Fed News Friday: Ron Paul vs Paul Krugman on Bloomberg
May 4th, 2012This was a big week for Federal Reserve and monetary policy news, but perhaps most significant, was between sound money proponent, Congressman Ron Paul, and New York Times blogger, Paul Krugman on Bloomberg TV this Monday.
The live debate between Ron Paul and Paul Krugman was a breakthrough media event in which a leading advocate of sound money policies was given a fair amount of time to debate a leading advocate of fiat monetary expansion, and the views of the sound money advocate were respected as equally credible and worth hearing.
The event Monday was also more than a breakthrough for sound money ideas– it was a major breakthrough for the nature of media and mainstream public policy analysis. Instead of a four minute segment with two partisan talking heads yelling at each other, interrupting each other, exchanging irrelevant accusations about the other person’s “side,” and diverting audience attention away from substantive policy issues, Bloomberg TV ran a 13 minute segment with two policy wonks having a substantive, policy-oriented debate over the issues.
Each had plenty of time to talk and elaborate their points. Each talked about the issues instead of rankling over something irrelevant that someone dumb in the other person’s political party recently said or did as so many talking heads do in typical TV discussion formats.
Just as significant was the topic of discussion itself: here a mainstream news outlet actually considered monetary policy worth discussing live for 13 minutes! That’s what makes the “Paul vs. Paul” debate this Monday so significant and newsworthy. Cutting past the ancillary issues and cable news filler, Bloomberg TV actually turned its audience’s attention to a thoughtful discussion about the Federal Reserve!
Given that the debate occurred on Monday, and our Fed News Friday feature is, as you might expect, a Friday feature– sound money advocates on the Internet have already analyzed the substance of the debate itself, rebutted Paul Krugman’s arguments, and defended Ron Paul’s claims. So I’ll leave out any analysis of the discussion itself (though I did link to it above in case you haven’t seen it), but more importantly, as significant as this discussion was, I think taking the substance of what each Paul said too seriously is fruitless.
How each interprets the economic crisis America faces today– after the crisis has already happened– offers no clue as to which view of the Federal Reserve and monetary policy is most correct. Predictably, both sides will interpret what they’re seeing happen in light of their own view of monetary policy and prescribe solutions on the basis of that view as well.
The real way to tell which view is most correct is to go back and see what Ron Paul and Paul Krugman were saying before the economic crisis took place. Whichever understanding of monetary policy and the Federal Reserve is most correct will be the one that gives its adherent the most prescient powers of accurate prediction. Whichever one actually understands how the economy works will be the one that can predict what it’s going to do next and prescribe the correct solution in advance.
To that end, I have reprinted two quotations below, one from Paul Krugman and one from Ron Paul. They both come from the discussion these two were having about monetary policy and the Federal Reserve years before the economic crisis and financial collapse struck, a discussion they did not have face to face, a discussion that was never aired on television, a discussion that no one paid attention to because the nation was swept up in war fever and manufactured alarm over irrelevancies like West Nile Virus. Here are the quotations:
Paul Krugman, August 02, 2002 in the New York Times
“The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
Ron Paul, Sept. 10, 2003, to the House Financial Services Committee
“Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.
Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.”
So who won?
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