Krugman v. Rajan: I root for the Indian-American :)

I clearly remember when I first heard about Raghuram Rajan, who is an economics professor at the University of Chicago.  It was from reports that he had taken on the then unassailable Fed guru, Alan Greeenspan, and warned about potential disasters.  Rajan did that with a whole lot of formal economic language, most of which I was/am incapable of understanding. And Nouriel Roubini warned about the disaster in theatrical ways, which I could easily understand :)

It was interesting to me that both these had offbeat ethnic names.  Placing the origin of Rajan's name was easy for me--both the first and last names are dead giveaways.  Naturally, I have then been on the alert whenever his name popped up in serious discussions in the publications that I follow (no, not the academic ones!!!)

The latest is a fascinating context.  Rajan and Paul Krugman are duking it out.  It is the wild, wild, west on the worldwide web.  (yet another evidence for how scholarly discussions are rapidly happening in real time and in open channels, as opposed to the time-delayed journal routes.  I love this.)

Rajan is clearly pissed off with Krugman's review of his book. Again, this is awfully close to a live debate: Krugman's review essay is in the latest issue of the NY Review of Books.  I read that on Sunday, when, as is my Sunday routine, I checked in with the NYRB site.  Perhaps it was there even earlier, and perhaps Rajan had access to that review in advance.  It is just awesome that Rajan's response--this essay--is dated September 19th.  How much more of a live debate can I take? :)

Anyway, Rajan writes:

Paul Krugman and Robin Wells caricature my recent book Fault Lines in an article in the New York Review of Books. The article, and their criticism, however, do have a lot to say about Krugman’s policy views (for simplicity, I will say “Krugman” and “he” instead of “Krugman and Wells” and “they”), which I have disagreed with in the past. Rather than focus on the innuendo about my motives and beliefs in the review, let me focus on differences of substance.

And that was the opening shot.  Rajan then goes through his arguments systematically.  As a non-economist, and more so when it comes to finance and monetary issues, I have a tough time then figuring out why Rajan is wrong.  As I have noted even earlier in a few posts, Krugman might have been ideological and a tad too shrill.  Rajan himself notes how there is a lack of consensus, in this case on the role of the fed in the crisis:

I admit that there is much less consensus on whether the Fed helped create the housing bubble and the banking crisis than on whether Fannie and Freddie were involved. Federal Reserve Chairman Ben Bernanke, a monetary economist of the highest caliber, denies it, while John Taylor, an equally respected monetary economist, insists on it. Some Fed studies accept responsibility while others deny it. 

As one on the sidelines, I am like many who have a tough time figuring out which expert is correct in the interpretation of apparently the same data that everybody is sifting through.

At the end of the day, I suspect that Krugman is becoming a lot more ideological and sarcastic when he doesn't need to.  Rajan makes this point as well:

Perhaps Krugman believes that by labeling other economists as politically extreme, he can undercut their credibility. In criticizing my argument that politicians pushed easy housing credit in the years leading up to the crisis, he writes, “Although Rajan is careful not to name names and attributes the blame to generic “politicians,” it is clear that Democrats are largely to blame in his worldview.” Yet if he read the book carefully, he would have seen that I do name names, arguing that both President Clinton with his “Affordable Housing Mandate” (see Fault Lines, page 35) as well as President Bush with his attempt to foster an “Ownership Society” (see Fault Lines, page 37) pushed very hard to expand housing credit to the less well-off. Indeed, I do not fault the intent of that policy, only the unintended consequences of its execution. My criticism is bipartisan throughout the book, including on the fiscal policies followed by successive administrations. Errors of this kind by an economist of Krugman’s stature are disappointing.

I am cheering Raghuram Rajan in this fight because his essay is a lot more convincing to me than is Paul Krugman's.  The fact that Rajan is an Indian-American also helps :)  It is also bloody humbling to realize that I am the same age as Rajan is, and what a non-entity I am, and how much the guy has accomplished.  Awesome.

Update: I notice the comment(s) ... but, first, here is more from Rajan--over at FP ... but, the contents look nearly identical to the earlier one.  This FP is dated Sep 20th, but it doesn't refer to the AEI essay ... hmmm....