Paul Krugman Crosses the Line

Gerald Epstein

In his recent New York Times opinion column, “Sanders Over the Edge” (4/8/16), economist Paul Krugman offers his readers a basketful of misinformation on important economic matters about which he should – and probably does – know better. The column contains a large number of snipes and a great deal of innuendo against Bernie Sanders and his supporters, but here I focus on his claims about “Too Big To Fail” (TBTF) banks, their role – non-role, according to Krugman –  in the financial crisis, and Sanders’ understanding of the policy tools available to deal with them. Krugman’s claims about these issues are misleading, almost certainly wrong, and, in my view, call into question the credibility of his New York Times column as a source of economic information and analysis.

Krugman starts here:

“Bernie is becoming a Bernie Bro.” I’ll leave it to others to dissect this one. Moving on:

“Let me illustrate the point … by talking about bank reform.

“The easy slogan here is ‘Break up the big banks.’ It’s obvious why this slogan is appealing from a political point of view: Wall Street supplies an excellent cast of villains. But were big banks really at the heart of the financial crisis, and would breaking them up protect us from future crises? Many analysts concluded years ago that the answers to both questions were no.”

As you can see by following Krugman’s link here, this is not, what Krugman suggests it is: it is not a link to an article quoting multiple analysts presenting strong arguments with evidence that large banks were not responsible for the crisis. It is a link to an opinion piece by Paul Krugman himself. Period.

And, moreover, in this linked piece, Krugman is far more circumspect and uncertain of the answers than if implied in his statement “that many analysts concluded years ago.” So, who are these “many analysts”? On what basis did they reach their conclusions?

Certainly, we can find some analysts who argue (“conclude” is a word that suggests an answer based on a comprehensive analysis of the facts) that the financial crisis was the result of government mismanagement, or was simply a textbook example of a bank run and not due to the actions of large financial institutions per se, or were the result of the decisions of a bunch of sub-prime mortgage providers – like Angelo Mozilo Countrywide Financial that operated more or less independently, and were outside of strict government regulation, that is they were in the “shadows.”

Krugman opts for this explanation: “Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial.” But, you don’t have to have seen “The Big Short” to know that the sub-prime lenders like Countrywide Financial were just one set of  players along a powerful supply-chain that contained  multiple links. This chain was geared toward creating and selling structured, securitized financial products like collateralized debt obligation (CDOs) and CDO-squared’s, mostly produced, financed and sold by the largest (now former) investment banks, J.P. Morgan, Goldman Sachs, Lehman Brothers and commercial banks including Bank of America, Citibank. Contrary to Krugman, the U.S. government authorized Financial Crisis Inquiry Commission (FCIC) reports :

“We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions (italic added) were a key cause of this crisis .… They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging, and selling trillions of dollars in mortgage-related securities, including synthetic financial products. Like Icarus, they never feared flying ever closer to the sun.” (pp. XVIII-XIX).”

The FCIC, thus, puts a central part of the blame squarely on the, so-called “systemically important financial institutions”, which Federal Reserve Bank President Neel Kashkari and former Goldman Sachs banker calls “Too Big to Fail Banks,” and which economist Bill Black, more appropriately calls “systemically dangerous banks.” I have read much of the academic literature on the financial causes of the great financial crisis and I think it is safe to argue that most experts agree with the FCIC and not Paul Krugman.

Paul Krugman, of course, is entitled to his views. But the point here is that it is highly misleading for Krugman to imply that the consensus among economists is quite the opposite of what it is in fact.

Who does Krugman blame in addition to the sub-prime lenders?

“… the crisis itself was centered not on big banks but on “shadow banks” like Lehman Brothers that weren’t necessarily that big.”

This again is highly misleading. First of all, Lehman Brothers was very big indeed. More important, this statement implies that there were “shadow banks” that were involved in the sub-prime debacle that were somehow distinct from the household name Wall Street banks like Citibank, Bank of America, Goldman Sachs, and J.P. Morgan, that Bernie Sanders, Elizabeth Warren and everyone else who talks about TBTF mean.

If these banks were not at the center of the crisis, then why, according the Congressional Oversight Panel , did the massive and “non-shadowy” Citibank get a tax payer bail-out in the amount of  $476.2 billion in cash and guarantees. Why did similarly placed Bank of America get $336.1 billion? “Little Lehman” didn’t bring these behemoths down. Their central role, and those of other TBTF banks – in financing, buying and selling toxic mortgage products put them – and the economy – into free-fall.

Paul Krugman didn’t inform his readers that important economists who study shadow banking do not exclude these massive banks from key aspects of this shadow banking system. Far from it: these TBTF banks are increasingly seen by experts to be at the center of this global shadow finance eco-system.

Krugman similarly misinforms his readers in discussing Bernie Sanders’ command over the details of the Dodd-Frank law and what it has to say about dealing with too-big-to-fail-banks. In a widely reported – and misreported – interview with the Daily News, Sanders was asked how he would break up the big banks. Krugman was only slightly more polite than Vanity Fair Magazine which proclaimed that the interview proved that “Sanders Doesn’t Know Diddly Squat About Wall Street”. Krugman referred to the “recent interview of Mr. Sanders by The Daily News, in which he repeatedly seemed unable to respond when pressed to go beyond his usual slogans.”

To sort this out, let’s look at the relevant part of the transcript:

Daily News: Okay. Well, let’s assume that you’re correct on that point. How do you go about doing it?” (That is: break up the big banks.)

Sanders: How you go about doing it is having legislation passed, or giving the authority to the secretary of treasury to determine, under Dodd-Frank, that these banks are a danger to the economy over the problem of too-big-to-fail.

Daily News: But do you think that the Fed, now, has that authority?

Sanders: Well, I don’t know if the Fed has it. But I think the administration can have it.

Daily News: How? How does a President turn to JPMorgan Chase, or have the Treasury turn to any of those banks and say, “Now you must do X, Y and Z?”

Sanders: Well, you do have authority under the Dodd-Frank legislation to do that, make that determination.

Daily News: You do, just by Federal Reserve fiat, you do?

Sanders: Yeah. Well, I believe you do.”

The relevant facts are these: Under Section 121 of the Dodd-Frank Act the  Board of the Governors of the Federal Reserve has the authority, subject to a 2/3 vote of the Financial Stability Oversight Council (FSOC) to take a range of actions, including (as a last resort) to “require the company to sell or otherwise transfer assets of off-balance-sheet-items to unaffiliated entities”, that is, to shrink the size of the bank in question. Note that the Chair of the FSOC is the Secretary of the Treasury. So, Sanders is correct that the Federal Reserve and the Secretary of the Treasury are the key players here. To be sure, Sanders’ last statement above, that Federal Reserve could break up the banks just by fiat – whatever that means – is not true under section 121.

Still, the Federal Reserve has more tools under its control through Dodd-Frank. For example, under section 619 (one of the key sections outlining the so-called Volcker Rule that tries to ban proprietary trading), states that for these financial institutions “no transaction, class of transaction, or activity may be deemed a permitted activity……(iv) would pose a threat to the financial stability of the United States.” The Federal Reserve would have significant power to issue regulations in this situation.

More generally, the goal of Dodd-Frank, as stated in Section 112 in describing the mission of the newly created Financial Stability Oversight Council (FSOC) is “eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure.” That is, end too big to fail.

In the end, Dodd-Frank does provide tools and responsibilities to the Fed and to the Secretary of the Treasury, along with other financial regulators, that can be used to break up the banks. Sanders’ answer was inelegant, to be sure, but, in reality, his answer reflects the fact that the law is on unchartered territory and in places is vague and would certainly be contested by the banks. So Bernie’s first answer is also the cleanest. “How you go about doing it is having legislation passed …”

In short, Sanders’ answers are way beyond “his usual slogans” as Krugman claims.

Is it possible that Krugman doesn’t understand these points. Seems very unlikely. I cannot begin to imagine his motives, but that is not the main issue here.

What it brings into question is Paul Krugman’s credibility as a New York Times commentator on these issue. Krugman’s credibility does not stem from his political analysis. Krugman is not a Political Scientist. Krugman’s “brand” is that he is a “brilliant, Nobel Prize winning economist.” In fact, much of his early research was brilliant; and, to be sure, Krugman did win the Nobel Prize. BUT, the misleading discussion of economics contained in his piece, “Sanders Over the Edge” does raise this question in my mind: Is Paul Krugman still qualified to write an economics opinion column for the New York Times?

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16 Responses to “Paul Krugman Crosses the Line”

  1. […] By Gerald Epstein, Professor of Economics and a founding Co-Director of the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst. Originally published at Triple Crisis […]

  2. Thanks Gerald Epstein, for quick and thorough rebuttal of Krugman effort to discredit Bernie. I guess he “believes” what he wrote. One of the main things we out here in the land of US are learning from all the different people working to get Bernie nominated as the Democratic candidate, is how people like Paul Krugman and Margaret Archer today, others yesterday and tomorrow, confirm the findings of that classic study of people paid one dollar to read a a text were more likely to argue its not-necessarily-so point when asked later than people paid $100.00

  3. Dana Fradon says:

    Mr. Epstein, a simple thanks to you for your brilliant, clear rebuttal of Mr. Krugman’s political rant. Mr. Krugman must have some political agenda that is driving his efforts to cut Mr. Sanders down by lying, slanting, and opinionating on what the Senator did or did not say. A personal note: Although I always read him, he is sort of liberal, I do not think highly of his writing skills. This always put me off.

  4. Dan says:

    Thank you Dr. Epstein.

    Best part, that, in humility you neglected to mention, is that on at least on at least two occasions, Krugman has lauded your work. Hope he’s willing to learn from you again!
    “I’ve lately taken to reading another econoblog, TripleCrisis; it’s been especially good on the (especially bad) G20 summit. In particular, Gerald Epstein is right…”
    “Both Rob Johnson and Peter Temin direct me to a paper by Gerald Epstein and Thomas Ferguson on the Fed’s strange, destructive turn away from expansionary policy in 1932. They look carefully at the archival evidence…”

  5. larry says:

    Gerald Epstein, Krugman did not win the Nobel prize, much as many economists would wish it were otherwise, he was awarded the Swedish Bank Prize under the auspices of the Nobel, which is s slightly different prize. And it has been controversial ever since it began some 30 or so years ago. If we credit Krugman per hypothesis for doing good work early in his career, we have to ask whether the quality of his thinking and analysis is as trenchant now as it was then. Setting his early work aside, I think we can assess his contemporary contributions as being biased, unathoritative, and lacking analytical rigor. For instance, his treatment of data in some of his blogs has been execrable.

  6. William Miller says:

    “Is Paul Krugman still qualified to write an economics opinion column for the New York Times?”

    Sadly, the NYT itself seems to increasingly be a propaganda horn for the Established Order (note also their published views on matters like Russia, Putin, Middle East, etc.) One also might question whether the paper is still a reliable source of objective reporting and analysis.

  7. Tom Andrews says:

    I have been a huge Krugman fan for many years. He has a reputation of speaking truth to power, especially to the Republican economic nonsense used to justify theft by the “millionaires and billionaires” from the vast majority of U.S. citizens. However, I think he has clearly stepped over some line of decency if not accuracy in his repeated criticisms of Bernie Sanders. Perhaps he is merely trying to promote Hillary, or maybe he just isn’t the progressive I had assumed him to be. Maybe Bernie will never be able to achieve his goals such as universal Medicare style health care, or a significant redistribution of wealth, but we can be assured that if you don’t even aspire to these laudable goals, you certainly have little chance of moving in that direction. Krugman has been a big disappointment recently.

  8. Susan Rankin says:

    I have been listening to Bernie Sanders Friday interview with Tom Hartmann on Progressive Radio for many years. That Paul Krugman calls Bernie a sloganeer tells me that Paul Krugman knows nothing about Bernie Sanders. Bernie is deeply knowledgeble, articulate, responsive, thoughtful, and actively committed to reform. So why is Krugman against Sanders? Is he personally connected to a Clinton circle of friends? That’s what it looks like to me.

  9. John Norman says:

    Krugman’s liberal reputation as a NY Times columnist has always been a consequence of his critiques of the ever more right leaning Republican reactionaries. But he has never been a progressive, not a la LaFollette, FDR or Bernie Sanders. He is a centrist economist who looks good in contrast to the right wingers. He may be an excellent economist, but to what purpose? Does he support unions? Defined benefit pensions? Expanding Social Security? Free public higher education? The fight against charter school privatization of K-12 education?
    Krugman’s (and others’) notion that Hilary can get things done and Bernie can’t is pure politics. She won’t get things done either if there remains a Republican controlled Congress. But if Congress flips, Bernie’s agenda will put much greater pressure on Congress. So will his victory by a larger margin than Hilary.
    Krugman is fit for the NY Times because his liberalism is theirs. But his political attacks on Sanders demonstrate he is no progressive, nor are his economics.

  10. David Eaglesfield says:

    Krugman claims with non-existent authority that the U.S. simply cannot afford Sanders’ reforms. I won’t touch economists’ reasonings, I’ll simply ask how Krugman thinks all the other industrialized Western democracies can afford single payer health care, free higher education, etc., etc., etc.?

  11. stillLearning says:

    Just started reading this, but I see no link to the article. Most readers could probably find it, but railing about an article with providing a link to it is to me, a big indicator of B.S.

  12. stillLearning says:

    In “Portside” the like is there.

  13. stillLearning says:

    Without really understanding this issue, I was inclined to believe Krugman’s analysis because of Sanders’ stand on a different issue. I was very surprised to learn that Sanders agreed with the Tea Party on ending the Export-Import Bank. While not an expert on that issue either, it seemed to me that Sanders was putting simple Ideological Purity above pragmatic economic sense.

  14. gary olson says:

    My sense is that Krugman and his ilk are feeling the ground shift under their feet and with it, their relevancy.