Paul Krugman Takes a Victory Lap over John Paulson in 2010 Forecasts

While Paulson Just Takes Huge Loss in Investments

In July 2010 Business Week magazine ran a story contrasting the expectations of Nobel Prize winning economist Paul Krugman with those of the winner of billions of dollars in investments, John Paulson.  At that time the economy was in the midst of a sustained recovery from the lowest point of the Great Recession, which had bottomed out in late 2009.

Mr. Paulson was very optimistic about the future of the economy

"We're in the middle of a sustained recovery in the U.S.," Paulson declared in London. "The risk of a double dip is less than 10 percent." The housing market is now, he says, an attractive buying opportunity. "It's the best time to buy a house in America," he said. "California has been a leading indicator of the housing market, and it turned positive seven months ago. I think we're about to turn a corner."

And Mr. Paulson’s investment strategy was based on that optimism

Paulson's latest 13f filing with the Securities & Exchange Commission, which records his holdings as of Mar. 31, indicates nearly $2.995 billion of Bank of America common stock and $2.052 billion of Citigroup (C) common. Despite healthy advances from their spring 2009 lows, banks may have more room to run, particularly if Paulson is correct in the estimate he made to investors, according to The Wall Street Journal, that housing prices will rise as much as 10 percent next year.

Mr. Krugman on the other hand was not very optimistic

Krugman, by contrast, sees darker forces at work. He argues that the market has already ratified his belief that fiscal tightening will smother the recovery, pointing to widening bond spreads in Greece and Ireland, where huge cuts loom. . . . The heart of the matter, for Krugman, is unemployment. As long as it remains at such elevated levels, he says, more and more people remain out of work for so long they become unfit to hold jobs.

Business Week admitted the question was an open one in July 2010, but came down on the side of Mr. Paulson.  On Tuesday Mr. Krugman wrote about how he was right and Mr. Paulson was wrong,

So, how’s it going? I’m sure that if Paulson had proved right, there would be a followup article mocking yours truly. Wanna bet that there won’t be a piece saying that maybe professors know something that traders don’t?

And as for how Mr. Paulson did with his investment strategy, the Financial Times reported things this way.

So far this year, Paulson & Co, the giant hedge fund Mr Paulson founded in 1994, has lost an estimated $6bn or so of his investors’ – and his own – money.

Oh, and in case anyone wonders how a genius can do this, remember that this is the genius that selected securities to go into an investment pool that he later bet would fail, as it did.  This time apparently Mr. Paulson had to do things on his own, and hence the failed results.

The point of all of this is neither to praise Mr. Krugman nor to condemn Mr. Paulson, but to point out that Keynesian economic theory is correct.  It has been correct for many decades and even if politicians say it is no longer correct, that doesn’t make it incorrect.  The Conservative opponents of Keynesian economics have this logic

1.  Keynesian economics requires increased government spending when the economy is weak in order to move the economy back to full employment.

2.   Conservatives are opposed to increased government spending on philosophical grounds.

3.  Therefore Keynesian economics does not work.

Yes that train of logic does not make sense.  But we said that is what Conservatives think, so what exactly was your expectation?