IMFed

Here is Paul Krugman two days ago again noting that: 1) Keynesian economics - which prescribes fiscal stimulus in the face of an economic downturn - has come through this crisis with flying colors; and 2) that a global intellectual failure is causing both the United States and Europe to impose austerity in the face of an economic downturn.

I’m still trying to make sense of this global intellectual failure. But the results are not in question: we are making a total mess of a solvable problem, with consequences that will haunt us for decades to come.

This intellectual failure is a rejection of Keynesianism in favor of a seemingly bizarre belief in what Krugman refers to as the confidence fairy.  The general idea is that we will impose austerity in the face of an economic downturn and this will restore market confidence.

[W]hat we’ve witnessed pretty much throughout the western world is a kind of inverse miracle of intellectual failure. Given a crisis that should have been relatively easy to solve — and, more than that, a crisis that anyone who knew macroeconomics 101 should have been well-prepared to deal with — what we actually got was an obsession with problems we didn’t have. We’ve obsessed over the deficit in the face of near-record low interest rates, obsessed over inflation in the face of stagnant wages, and counted on the confidence fairy to make job-destroying policies somehow job-creating.

But, I have to say, I'm a bit surprised by Krugman's surprise.  Can this "global intellectual failure" really be a mystery to Krugman?  Here is Krugman in The Return of DepressionEconomics (1999) discussing the IMF's Confidence Fairy policies:

In the summer of 1998 Brazil was already suffering an economic slowdown . . . Then the collapse of economic reform in Russia triggered an attack on Brazil's real . . . and the country went to the United States and the IMF for help . . . .

The program for Brazil was peculiarly extreme; it was almost like a caricature of the policies that had been introduced in Asia the preceding year.  But like many caricatures, it emphasized the distinctive features of its subject.  At the core of the policies imposed by Washington over the last few years, on one country after another, is an almost perfect inversion of the Keynesian compact:  faced with an economic crisis, countries are urged to raise interest rates, slash spending, and increase taxes.

Why, sixty years after Keynes, would anybody think that it was a good idea to break so profoundly with the Keynesian compact?  The answer lies in the double standard and the perceived need to win market confidence at all cost.

Krugman, The Return of Depression Economics, pp. 111-112.

I think austerity policies are shocking in their cruelty, but these policies are not surprising - we've been consistently forcing them down the throats of developing countries around the world.  Despite Krugman's seemingly genuine surprise that austerity is now being applied to the first world, the Confidence Fairy/austerity approach wasn't cooked up for this crisis.  There is a global financial cabal that has one response to economic crisis - make sure the Masters of the Universe creditors are paid.  Period.  End of Story.  

There is a model at work - it just happens to be a model that protects the few at the cost of almost everyone else.