[lbo-talk] Krugman: Does Fiscal Austerity Reassure Markets?

[Michael Pollak]

http://krugman.blogs.nytimes.com/2010/06/13/does-fiscal-austerity-reassure-markets

Paul Krugman - New York Times Blog

    June 13, 2010, 3:53 am

Does Fiscal Austerity Reassure Markets?

<snip>

    But I suddenly realized this morning that there's yet another question

    for the deficit hawks: what evidence do you have that fiscal austerity

    of the kind you're demanding would reassure markets, even if they did

    lose confidence?

    Consider, if you will, the comparative cases of Ireland and Spain.

    Both countries appeared, on the surface, to be fiscally responsible

    until the crisis hit, with balanced budgets and relatively low debt.

    Both discovered that this was an illusion: revenues were buoyed by

    immense real estate bubbles, and when the bubbles burst they plunged

    into deficit -- and found themselves potentially on the hook for large

    bank losses.

    The countries responded differently, however. Ireland quickly embraced

    harsh austerity; Spain has had to be dragged into austerity, and still

    faces major political unrest.

    So, how's it going? This article is typical of what you read: it

    describes the Irish as doing what has to be done, while the Spaniards

    dither. And it has good things to say about how the Irish response is

    working:

<quote>

    Much bitterness but also stoicism; markets impressed by Irish resolve

    to bite the austerity bullet.

<unquote>

    Well, I guess that's right -- if by "markets impressed" you mean a CDS

    spread of 226 basis points, compared with 206 points for Spain; not to

    mention a 10-year bond rate of 5.11 percent, compared with 4.46 percent

    for Spain.

    So, I'm glad to hear that Ireland's stoic acceptance of austerity is

    reassuring markets; it must be true, because that's what everyone says.

    Because if I didn't know that, I might look at the data and conclude

    that markets actually have less confidence in Ireland than they do in

    Spain, and that austerity in the face of a deeply depressed economy

    doesn't actually reassure markets at all.

    But hey, what are you going to believe: what everyone knows, or your

    own lying eyes?

<end blog excerpt>

Michael