Oh, SNAP! Krugman vs. Morgan Stanley on Bonds

[Kurt_and_Hunter]

Krugman. November 2009:

November 22, 2009, 5:49 am
Role reversal

Many people on Wall Street are now warning that there’s a huge bubble in government debt, that interest rates will spike any day now; it’s a warning that clearly has the Obama administration’s ear. A good sample is this piece from Morgan Stanley, according to which “Our US economics team expects bond yields to rise to 5.5% by the end of 2010 – an increase of 220bp that outstrips the 137bp increase in the fed funds rate expected over the same horizon.”

Btw: what? Almost everyone expects unemployment in late 2010 to remain close to 10%. Why, exactly, would the Fed funds rate rise sharply?

Anyway, I was wondering: it’s my impression that the same people now warning about the alleged Treasury bubble dismissed warnings about the housing bubble. Is this true?

I think so. Morgan Stanley, September 2006:

The pessimists argue that the bursting of a putative housing bubble means that prices could decline significantly. There is some risk that prices could decelerate faster or even decline in real terms — after all, investment and speculative activity has picked up in the past five years. But the character of housing demand makes the much-feared decline in prices on a nationwide basis unlikely …

http://krugman.blogs.nytimes.com/2009/11/22/role-reversal/

_______________________

Krugman this Morning:

August 20, 2010, 10:57 am
The Power Of Error

So policy makers live in awe of savage priests, who demand that we sacrifice virgins to the invisible gods of the bond market. But what puzzles me is this: why do the priests have such influence? Never mind the victims (we never do); anyone who listened to the priests has lost a lot of money.

A case in point: Morgan Stanley, the most bearish among the 18 primary dealers that trade government securities with the Federal Reserve, acknowledged that its forecast that Treasury yields would rise this year was misguided.

Morgan Stanley had forecast that a strengthening U.S. economy would lead to private credit demand, higher stock prices and diminish the refuge appeal of Treasuries, pushing yields higher. David Greenlaw, chief fixed-income economist at Morgan Stanley, said in December that yields on benchmark 10-year notes would climb about 40 percent to 5.5 percent, the biggest annual increase since 1999. The firm reduced its forecast to 4.5 percent in May and to 3.5 percent last week.The 10-year note yield fell as much as 4 basis points to 2.53 percent today, the lowest level since March 2009. Yields have declined 10 basis points in the last five days and about 46 basis points in four weeks.

I wrote about this forecast in November 2009, because I believed that such predictions were having a big impact on the Obama administration. And I tried to point out then that the same people confidently declaring that there was a bubble in the bond market completely missed the housing bubble.

And yet these people continue to influence policy.

http://krugman.blogs.nytimes.com/2010/08/20/the-power-of-error/

[depakid]

1. " yet these people continue to influence policy."

Story of the last 19 months... and the chickens have indeed come home to roost, just in time for the midterm elections.

Heck of a job.

[econoclast]

2. You'd think Krugman would be more forgiving of people who think hi deficits lead to hi interest rate

He used to think so too. So while Krugman is sanguine about defecits today, he wasn't always. Guess when he wrote the following for the NYTimes? If he was scared stiff then with ten-year defecits projected to be 1.8 trillion dollars and 4% of GDP, why is he not peeing down his leg now? Maybe he is one of the wishful-thinking economists who tell their readers "this time it's different"?

Here is an exerpt from some vintage Krugman .....

A Fiscal Train Wreck
By PAUL KRUGMAN

... it's time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits. 


So what?  ... we're looking at a fiscal crisis that will drive interest rates sky-high.

A leading economist recently summed up one reason why: "When the government reduces saving by running a budget deficit, the interest rate rises."


But what's really scary ? what makes a fixed-rate mortgage seem like such a good idea ? is the looming threat to the federal government's solvency.

That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 ? make that 3, O.K., maybe 4 ? percent of G.D.P. But that misses the point. "Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen." So says the Treasury under secretary;  his point is that because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.


How will the train wreck play itself out?  ... my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.

And as that temptation becomes obvious, interest rates will soar. It won't happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.

[Kurt_and_Hunter]

5. Irrelevant and disingenuous

There is nothing much sillier than having ideas like "deficits are bad" or "deficits are not bad."

Only ideologues think like that. (Like pugs thinking tax cuts are always correct.)

Economic policy exists in the context of economic reality.

The piece you cite is from March 2003. (Did interest rates go up after the piece was written? Yes, BTW.)

What Krugman says about the deficit today is about today. What he said in 2009 was about 2009. And so on.

We are in a rare economic situation with 0% Fed rates, 10% unemployment and flirting with deflation.

In that circumstance the deficit has almost no effect on interest rates. It just doesn't.

Anyone who had the same policy advice on the deficit in 2003 and 2009 is a fool.

[xchrom]

3. More corporatism wasn't the answer to the problem

Of too much corporate influence.

[pansypoo53219]

4. fuck these anti inflation shitheads.

interest rates SHOULD BE HIGHER. it REWARDS SAVERS. not the spenders. and the traders and it helps the fed stimulate the economy inrecession by LOWERING the rate, but it was held artificially low by greenspan so long, it illuminated that tool.

and no, i is not a economist + i only read the 1st chapter of william greider's temple book.

fuck wall street.

[raouldukelives]

6. +1

[Wilber_Stool]

7. What is it they

say about Wall Street and Washington? It's the only place you can fail up.

[Kurt_and_Hunter]

8. People investing their ideaology...

The Glen Beck show is sponsored almost entirely by people selling gold as a hedge against the coming hyper-inflation.

While 10 Year Treasuries are trading at under 2.5%.

:rofl: