Tuesday, March 26, 2013

Don't trust the insiders

The Unnatural Rate Hypothesis

Paul Krugman, NYT

When I read opinion pieces by insiders, I often find the ostensible argument less interesting than what is taken for granted. It’s the throwaway lines, the statements that obviously are meant to refer to what “everyone knows”, that can be truly revealing about the state of conventional wisdom.

So it is with Fred Hiatt’s latest deficit-scold column. Dean Baker is exercised over Hiatt’s evident longing for a financial crisis to get action on the policies he believes are necessary to avoid an, um, financial crisis; indeed, Hiatt is following in the inglorious footsteps of Alan Greenspan, who declared almost three years ago that the failure of interest rates and inflation to soar was “regrettable”, rather than being an indication that his model of the economy was wrong.

But what I found striking was Hiatt’s offhand explanation of why his never-changing, never-right prediction keeps not happening; it’s because "the Federal Reserve is gobbling up U.S. debt to keep interest rates low."

Clearly, this has become part of the CW. And once again we see how a highly dubious economic idea can become part of what Everyone knows and Nobody disagrees with, even if in this case Nobody includes a fellow by the name of Ben Bernanke, who gave a speech on this very topic just a few weeks ago.

(More here.)

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