Krugman: Blame the Speculators

Paul Krugman sees lots of villains in the current downturn. Of course, there are those people who think that free markets are a good thing, so they obviously are to blame. Then there are the Bushites, who did not believe enough in the wonder and majesty of governmental powers, so they failed to create Paradise on Earth.

But there is more. Krugman on other occasions has blamed the Chinese for our economic malaise, but now he has another culprit: those "socially useless" speculators.

I find it most interesting that Krugman resorts to the Last Refuge of an Economic Scoundrel when he points the finger at those people who do not have everlasting trust in the promises made by politicians. Now, there are times when Krugman rejects the "speculators are at fault" argument. For example, I don't recall Krugman agreeing with Ken Lay's contention that the short sellers brought down Enron, although given Krugman's explanations of the downturn, Lay's point would be as legitimate as anything from Krugman.

(Note: I believe that Lay was wrong. Short-sellers by themselves cannot make a stock price plunge and stay down permanently any more than they can bring down an entire economy.)

When the government of Great Britain 40 years ago was inflating like mad and engaging in all sorts of accounting trickery, currency buyers began to short the Pound. Of course, the officials of Britain's Labor government did not blame their reckless policies; no, it was the fault of the "Gnomes of Zurich." Yes, those bad men in Switzerland were conspiring to bring down the Pound.

Unfortunately, that mentality exists today, and I am not surprised that it is Krugman leading the anti-speculation charge. Anyone familiar with finance know that speculators and short-sellers do not control markets; they expose the shortcomings of market participants. Speculators did not short Enron stock because they thought it would be fun; they shorted it because they believed (correctly) that it was overpriced.

In his column today, Krugman declares that a lot of financial transactions are "socially useless," and should be taxed. My guess is that he would include short-selling among those transactions, and in that he is aping his spiritual mentor, John Maynard Keynes, who believed that the sale of stock in secondary markets also was "socially useless."

Krugman, in his condemnation of the "speculators," ignores the 800-pound gorilla sitting in the room: the moral hazard that government created in the financial markets that ultimately led to the financial meltdown. Why does he ignore things like the "Greenspan Put" and the various bailouts? Easy, government-caused moral hazard does not fit his socialist worldview.

In Krugman's world, private enterprise itself is the cause of instability, and government (as long as the Right People are in Charge) is the white knight. Thus, it hardly surprises me that he resorts to the "Gnomes of Zurich" nonsense.