Rajan v. Krugman

Raghu Rajan’s Fault Lines is perhaps the most thoughtful book on the financial crisis, and now Professor Rajan is continuing his incisive analysis at a U. Chicago blog. Here, he defends his own criticism of the Fed’s ultra-easy monetary (both leading up to the crisis and again today) against Paul Krugman’s crude Keynesianism.

Some excerpts:

Before saying the real problem is we are not providing enough monetary stimulus, should we not worry about why corporations did not invest then and what other problems will emerge as we  keep rates ultra-low while hoping corporations will see the light?

. . .

If the government raised taxes explicitly to provide the interest subsidy, everyone would scrutinize the use this money was being put to carefully. Because the Fed picks investors’ pockets silently and forcibly through its ability to set the short term interest rate, no one asks questions about cost.

. . .

Of course, the Fed now disingenuously claims that the worst excesses in the housing market were committed when it had already started raising rates, and therefore it is not responsible for the housing boom. But it was complicit in setting off the boom by keeping interest rates too low for too long before then!

I may disagree with Rajan’s take on “global imbalances” (as I wrote about here) but nevertheless think he has become one of the smartest academic analysts of today’s confusing economic landscape.

Comments are closed.