Sunday, March 08, 2009

Clash of the Titans: Sachs on Krugman

I am not a macro-economist and I do not play one on TV but the Krugman/Sachs discussion below seems to revolve around why did U.S interest rates get so low and that demand curves slope down. When interest rates were really low (and John Taylor says way too low), we borrowed a heck of lot. Now somebody had to lend us that $. How does Chairman Greenspan sleep? He should re-enroll in a different econ PHD program and redo his studies. Rules over discretion!

Did Dr. Sachs call Dr. Krugman to congratulate him on winning the 2008 Nobel Prize? In Cambridge in 1979, was the smart money bet on Sachs, Summers or Krugman to be the first Nobel winner?

New York Times
March 8, 2009
Blame for the Global Crisis
To the Editor:

In “Revenge of the Glut” (column, March 2), Paul Krugman repeats the claim that Asia caused the current global crisis by oversaving. He writes that after the Asian financial crisis of 1997-98, the emerging economies of Asia amassed “huge war chests of foreign assets” and that “most of that money went to the United States — hence our giant trade deficit.”

But the numbers don’t add up. The Asian developing countries ran a combined current account surplus (net lending to the rest of the world) of $38.3 billion in 2000, while the United States ran a whopping current account deficit of $417.4 billion.

By 2004, the United States’ deficit had swelled to $625 billion, against a surplus of developing Asia of $82.5 billion.

In fact, the Federal Reserve created two bubbles, the dot-com bubble (1998-2001) and the subprime bubble (2002-7), and these substantially raised American borrowing from the rest of the world. Now the whole world pays the price.

Nobody else made us do it, least of all the developing countries of Asia.

Jeffrey D. Sachs
New York, March 3, 2009

The writer is director of the Earth Institute at Columbia University.