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Krugman, On Why Reappointing Bernanke Was The Right Move

This is an excerpt of Robin Young’s conversation with Paul Krugman on “Here & Now.” Click the “Listen Now” button above to hear the full interview.

President Obama took a break Tuesday from his vacation on Martha’s Vineyard to say he thought Ben Bernanke should keep his job, praising the Republican Federal Reserve Chairman’s “bold and out-of-the-box thinking.”

Economists agree that the special lending programs that Bernanke created to pour money into the financial system are a radical departure for the federal bank, but critics say he gave too much to banks and the country is not out of the woods yet. Bernanke will face a Senate hearing before being confirmed.

Meanwhile, two reports on Tuesday, from the White House and the Congressional Budget Office, say the federal deficit will explode in years to come.

For a view of where we are in the economy — a decidedly liberal view — we spoke to Paul Krugman, the Nobel Prize-winning economist and columnist for The New York Times. He was a thorn in the side of the Bush administration, and is proving to be quite a splinter for President Obama as well.

Robin Young: Paul, welcome back to Here & Now.

Paul Krugman (AP)

Paul Krugman (AP)

Paul Krugman: Hi there, good to be on.

Now you’ve criticized Ben Bernanke for missing the fact that there was a housing and credit bubble, and for being slow to respond at the beginning of the financial crisis, but you’ve also written that he’s earned the right to this reappointment. Why?

Because once it became clear that we had a really, really big crisis, Ben Bernanke responded aggressively, imaginatively, he understood the stakes. He may have been a little off on his — more than a little off on his — forecast before it happened, but when it happened he was as good a firefighter as we really could have hoped for. And so, who would you have preferred to have in that seat this past year?

Tell us why. He cuts the prime-lending rate, pours money into Wall Street…

That’s right. Yeah, it’s cutting interest rates fast, realizing that we really were at risk of a second Great Depression, unconventional policies. Having the Federal Reserve out there buying commercial paper, which is, you know, private debt. Having it buy long-term government debt.

All of this is stuff that someone else might have hesitated, said, ‘Well, that’s a little unusual, let me wait until it’s clear that we really are headed for another Great Depression,’ and Bernanke didn’t do that and I think we have to be thankful for that.

Where do you think we are? Bernanke spoke last week with central bankers from around the world and said the prospects for a return to growth in the near term appear good — he also warned that unemployment would remain high for another year — but was he right to be optimistic?

Well, I don’t know if you call it optimistic. We’re having a problem with language right now. We basically have a binary language, we say either the economy is in recession, which is everything is going down, or the economy’s in recovery, where everything’s going up.

We’re either in hell or we’re in heaven. Where we are right now looks like we’re in purgatory. That is, the economy is probably growing if you measure it by GDP, but it’s not generating jobs. the unemployment is probably going to be heading higher for quite awhile.

It’s not the sum of all fears. Five months ago, six months ago it was actually reasonable to worry that we might be headed for 1930′s conditions. That doesn’t look like it’s going to happen now, but it’s a long, long way from what we really want to see.

You’ve said that the stimulus package wasn’t bold enough. But what does someone like Bernanke do? He’s cut the prime-lending rate almost to zero, nowhere to go there, poured money into the financial markets. There’s criticism that there’s too much money floating out there and that he now has to navigate away from the shoals of inflation –

That’s kind of why I want someone like Bernanke — turned out to be Bernanke — in there, because he understands, I think, that these pressures are always there and that the great risk now is that the Fed and the Obama administration will start to pull back too soon.

This is what happened to the U.S. economy in 1937 when Franklin Roosevelt started listening to the forces of orthodoxy, it’s what happened to the Japanese in 1997 when their government started listening to the forces of orthodoxy.

And you start saying, ‘Oh, well, you know maybe we should start worrying about inflation,’ when actually deflation is still the pressure that’s on the economy; you start saying, ‘Well, you know we’re growing,’ even though we’re very, very far below full employment — and you backslide. So, no, what he really needs to do is, basically we need to keep all of these supports for the economy in place until we have a real recovery, which is not yet happening.

This brings us to some of the spats you’re having with people who are on the other side of the fence who say, ‘Too much spending.’ I’m thinking of Harvard historian Niall Ferguson. You both were at a panel discussion at the Metropolitan Museum of Modern Art, you arguing for more spending, he saying that spending is going to lead to inflation and lead other countries to question whether the U.S. continues to be a good bet with such a debt.

Now, I want to put aside how heated that debate got on blogs and everything…

I have had two blog posts on this over the course of four months, you know, this is not something that’s major in my life.

But that seems to be at the crux of the matter: Spend or keep an eye on the debt. What about that question? This idea that the more the U.S. goes into debt, the less like a good deal we look to other countries that are supporting us.

There are several things you need to bear in mind here. First, the reason that China is buying so much less of our debt is that we are no longer running the big trade deficits we were running in the past. We actually don’t need foreign financing to anything like the same extent.

Who is buying our debt is Americans, because people are looking for a safe place to put their money. There’s actually an useful role — actually a critical role — played by deficits right now. Because everybody’s looking for a safe place to put their money, they don’t want to spend it, so they’re piling into U.S. government debt. If the U.S. doesn’t supply that debt, the result is that there just isn’t enough demand for real stuff in the economy, and the economy plunges.

The reason we haven’t had another Great Depression is in large part because, in fact, federal spending has continued, has been maintained, at the expense of large deficits, which is not a good thing, but those deficits are in a way the flip-side of supporting the economy through a very, very difficult time.

So I don’t worry at all about the revolt of the creditors. I do worry that if you look out 10 years, we will have a level of debt that is probably not crisis level, but is certainly not a good thing.


This is an excerpt of an interview that originally aired on “Here & Now”, Aug. 25, 2009.

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