Paul Krugman

Paul Krugman @paulkrugman

Now, it's certainly possible that the Fed hasn't yet tightened enough. That's a quantitative question, and hard to answer in this strange new economic environment. But the hardliner arguments I'm hearing seem to rest on dubious logic 12/ — PolitiTweet.org

Paul Krugman @paulkrugman

Again, maybe this is more than a knee-jerk application of the concept of core inflation to unusual circumstances; maybe there's an argument saying that current monetary policy should react to the state of the rental market a year ago. But what is it? 11/ — PolitiTweet.org

Paul Krugman @paulkrugman

But that isn't a reason for tight monetary policy! If new-tenant rents are leveling off, which seems to be happening, this says that conventional measures of core inflation are about the past, not a good indicator of whether the economy is overheated now. 10/ — PolitiTweet.org

Paul Krugman @paulkrugman

Finally, rent. Excellent new paper from the BLS shows that the CPI rent index lags a full year behind rents paid by new tenants, which means that core inflation likely to stay high bc of big rent rises in the past 8/ https://t.co/u44F0shqnH — PolitiTweet.org

Paul Krugman @paulkrugman

These days all available evidence says that inflation expectations are still anchored, which means that analogies with the Volcker disinflation are all wrong, talk about "sacrifice ratios" etc misplaced. Unless the hardliners have a different model? If so, what is it? 7/ — PolitiTweet.org

Paul Krugman @paulkrugman

Second, there's the argument that we need an extended period of unemployment well above the NAIRU (bad term, but never mind for now) to tame inflation, as in the 1980s. But I thought we were agreed that this was because in 1980 inflation was entrenched in expectations 6/ — PolitiTweet.org

Paul Krugman @paulkrugman

We know that the strong dollar will take a while to hit trade flows; mortgage rate rises are clearly having a big effect on housing, but construction employment has yet to decline. Surely much of the impact of the tightening so far lies in the future? 5/ — PolitiTweet.org

Paul Krugman @paulkrugman

First, there's the argument that the continuing tightness of U.S. labor markets says that we still haven't tightened enough. This seems odd given what I thought was a universal view that monetary policy works with substantial lags 4/ — PolitiTweet.org

Paul Krugman @paulkrugman

At this point, however, hard-liners who want the Fed to keep tightening are relying on arguments that seem to me to be just conceptually wrong, indeed involve implicitly rejecting what I thought were generally accepted principles. 3 arguments in particular 3/ — PolitiTweet.org

Paul Krugman @paulkrugman

In 2021 both sides agreed on the conceptual basics: big fiscal outlays would be stimulative and potentially inflationary. So it was a quantitative argument about the size of those effects, and the pessimists were right 2/ — PolitiTweet.org

Paul Krugman @paulkrugman

A 🧵on the current macro policy debate, which looks on the surface a lot like the debate in early 2021 — in which I was wrong! — but to me seems quite different, and in a disturbing way 1/ — PolitiTweet.org

Paul Krugman @paulkrugman

Panic! at the discount window https://t.co/NS2scxlnXw — PolitiTweet.org

Paul Krugman @paulkrugman

So stubborn core inflation is an artifact of the way the numbers are constructed, which makes sense for many purposes but NOT as a guide to policy 4/ — PolitiTweet.org

Paul Krugman @paulkrugman

One example 3/ https://t.co/VpHfHJGp4h — PolitiTweet.org

Paul Krugman @paulkrugman

The various private rent measures, which all basically measure rent on new apartments, vary, but they all show a rapidly cooling market 2/ — PolitiTweet.org

Paul Krugman @paulkrugman

Precisely. If we're concerned that the economy is running too hot, policy should reflect how hot it's running now, not how hot it was running a year ago. The BLS study showing long lags in measured CPI rent is a reason to pay less attention to measured core 1/ — PolitiTweet.org

Paul Krugman @paulkrugman

But it's a bad take. Banks are valuable because of the function they serve, not because deposits are part of M1 or M2. A banking crisis matters because it degrades that function, not because it reduces some monetary aggregate 3/ — PolitiTweet.org

Paul Krugman @paulkrugman

This is closely related to D-D. Before their work and Bernanke's, many people thought banking crises were a problem because they reduced the money multiplier, and hence led to a fall in the money supply. That's how Friedman/Schwartz framed it 2/ — PolitiTweet.org

Paul Krugman @paulkrugman

Some people have been asking me about the inclusion of Ben Bernanke. But it makes sense. What he did — this may raise some hackles — was free the discussion of banking crises from the tyranny of monetarism 1/ https://t.co/sGZTTe5yUZ — PolitiTweet.org

Paul Krugman @paulkrugman

Anyway, a richly deserved prize. As usual, a number of other people besides Bernanke deserved to share. (Would I say that about my own? Yes!) But this is a prize for work that really did contribute in an important way to understanding 15/ — PolitiTweet.org

Paul Krugman @paulkrugman

Speaking of which, I don't think the risk of two, three many gilt-like crises is the main reason the Fed should stop raising rates. But it is *a* reason 14/ — PolitiTweet.org

Paul Krugman @paulkrugman

And at a sort of metaphysical level, once you read D-D you understood the possibility of various kinds of self-fulfilling financial panics, like the euro crisis of 2011-12 or the recent crisis in British gilts 13/ — PolitiTweet.org

Paul Krugman @paulkrugman

So, for example, a lot of what used to go through regulated banks went instead through repo — overnight lending using stuff like mortgage-backed securities as collateral. All of which suddenly collapsed; all of us were wandering around muttering "Diamond-Dybvig" 12/ https://t.co/sKQ2TaS8AJ — PolitiTweet.org

Paul Krugman @paulkrugman

Bypassing conventional banks also meant bypassing regulation, allowing slightly higher yields — but without a safety net. People (who no longer remembered old financial crises) didn't care, until suddenly they did 11/ — PolitiTweet.org

Paul Krugman @paulkrugman

What not enough people noticed was that a growing share of banking was being carried out by institutions that weren't big marble building with rows of tellers. "Shadow banking" came to make up a majority of the financial system 10/ — PolitiTweet.org

Paul Krugman @paulkrugman

The thing is, by the 1990s most economists thought this was a solved problem. We had deposit insurance plus bank regulation. Old-fashioned panics were supposed to be ancient history. 9/ — PolitiTweet.org

Paul Krugman @paulkrugman

So if you're going to have a financial safety net, you also need effective financial regulation; if you don't, you can get massive moral hazard-driven losses like the S&L crisis. You see what I mean: Diamond and Dybvig made a huge range of stuff comprehensible 8/ — PolitiTweet.org

Paul Krugman @paulkrugman

Another answer is deposit insurance, which reassures people that their money is safe. However, both answers create moral hazard — a temptation for banks to take on excessive risk, and/or engage in fraud 7/ — PolitiTweet.org

Paul Krugman @paulkrugman

This can force banks into fire sales, and make fundamentally solvent institutions go bankrupt — and bank runs can be contagious. What's the answer? One answer is to have a central bank — which can't run out of money bc it prints it — lend to cash-short banks in a crisis 6/ — PolitiTweet.org

Paul Krugman @paulkrugman

By reconciling the need for liquidity with the need for illiquid investments, banking makes society richer. But ... it creates the risk of crisis. If, for whatever reason, people lose confidence in banks, they will all try to withdraw funds at once 5/ — PolitiTweet.org