The ugliness is awesome

The Immorality of the Interest Rate Hawks

Paul Krugman, NYT

Business Insider reports on a Bloomberg TV interview with hedge fund legend Stan Druckenmiller that helped crystallize in my mind what, exactly, I find so appalling about people who say that we must tighten monetary policy to avoid bubbles — even in the face of high unemployment and low inflation.

Druckenmiller blames Alan Greenspan’s loose-money policies for the whole disaster; that’s a highly dubious proposition, in fact rejected by all the serious studies I’ve seen. (Remember, the ECB was much less expansionary, but Europe had just as big a housing bubble; I vote for Minsky’s notion that financial systems run amok when people forget about risk, not because central bankers are a bit too liberal). But props to Druckenmiller for being explicit about what he thinks should have happened: after the dot-com bubble burst,

instead of taking a recession and having the cleanup…they needed an offset. So they created the housing bubble. So now by hindsight, everybody says, ‘Well, you had these horrible Wall Street actors,’ and I’m sure there were quite a few horrible Wall Street actors. And I don’t doubt that they were part of the problem. In fact, I know they were part of the problem. But I also know it was negative real interest rates for 12 outta 20 years that enabled these actors to do the things they were doing and incented, yes, incented them to go out and gamble the way they were gambling.

So, we should have had a recession — or, since we actually had one, a much longer and deeper recession — to “clean up” Wall Street’s excesses; and if Wall Street went on to engage in much bigger excesses, well, boys will be boys, and it’s really that foolish preoccupation with full employment that deserves the blame.

(More here.)