Using a Retirement Account to Buy a Home, Plus a Paul Krugman Round-Up

*Economists Robin Wells and Paul Krugman. Photo by PBS NewsHour.* Our web-exclusive interviews with Paul Krugman, accompanied by conservative critiques, and one with his wife, Robin Wells, have garnered so much attention that all five ranked among the nine "Most Watched Videos" at [**pbs.org/newshour**](http://www.pbs.org/newshour/). Since none of them aired on the broadcast, we thought we'd provide an archive here for those who haven't yet seen them. Krugman on European austerity, with a response from Jacob Kirekegaard of the Peterson Institute for International Economics: [**Paul Krugman on Germany's 'Whips and Scourges'**](http://www.pbs.org/newshour/rundown/2012/06/paul-krugman-on-germanys-whips-and-scourges.html) Krugman focused on Spain and Germany with critique from Terence Burnham: [**Paul Krugman on Europe 'Doing the Unthinkable'**](http://www.pbs.org/newshour/rundown/2012/06/paul-krugman-on-europe-doing-the-unthinkable.html) Krugman on his former boss, Ben Bernanke: [**Paul Krugman on Ben Bernanke's 'Green Shoots'**](http://www.pbs.org/newshour/rundown/2012/06/paul-krugman-on-ben-bernankes-green-shoots.html) Krugman's take on what happened in the great crash of '08, and if we are in danger of forgetting the lessons learned and getting ourselves into yet another financial disaster: [**Paul Krugman on the 'Cartoon Physics' of the 2008 Crash**](http://www.pbs.org/newshour/rundown/2012/06/paul-krugman-on-the-cartoon-physics-of-the-2008-crash.html) Economist Robin Wells talked with us about what the pair disagree on and her analysis of the financial crisis: [**Robin Wells on Universal Coverage, Europe Unwinding and Husband Paul Krugman**](http://www.pbs.org/newshour/businessdesk/2012/06/robin-wells-on-universal-cover.html) Now, I'm going to take the liberty of responding to Krugman's take on [**Mutual Assured Destruction**](http://www.pbs.org/newshour/rundown/2012/06/paul-krugman-on-the-cartoon-physics-of-the-2008-crash.html) myself. *(Video and transcript below.)* First, Krugman's notion of debt repayment as "mutual destruction." This was an idea that plagued English economist John Maynard Keynes, who explained its dangers and propounded the "paradox of thrift" during the global Great Depression of the 1930s. We explored the paradox at length on the NewsHour in 2009. The result is online at, among other places, the [**Council for Economic Education's "econedlink,"**](http://www.econedlink.org/interactives/index.php?iid=23.) a site for teachers of economics (Many of our other stories are there as well, with suggested questions for students.) The second key insight in today's Krugman morsel is the "Wile E. Coyote Moment." One of the great conundrums in human life is not that we don't know we're on an unsustainable path, but that the timing of the W.E.C. Moment seems impossible to predict. President Richard Nixon's esteemed economist, the late Herb Stein, lives on for an observation of his that has become known as "Stein's Law": "If something cannot go on forever, it will stop." But when will it stop? That is the question every investor, every soldier, every human being would like to know, but just can't. Human systems simply have too many moving parts, constantly reacting to each other, just as complex physical systems do. I once asked the late Harvard philosopher Nelson Goodman how economics could pose as a science, given how off-base its predictions so consistently are. He responded that the identical charge could be leveled at physics. "We know all the forces that affect a leaf falling from a tree," he said," but we can never tell exactly -- or sometimes even approximately -- where any given leaf will land." And on Dec. 30, 1999, [**I asked Jim Cramer**](http://www.pbs.org/newshour/bb/economy/july-dec99/stocks_12-30.html), five years before he began to floridly flaunt his money madness on CNBC: **Paul Solman:** Are you subscribing to what has been called the "greater fool theory," that is, that there is a greater fool who is going to buy the stock at these inflated prices? **Jim Cramer:** I said to two of my investors that I can play the greater fool theory better than anyone else, so to tell you right now a lie that I'm not playing it would be wrong. I'm a trader by nature. The NASDAQ composite index was above 4000 that day. A year later, it was at 2400. The Wile E. Coyote moment didn't come exactly when even Jim Cramer expected it to. As it so often doesn't for any of us.

> **TRANSCRIPT: 'Paul Krugman on the 'Cartoon Physics' of the 2008 Crash'** >
> > **Paul Solman:** To what do you attribute the disaster that befell us? > > **Paul Krugman:** I think it was largely just one of those things that happens with an assist from bad ideology. So the, the main thing that happened was we had a long period without a depression. People, very few people alive really remember the Great Depression, and very few people actually remember severe financial crisis at all in this country. And so everyone gets complacent which includes, includes politicians and public policy officials. This is the Minsky story... > > **Narrator:** Hyman Minsky, that is, a Harvard-trained economist whose story was about booms and busts. Minsky was at one time widely dismissed bythe economics profession... > > **PK:** But now everybody including me quotes him because one of his arguments was exactly that you have, you have a depression, you have a bad scene and everybody gets cautious and that caution gives you several decades of stability and as the stability goes on people forget the dangers and they make the same mistakes and get you right back into another one. So, so there was a natural cycle. But then on top of that you had an ideology of that was not just pro-market but religiously pro-market that markets are never wrong, that all government regulation is bad, that government is never the solution it's always the problem, so that we had a kind of reckless removal of the safeguards on the system all on top of what would probably have been a gradual march to crisis anyway. And paraphrase Lincoln -- and the crisis came. The specific probably don't matter very much, it ended up being subprime and then Lehman Brothers, but it could have been something else. One of, one of these years we were going to have this crisis. >

People, very few people alive really remember the Great Depression, and very few people actually remember severe financial crisis at all in this country. And so everyone gets complacent.
--Paul Krugman

> > Measures of debt, measures of leverage in the financial sector, measures of household debt relative to income rose steadily and fairly rapidly especially after 2000. And then at a certain point well, so Wile E. Coyote in, you know for people not familiar with the Classics, in the Road Runner, there's almost always a moment when Wile E. Coyote runs off a cliff and according to the laws of cartoon physics it's only when he looks down and realizes that there's nothing under him and ... So the Wile E. Coyote moment hit in 2008 when you know, the housing bubble had started to burst, people started to look and say: There's all that debt, oh that's terrible, better call in those loans, better force people to repay. > > **PS:** And that's de-leveraging. > > **PK:** De-leveraging. And the trouble is that there are paradoxes in all this stuff and of them is what we call the paradox of deleveraging, which is if everybody tries to pay down debt at the same time what happens is the economy shrinks, prices of assets fall and people lose their jobs, people lose their income, profits crash, and everybody ends up being in a worse financial position than they were before because they're, they're... When everyone tries to do it at the same time, the result is mutual destruction. Meanwhile, I answer (again) a reader's question about using retirement funds to pay for a home and sheepishly beg your pardon for repeating myself [from Wednesday](http://www.pbs.org/newshour/rundown/2012/06/a-humours-song-to-keep-in-mind-as-us-heads-towards-fiscal-cliff.html). Problem is, the answer was lopped off in the middle, undoubtedly by me, somewhere between the initial gleam in my eye and electronic transmission. Below is my answer in full. **Name: Terry Coleman** **Question**: I want to take some money out of my 401(k) to purchase a home. How do I go about this? **Paul Solman:** Take out the money and pay for the home. Your 401(k) is an account. You withdraw from it as you would any other. There are only two rubs. One, if you're less than 59 and a half, you will be required to pay a 10 percent penalty on the amount for early withdrawal. Second, no matter your age, you'll have to pay taxes on the withdrawal just as if it were regular income. The advantages of a 401(k), IRA or similar "tax-deferred" account are that you don't have to pay taxes on its growth -- assuming there is growth. But that's only until you withdraw money from the account, at which point you have to pay taxes. Should you or shouldn't you? The decision depends on a number of factors, and I have a Q-and-A coming up on this subject soon. But one factor is the tax rate now, compared to the tax rate at the time of withdrawal. It is assumed that people will earn less in retirement than while working, and so their marginal tax rate -- the highest rate they pay -- will go down. But what if tax rates go up between now and the day you hit 59 and a half? By the way, there is another alternative to withdrawing while still accessing your retirement money: to borrow from your retirement account. Yes, you have to pay interest. But the beauty of it is, you pay back the interest to the account, i.e., to yourself. I did this once to buy a new house before getting the money from selling the old one. Worked like a charm. *This entry is cross-posted on the [**Rundown**](http://www.pbs.org/newshour/rundown/)- NewsHour's blog of news and insight.*

Follow @paulsolman