Friday, May 07, 2010

Is Paul Krugman an Efficient Marketeer?

Nor should you take seriously analysts claiming that we’re seeing the start of a run on all government debt. U.S. borrowing costs actually plunged on Thursday to their lowest level in months. And while worriers warned that Britain could be the next Greece, British rates also fell slightly. Paul Krugman, May 6, 2010

Not 12 months ago, Paul Krugman mocked Eugene Fama's Efficient Market Theory-based views on the Tech and Housing Markets via Larry Summers "ketchup economists" paper:

What this [Fama's tirade against the notion of "bubbles"] made me think of was an old paper by Larry Summers mocking finance economists as the equivalent of “ketchup economists”, who believe that they’ve demonstrated market efficiency by showing that two-quart bottles of ketchup always sell for twice the price of one-quart bottles.

Recently, however, as the opening paragraph (above) illustrates, Fama's efficient market theory- in brief (and without nuance): market prices quickly reflect all new information reasonably accurately- is now a sufficient basis from which to calm nerves over sovereign debt problems in the US and UK markets.

Perhaps Mr. Krugman doesn't like ketchup, tech stocks or houses, but does like cheap government debt issued by the US and UK (maybe that's where the Nobel prize money is invested?). Whatever the reason, Mr. Krugman can't have it both ways- either current market prices and recent reaction to news are not sufficient cause to dismiss "bubble" qualifications (which is my view) or they are (or there's an alternate theory which leads him to think US and UK debt is "safe" while Tech and Houses weren't).

If so, I'd love to read about it.

Given the recent kerfuffle between Mr. Sorkin and Mr. Krugman at the NYTimes over the nuances of Mr. Krugman's views on bank nationalization, I'm sure Mr. Krugman would argue I misread his meaning.  Maybe so.  Unlike, it seems, Mr. Krugman, I can understand how an author's intent wouldn't instantly manifest in a reader's mind (perhaps Krugman is an advocate of the efficient prose theory).

Your author meekly mining the economic press on a lovely Friday afternoon, signing off.

4 comments:

蘇pet0701em_halvorsen said...

I love readding, and thanks for your artical. ........................................

tinbox said...

This isn't the first time PK has used market action to justify his assertions. Very few reasonable people are comfortable challenging him on this sort of point.
The thing is, he didn't win the Nobel for bond market (or commodity market) forecasting and does not seem to have a real talent for it.

There really doesn't seem to be much of a positive role for "savers" to play in his economic models--ever.

Dude said...

tinbox,

I think Krugman has a talent for forecasting potential financial crises, but his desire to be a "court economist" conflicts with a "brutal truth" view, at times.

tinbox said...

PK certainly isn't forecasting any trouble in the USA. He's the drum major for the economists calling for bigger deficits. As usual Brad DeL http://delong.typepad.com/sdj/2010/05/say-it-aint-so-david.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BradDelongsSemi-dailyJournal+%28Brad+DeLong%27s+Semi-Daily+Journal%29

and M. Thoma
http://economistsview.typepad.com/economistsview/2010/05/congress-and-the-fed-why-the-bark-is-worse-than-the-bite.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+EconomistsView+%28Economist%27s+View+%28EconomistsView%29%29
march right in step.
They all think it's OK because interest rates are low right this second.
None have any working theory on how 10 year rates are impacted by banks borrowing at zero overnight with a TBTF backstop.