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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.

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