The Gold Standard  

Main course 2 – joint serving by both

What is interesting is that PK himself provides a possible angle.

The only thing that might drive up interest rates—and this is a real concern (emphasis mine) - is that people may grow dubious about the financial solvency of governments.

NF was quick to latch on to that:

Well, if you listened carefully to what Paul Krugman said, he actually agreed with me. Because what he said was that everything is just fine as long as the financial credibility of the United States isn’t called into question, but my point is that it will be called into question

That should have been end of story. In some sense, PK prolonged it and ended up throwing gratuitous insults at NF with Bradford providing support. It is all unsavoury stuff and rather needless. Each one is talking past the other and taking ideological stance because somewhere towards the end NF manages to squander all his advantage.

It is important to reproduce what NF said, in entirety, on the topic of State vs. Market:

Well, I tell you what, I feel depressed after what I’ve heard tonight. We are now contemplating a massive expansion of the state to substitute for the private sector because that’s the only thing Paul thinks will deliver growth. We’re going to reregulate the markets, we’re going to go back to those good old days. Where were you in the 1970s when all these wonderful regulations were in place? I don’t remember that going too smoothly. But what else are we going to do? We’re going to print money. Almost limitlessly we’ll print money. That’s going to be fine, too. And when we’re done with that, we’re going to raise taxes. What a fabulous package we have in store for us. You know, back in late 2007, I was asked what my big concern was, and I said, “My concern is that we’re going to get the 1970s for fear of the 1930s.” It’s very easy to forget, in your iron indignation at the failure of the market, where the true mainsprings of economic growth lie. The lesson of economic history is very clear. Economic growth does not come from state-led infrastructure investment. It comes from technological innovation and gains in productivity and these things come from the private sector, not from the state.

 No one in their right minds would disagree that innovations, by and large, comes from the private sector (sometimes they come from research done in State-funded universities on which the private sector free rides. That is a different story).  But, who has now brought the State into play? His favourite private sector. In fact, the State went out of the way to be friendly to the private financial sector. This is how they chose to reciprocate: by bequeathing to the world the worst financial crisis since the Great Depression (that is until now; they may well go on to claim the top slot eventually).

Moreover, official statistics shows that investment spending is declining in his home country and in his adopted country. What is the alternative to fiscal stimulus, if growth matters?

So, if PK responded ideologically, NF vindicates him with his ideological response without acknowledging the cause of the crisis and without providing any real alternative.