Paul Krugman wrote recently in the New York Times another piece of wayward economic analysis. His focus is a critique of Marco Rubio’s response to President Obama’s State of the Union address on Tuesday night. Krugman claims that “that zombie economic ideas have eaten his brain” speaking of Senator Rubio.
Let’s look at these zombie ideas that Krugman claims the republicans, and classical liberals more broadly, are holding onto regarding the financial crisis, despite the facts:
Krugman “No, the government didn’t force banks to lend to Those People”
Krugman “[N]o, Fannie Mae and Freddie Mac didn’t cause the housing bubble”
Krugman “[N]o, government-sponsored lenders weren’t responsible for the surge in risky mortgages”
I guess Krugman still believes that markets, left to the process of self-adjustment, led to a housing bubble and collapse and intervening years of high risk lending. No, the government didn’t force banks to lend, but the government (via the Fed) did force the price of money down to historic lows spurring mal-investment and unsustainable borrowing. Did Fannie and Freddie cause the housing bubble? Why no Mr. Krugman, but they did incentivize high risk lending by buying mortgages from banks and other institutions. When government is the insurer…risky lending results.
When was the last time an unregulated industry collapsed?