post with: economy is not an >exact< science. (It took me some hours to realize this: FINALLY I understand why I could not make a head or a tail out of it, economics.) I would like to make one step more: it is not even science, and real life is going to prove that. NOTHING of what Mr. V. has written can ever be proved as true, or "working". What CAN be proved is that all what he wrote is nonsense. Oh, Happy Day!

    May life prove also how narcissism rules Greece via Syriza's leader and its minister of finances. It would have been better for the imago of both that they could have stayed.....anonymous.

    1. @Antoinette JanssenJanuary 31, 2015 at 3:20 PM

      You might also consider that due to some hidden technical mysteries all users not having a blogspot account are forced to write anonymously :(


    2. My dear: all politicians across Europe are narcissists, including the President of the Commission. Do you prefer the corruption and nepotism of Juncker and others to the honest technical skills of Varoufakis, or the apparent honesty and clean history of Tsipras? If so, then you are a large part of the problems of Europe, and have nothing interesting to say here.