Tuesday, June 7, 2011

Richard Koo versus Paul Krugman

Economist Richard Koo attacks Paul Krugman for both his advocacy of QE2 and his misunderstanding of what QE2 actually does.

"The result of QE2 has not lived up to administration, or Krugman's expectations, according to Koo. Instead, we're left with only two policy choices: protectionism and dollar devaluation, or more fiscal stimulus.

It's important here, to note, WHY QE2 doesn't work, according to Koo... essentially all that happened is that by buying up Treasuries, investors were forced to look for returns elsewhere, in places like stocks and commodities. The latter, the commodity gains, ended up slowing down the economy. What's more, QE2 has had no positive impact on bank lending whatsoever".


Anti said...

You know, given the choice between this MMT and what seem to be clear market indications QE works, such as increased GDP, I'll stick with QE.

To quote the famous Berra cliche: "In theory there is no difference between theory and practice. In practice there is."

NeilW said...

It all boils down to whether you believe the money multiplier theory or not.

Krugman has a line of 'zombie theories' - arguments that keep coming back no matter how many times you kill it.

Money multiplier is one of those theories. We're going to need a lot of head shots to finish it off.

The null hypothesis is that bank lending is constrained by central bank reserves. Where's the evidence that isn't the case?

Anti said...

I add that having just checked, it looks like consumption and corporate profits surged, along with GDP in 3Q 2010, after QE2 was announced, and the program having begun before the end of the quarter as I recall.


This seems at odds with the idea that QE merely inflated asset prices by sending investors into riskier assets.

I think some of you are making MMT a religion, when maybe we just haven't had enough QE. I think I'll take Friedman over Galbraith as long as I see correlations like this.

NeilW said...

Correlation isn't causation.

Your assumption is that QE caused the GDP increase and not something else. You have no evidence that is the case.

Why isn't it the continuing deficit spending of the government for instance.

Anti said...

Neil, the fact that I used the word "correlation" pretty clearly indicates I didn't assume causation, especially preceded by "as long as".

There was temporal precedence and close temporal contiguity regarding QE1 and QE2 with big rises in asset prices, consumption, and GDP. If you think the market is wrong, then you better have beaten it over this period, otherwise you look silly.

Anti said...

With respect to QE1, it was actually an extension of it announced March 18, 2009, after which the markets and economy started a huge recovery.

Tom Hickey said...

Well, we are going to find out. QE2 is ending and QE3 is not planned. Fiscal austerity is the word of the day. Either the GOP claim that fiscal austerity is expansionary is going to work, obviating the need for QE3, or it's not and markets will tank. Then the Fed will rush in with QE3, while the deficit will decline due to fiscal austerity. The we'll see whether GDP increases due to QE or not. Should only take a couple of quarters to find out.

googleheim said...

What about Japan ?

This blog is nothing without a Japanese MMT experienced theorist.

Someone needs to come up and explain how things went in Japan for the past 20 years and how things are coming along here.

Adam2 said...

googleheim - Are you being ironic or not? I cannot tell.

Adam2 said...

Even trying QE is a dumb idea with the reasons they gave.

For the proponents of QE

QE = extend credit.

extend credit = more private debt

This is not needed when households are already in over their heads with too much debt.

Anonymous said...

While it may seem additional fiscal spending is dangerous, Koo argues that when companies and individuals are paying down debt and saving there is glut of savings in the system to buy that sovereign debt.

Koo might be right but he doesn't get It either.

googleheim said...

Hi Adam

Just both at same time.

All this hoopla about Japan's lost decade but no firm analysis giving case by case by case historical review -

not even Frontline has covered the lost decade or I might be wrong - I will check.

i am not about to pull up a book or a journal, but you would think that Japan would have been blisteringly imprinted on USA starting in 2002 - with all warnings and stops on file

instead we got all these mathematicians and physicists going to financial engineering and making these models for derivatives which are so elegant for they are derived from tools quantum mechanics provided

what we got is a big sucking noise that pulled all mortgages from the banks and spit out at a bigger sucking noise

all the liar loans and all the foreclosures plus more could have been covered by 50% of the original TARP only without QE1 and QE2

therefore it's the wars and the deregulation

the problems of today were given to us by our grandfathers of the 70's and 80's, and they were deregulationistas

the hoopla of debt today is a sin to our grandchildren of the future is a smoke screen for the fact that we are already living today with the effects of deregulation to which we are mortgaged by the fault of our "grandfathers"

yes, we needed more reports from Japan since 1995 and more awareness of the country that we were buying all their crap and the Japanese hold $1 trillion of our debt for same as Brits and Chinese

googleheim said...


we need Richard Koo on tap here on this blog

more historical mechanics on Japan so we can make money while this thing rides out

googleheim said...






similar to dark matter - it's pointless and it is not evident if it really does anything in the universe - like cellulite you don't need it for the organism



googleheim said...



Adam2 said...

moneyfornothingchicks4free, did you ever get an answer regarding Richard Werner. He seems so close. Yet so far away.

Adam2 said...

Seems to me if you combined Richard Werner and Richard Koo you get MMT. Two of the leading economists that understand the Japanese malaise.

STF said...


QE drove all sorts of speculation in equities and commodities that drove GDP. Your point about 2010Q3 is perfectly consistent with this. Cullen Roche--and MMT'er, by the way--was all over this from the very beginning.

And, of course, even with that, the economy's been slowing long before QE's over.

Anti said...


I don't think you understand what QE's supposed to do. It's supposed to increase consumption, increase exports, lower the value of the dollar, decrease unemployment, increase NGDP and RGDP, increase asset prices in fundamentally sound ways, etc. Stock prices went way up and so did corporate profits following each of the QE events I mentioned.

What is QE success supposed to look like?

And now you mention a sagging economy? Well of course that doesn't mean QE failed. We're sinking now from a higher base and it's due to new drags on growth, requiring more QE.

There was never anything close to enough QE done in the first place, and anyway, when additional problems arise, additional QE is needed when at the zero bound.

The stupid Fed's been trying to target inflation at 2%, when it should have been at 5-6% at least when QE started, and they often lag in their response to falling short of their target anyway. That's what's happening now.

Matt Franko said...


"I don't think you understand what QE's supposed to do."

Here it is right from the Feds press release of Nov 2010:

"To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."

Since this statement, the unemployment rate has RISEN and the growth rate has FALLEN.

As my 12 year old would say: "EPIC FAIL!"

The Fed policy makers and our elected econ policy makers are a disgrace to humanity.

Anti said...
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Anti said...

Matt, what are you talking about? GDP rose and unemployment fell for months, starting just about the time QE2 expectations set in last year. Now we get additional headwinds and QE2 is winding down and you think it failed? lol That's silly.

Did QE2 raise NGDP and reach the Fed's stated 2% target? Yes. Is that sufficient for robust recovery? No, and everyone should know that. Do they wait too long to respond with more QE when new headwinds show up? Yes.

If the Fed targets the forecast and actually maintains NGDP at 4 or 5% until we're back to pre-crisis trajectory, most of this anti-QE MMT talk dies.

It raised real and nominal GDP, lowered the value of the dollar, boosted exports, boosted consumption and corporate profits, gave us nice recovery signals in the yield curve...

Again, what does QE success look like? Do you think a central bank can just run one weak program and then expect you'll never need more stimulus again?

Matt Franko said...

Anti here is the link:


Total employed in March was higher than now in May. yoy for end May we are up only 400k jobs for the year: THAT IS NOT GOOD.

Growth rates realized and projected are going DOWN and being revised DOWN.

And QE2 is NOT winding down.


They have been buying 6-7B per day all along and current. They have not been letting up on purchases as we head into the end of it....

This is the empirical data, not psycho-babble. this is the record of the statements of the actual policy makers at the Fed, not some moron media pudits who dont know macro.

QE2 is a failure based on the criteria the policy makers at the Fed set themselves.


Anti said...


It wouldn't matter if there was a one month boost from QE, if new drags on the economy show up. It doesn't mean QE failed. Would you deny that the economy improved for about 6-7 months after QE2 expectations began to become evident?

Matt Franko said...


I'll look at it.

For the time frame, do you mean from about August '10 after Jackson Hole?

So I'll look at August '10 thru June '11 ?


Matt Franko said...


Look at figure 1 in the Steve Keen article Tom posted above.


Figure 1, US Real GDP Growth Rate: Falling ever since August '10

I'm not saying QE2 caused this, I'm saying QE2 does not have any of the effects that policy makers stated it would; ie increased growth and increased employment. In fact the OPPOSITE happened.


Anti said...


I look at GDP numbers like these:


Real GDP rose, unemployment fell, consumption increased, asset prices rose, inflation metrics rose, dollar exchange rate fell(yes, I know China's appreciating the RMB), etc., etc.

I think the most compelling case for QE effectiveness is that inflation rose to within the Fed's stated target range of ~2%. That target's too low, and that's the only problem I can see.

And again, it's not just asset inflation in stocks when both consumption and earnings rise.

Anti said...

I find the MMT perspective interesting so far, but where can I find an empirical case for it? It's completely new to me and all I've seen are people arguing from accounting identities.

Where is the exemplar case laid out that corresponds to data over decades?

Tom Hickey said...

Not a long-term study but some history:

Think big deficits cause recessions?
 Think again! by Frederick C. Thayer

Not decades but in 2004, Godley and Izurieta foresaw the currency situation based on sectoral balances and say why the solution is fiscal rather than monetary.

Here are some sectoral balance charts that cover decades:

Sectoral Financial Balances - 1952-2010



Irish sectoral balances 2003-2009

Anti said...


Thanks. I'll have a look at this.

By the way, I think you add a lot to this blog.