On Monday, the Dow Jones Industrial Average took a 600-point swan dive. What message were investors trying to send with the massive selloff?
Some say it was a signal that the Standard & Poor’s downgrade has rattled investors’ confidence that policymakers in Washington, D.C. and throughout Europe will get their fiscal houses in order. But according to New York Times columnist and Nobel Prize winning-economist Paul Krugman, it’s just the opposite.
On Monday night’s “NewsHour” on PBS, Krugman suggested the downgrade doesn’t mean very much at all.
“The reason that the S&P downgrade mattered, if it did at all, is not that it made people think that U.S. debt was unsafe,” Krugman explained. “In fact, people have piled into U.S. debt, right? Interest rates on U.S. government debt are at their lowest point since January 2009.
“What the downgrade did is, it made people think that the U.S. government is now going to be hamstrung, not able to take action to prop up the economy, not because it can’t actually finance the debt – the spending, not because it’s in real fiscal trouble, but because some guys at S&P by calling that downgrade have bullied the U.S. economy, have bullied the U.S. government into taking actions that are going to be the wrong thing to do.”
Ultimately, Krugman said, the message to policymakers is that they need to take on jobs first in the short-term and then go after the deficit — the exact opposite message of the S&P downgrade.
“So, this is not — you know, the narrative which says that we have is a fiscal problem and that’s the source of the difficulties is not at all right,” he continued. “What’s actually happening is that the same people who have been urging us to take the wrong policies, to not focus on jobs first and deficits later, have now upped the ante. And that’s making the economy look worse. And that’s leading to this global crash. Similar things are happening in Europe and so we have a global downturn based not on — again not on real fiscal constraints, but on bad ideas being enforced by bad agencies like S&P.”
Krugman later insisted the market crash was a product of investors rejecting the government’s take on what the global economy’s top priority should be.
“[T]here’s a lot of truth in all of this, but what actually happened in the markets today did not look like a solvency panic,” Krugman said. “It looked like a growth panic. It looked like the markets, investors are afraid that this global economy is going back into the ditch, and nobody is prepared to act. And in a way, what the markets were telling us was, you guys have been obsessing on the wrong things. Sure, we have a long-run fiscal problem, but right now we need to be getting this economy moving. And that’s the thing that nobody has been talking about.”
Despite the market’s turmoil, Krugman didn’t fear the threat of a second Great Depression.
“Well, OK, I don’t think we’re about to see Great Depression II,” he said. “But I do think we are really looking at a long period of weak performance. There’s a pretty good chance of a second leg to the recession, a double-dip. There’s a very good chance that unemployment is still going to be nine percent or higher a year from now, two years from now. So what we’re seeing now is the — you know, is — I have been calling it the lesser depression, a really long period of really poor performance. If you’re unemployed now, I really feel for you because your chance of getting reemployed is very low.”
Krugman didn’t give a pass to President Barack Obama either, suggesting he needed to lead more.
“And so this is — this is depressing,” he said. “And we need somebody to stand up, in a way that the president didn’t, by the way, this afternoon, and say ‘we are on the wrong track — we are not dealing with the problem at hand — and at least to call out the people who are standing in the way of doing the right things.”