Paul Krugman: I May Be Dumb, But I’m Not Stupid


 I May Be Dumb, But I’m Not Stupid, by Paul Krugman, in NY Times: Or something like that. The usually very insightful Kantoos seems to have missed what people like me are actually saying about the need for emergency funding in Europe.

He writes,

It is the argument that is used for Italy and Spain these days, countries that are „illiquid but solvent“ as the popular opinion goes. Isn’t illiquidity always a sign of doubts about solvency? Never mind. Paul Krugman, pointing to Paul de Grauwe, is endorsing this argument as well as The Economist, Willem Buiter, and many others.

That’s not the actual argument; I know very well that liquidity problems generally reflect solvency concerns. The point, however, is that Italy and Spain arguably are at risk of suffering from self-fulfilling panics. And you need open-ended credit to avert that fate.

Now, Kantoos is right that more expansionary ECB policy, including a higher inflation target, is really what the doctor ordered. But it would take time to get that moving; even if Mario Draghi suddenly rips off his mask and reveals himself as a closet Woodford/Svensson/Krugmanite, it would take a long time to turn monetary policy around sufficiently to restore confidence. And the existential threat to the euro zone won’t wait.

So the indicated policy is lend now, inflate later. If you don’t like that, say goodbye to the euro.

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