Paul Krugman is truly an oddity. He did win a Nobel Prize for his work promoting free trade, but now he advocates basically everything that goes against free trade and market economy.

His latest rant: not only didn’t economists predict the crash, they didn’t push Keynesian policies hard enough. It is due, according to Krugman, to a deification of the markets that doesn’t consider market failures and irrationality.

His thoughts are wrong on so many level. First of all, economists did predict the housing crash as early as 2003. People of the Austrian School of economics he so reviles were the first ones to see that Fed money, along with low interest rates and government-sponsored enterprises like Fannie Mae and Freddie Mac, were fueling the housing bubble.

Therefore, it wasn’t market failure nor irrationality that caused the crisis but, au contraire, the government’s visible hand that changed people’s incentives. Indeed, with the litany of government programs supporting housing – Community Reinvestment Act, which was beef up under Clinton; Fannie Mae, which was encouraged to have more owners and therefore lower mortgage standards; tax deductions for mortages; Equal Credit Opportunity Act, which basically bars a bank from asking questions relating to a person’s capacity to pay; fines to banks not respecting government regulations on housing despite officials acknowledging the high risks, etc. – it’s no wonder so much money was involved in housing. Without such incentives, lower-income people would never have risked getting a mortgage. Or rather, the banks would never have loaned the money.

In other words, people were acting rationally according to these numerous government signals. Since interest rates were so low, saving wasn’t attractive but spending was. And a house is spending because once it’s finished, it doesn’t create more wealth like a plant..

Wrong Diagnosis, Wrong Cure

So since most economists couldn’t see the crisis coming, it’s no wonder that their solution (government spending) reflects their ignorance on the origin of bubbles. And contrary to what Krugman and his minions pretend, there has been no austerity in most OECD countries, be it the U.S., Canada, France, the U.K., Spain, etc. Countries that did experience austerity like Estonia fared much better.

Finally, there is ample evidence that high public debt is worrisome. Just look at the Canadian province of Quebec, which stands in the top-10 most indebted jurisdictions on the planet. When the previous minister of Finance revealed a $2.5 billion deficit, Fitch downgraded its forecast on the provincial debt. Had it followed up with a credit downgrade, then interest payments, already the third largest spending after healthcare and eduction, would have increased even more. Fortunately, there were elections and the new Finance minister proposed a complete revision of programs. Therefore, Fitch upgraded its forecast on the debt.

In short, Krugman doesn’t deserve to be called an economist. His prescriptions (more government spending, breaking windows) have been proven wrong time and time again. He is still popular because newspeak liberals still have a tremendous influence in the media; therefore they distort facts like Krugman does or simply omit them.