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Krugman Turns Bullish; Ginsburg Delays Chrysler Sale

Posted by Larry Doyle on June 8, 2009 4:41 PM |

Nobel prize-winning Princeton economist Paul Krugman commented today that he believes our economy will emerge from recession in the 3rd quarter of 2009. In response to those comments, our equity markets rallied back to unchanged levels on the day after having previously been down by 1%.

Krugman, as with any economist, is entitled to his opinion as well as to changing his opinion.  To this point Krugman has been openly critical of many of the Obama administration policies.

I am disappointed that such a substantial, market-moving comment by a high profile economist is not supported with more thorough analysis. I have scanned all of the major news outlets and see nothing of substance. Against that backdrop, I will pose questions myself that I hope Krugman will address:

1. What prompted the change?

2. Are you still openly critical of the programs intended to repair bank balance sheets?

3. Are you still in the camp concerned more by deflation than inflation?

If Krugman believes our economy is emerging from the recession while still battling deflation, he may be all by his lonesome on that front.

While the equity markets did rally back to close unchanged, the bond market continued to sell off led by the front end of the yield curve. The 2yr Treasury is now trading at a 1.43% (+13 basis points on the day) while the 10yr Treasury is now trading at a 3.91% (+8 basis points on the day). Price action of that sort is not indicative of a potentially deflationary environment.

Mr. Krugman, the ball remains in your court. Any Nobel prize-winning economist in good standing will address the full spectrum of questions when leading with such a bold statement as you did earlier today.


Also of note: Supreme Court Justice Ruth Bader Ginsburg has ruled that the sale of Chrysler to Fiat is subject to further review by the court. An Indiana pension fund, which is a Chrysler creditor and holds a very small percentage (approximately .5%) of Chrysler’s outstanding debt, requested a ruling on the Chrysler sale by the court.  Any sort of extended delay and review may very well imperil the sale of Chrysler to Fiat. In so doing, Chrysler may be forced into liquidation.

Please recall that many creditors shared the feelings of the Indiana pension fund but were “strongly encouraged, if not intimidated,” by the Obama administration to accede to the administration’s directives.

I tip my hat to Ginsburg for her juris prudence and her respect for attempting to separate the judicial and executive branches of our government.

  • Larry –

    Another interesting story that came out today is that the Chairman of the Public Company Accounting Oversight Board resigned today. more than a year before his term is set to expire. This is just interesting given everything you have discussed regarding Mark to Market Accounting Suspension and the significance of that with banks recent “turnaround”.


  • fiscalliberal

    I would guess that Krugman himself would be surprised that his comments would move the market.

    • Fiscal…I would agree with your assessment. Given that he did make this public opinion and that he is a high profile economist it would be good to hear him expound across the board.

  • lizzy

    I was glad to see that Ginsburg delayed the sale of Chrysler. We need to see that the laws are followed; people should not be intimidated by the administration. I have been learning from your recent posts about the bond market. Thanks for the great information.

  • Lizzy,

    Welcome back!! Hope you had a nice break.

    As a veteran of the bond market my natutal inclination is to look at what is driving interest rates and how the yield curve is moving. Glad you find it informative.

    I would be surprised if the court takes a protracted amount of time on the Chrysler situation. That said, it could get very interesting.

  • formerbanker

    LD – forecasting the end of the recession says absolutely nothing about where the stock market should go – Krugman said nothing of the growth rate going forward. This economy has no chance of anything approaching 1.5% growth over the next 2 years (annual) given the state of jobs and the consumer balance sheet.

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