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Nobody Understands Debt -- Including Paul Krugman

David_N

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Somewhat old but a very interesting read. Krugman isn't a bad guy, he's a victim of textbook econ.
Forbes Welcome
Paul Krugman has published a trio of blog posts on the issue of debt in the last week: “Debt Is Money We Owe To Ourselves” (February 6th at 7.30am), “Debt: A Thought Experiment” (same day at 5.30pm), and finally “Nobody Understands Debt” (February 9th in an Op Ed).

There is one truly remarkable thing about all three articles: not one of them contains the word “Bank”.

Now you may think it’s ridiculous that an economist could discuss the macroeconomics of debt, not once but three times, and never even consider the role of banks. But Krugman would tell you why you don’t need to consider banks when talking about debt, and call you a “Banking Mystic” if you persisted.

Well Krugman would be wrong, and you would be right. This is one of the many times where “experts” in economics have it all wrong, and the general public’s gut feelings about banks, debt and money are closer to the truth. Bank lending is fundamentally important to the performance of the economy, and it is also fundamentally different to lending between individuals. But mainstream economics has convinced itself of the opposite propositions—that lending (most of the time) has trivial macroeconomic implications (the exception being during a “liquidity trap”), and that bank lending to individuals is really no different to lending between individuals.

This is the crucial difference between bank lending and the “peer to peer” vision of lending that mainstream economists like Krugman persist with—despite the evidence and the admonition, from institutions like the Bank of England, that they have got the mechanics and the importance of bank lending all wrong. Because mainstream economists like Krugman ignore bank lending, they ignore the biggest factor determining macroeconomic performance.
 
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David_N

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Relevant: Forbes Welcome
Even someone like Joe..
In effect, Joe is complaining that banks aren’t doing what economics textbooks say they should do. But those textbooks are profoundly wrong about the actual functioning of banks, and until the economics profession gets its head around this and why it matters, then the economy will be stuck in the Great Malaise that Joe is hoping to lift us out of.

The argument that banks merely intermediate between savers and investors leads the mainstream to a manifestly false conclusion: that the level of private debt today is too low, because too little private debt is being created right now. In reality, the level of private debt is way too high, and that’s why so little lending is occurring.
 

DA60

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And the point of this is what exactly?
 
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