Krugman's Call for a Housing Bubble

[_Droopy]

http://mises.org/daily/6372/Krugmans-Ca ... ing-Bubble

In 2009, Lew Rockwell posted this quote of Paul Krugman's from a 2002 New York Times editorial:

To fight this recession the Fed needs…soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Krugman. 2002. Calling for a housing bubble.

What's more, by explicitly calling for a new bubble to replace the recently burst one, he anticipated by 6 years The Onion's hilarious "report" that "demand for a new investment bubble began months ago, when the subprime mortgage bubble burst and left the business world without a suitable source of pretend income." Except Krugman was being serious.

The quote caught on in the blogosphere, to such an extent that Krugman actually responded in his New York Times blog:

Guys, read it again. It wasn't a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that's just what happened.

So with a deft little two-step, Krugman painted himself as a doctor who gave an excellent diagnostic, and not a disastrous prescription. One of his ditto-heads posted on his blog that saying Krugman advocated or caused the housing bubble was "Like saying Nostradamus caused the rise of European fascism."

Even economist Arnold Kling bent over backwards to interpret the column in a benign light:

He was not cheerfully advocating a housing bubble, but instead he was glumly saying that the only way he could see to get out of the recession would be for such a bubble to occur.

Mark Thornton on Mises.org followed up with a devastating collection of 2001 Krugman quotes clearly documenting his support for inducing a housing bubble. The most damning of this batch is the following from a 2001 interview with Lou Dobbs:

Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. [emphasis added]

How can anyone spin that as a purely academic musing, and not a policy recommendation for artificially inducing housing spending?

Ignoring the other quotes for a moment, and just judging from the 2002 column, did Krugman support pumping up a housing bubble or not? Given that, even in his blog post defending himself, he explicitly stated his belief that "the only way the Fed could get traction would be if it could inflate a housing bubble," there are only two possibilities:

1. He did not support inducing a housing bubble, and wanted the Fed to not fight the recession.
2.He did support inducing a housing bubble.

Anyone even somewhat familiar with Krugman's attitude toward Fed activism should know that proposition #1, that Krugman supported a do-nothing policy, is preposterous. So, especially after bringing back in the quotes gathered by Mark Thornton, the case for proposition #2 is overwhelming.

And what about his strawman protests that he didn't cause the housing bubble, much less the Enron scandal or Kennedy's assassination? The man is willfully missing the point. What is damning about these quotes is not that he necessarily caused anything. What is devastating about them is that they expose the intellectual bankruptcy of his economic principles. Those who look up to him as an economic sage should realize that the neo-Keynesian principles that led him to advocate aggressive interest-rate cuts and mammoth public spending now, are the very same principles that led him to advocate inducing a housing bubble then. He would himself affirm that his economic principles haven't fundamentally changed since then. So the conclusions and policy prescriptions he infers from them are just as wildly wrong now as they were then.

Krugman's first editorial could be twisted, if one was inclined to twist, into something seemingly benign. The second wave of quotes is much harder to mischaracterize (which is not to say that the most unquestioning of Krugman's devotees don't try). The laziest tactic of the Krugman apologists is to only address the more stretchable 2002 editorial, and completely ignore the 2001 quotes. But not even that approach, if accepted, helps Krugman's case, since the 2002 editorial is damning enough on its own, once the benign interpretations of Krugman's apologists are shown to be nonsense.

One protestation offered has been that a quotation offered above omits the context, which shows that Krugman was "merely" quoting someone else:

To fight this recession the Fed needs … soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

The last sentence quoted reads in full,

And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

"Partisan misquoting!" the apologists cry. But lets pull the lens back even further, and add even more context by including the whole paragraph, and the one preceding it.

A few months ago the vast majority of business economists mocked concerns about a ''double dip,'' a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I've repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble. [Emphasis added.]

So the first paragraph introduces the "double-dipper iconoclasts", and then clearly states that he, Krugman, agrees with them. The second paragraph then outlines the "basic point" of the double-dippers, which again, he agrees with. And the basic point in question is that to "fight this recession the Fed … needs soaring household spending."

Krugman then continues to say how the Fed would need to accomplish this goal, which again, he supports; he says that the recession needs to be fought with soaring household spending, which Alan Greenspan needs to induce by creating a housing bubble to replace the Nasdaq bubble. By writing, "as Paul McCulley of Pimco put it", Krugman is not "merely" quoting another person; he is using someone else's phraseology to express his own opinion.

Another protestation is that Krugman was saying the housing bubble won't work, since later in the editorial he wrote,

Judging by Mr. Greenspan's remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman's crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging.

But this protestation completely ignores the fact that when Krugman wrote in the editorial,

Despite the bad news, most commentators, like Mr. Greenspan, remain optimistic.

and

But wishful thinking aside, I just don't understand the grounds for optimism. Who, exactly, is about to start spending a lot more? [Emphasis added.]

he was clearly characterizing a housing bubble as an object to be desired, whether or not he thought it was possible. In other words, at best, Krugman could be interpreted as saying that it would be great if Greenspan could pull off a housing bubble, but that he, Krugman, doubts whether he'll be able to accomplish such a worthy feat.

So it should be clear that the Fed causing a housing bubble in order to bring about "soaring household spending" was Krugman's optimal situation, whether or not he thought it was doable at the time. Given the consequences of the housing bubble that did ultimately happen, that alone should be enough cause for the public to stop listening to this fellow.

Another question is, how did he see the Fed bringing about his optimal situation? He answered this question himself in a 2002 interview with Lou Dobbs (which can be found here, though not at the page originally linked to in Thornton's collection):

Low interest rates, which promote spending on housing and other durable goods, are the main answer. [Emphasis added.]

This brings us to the key point that all the Krugman apologists egregiously ignore: namely that it would be surprising if such an arch-Keynesian economist as Krugman (he's written extensively on what he has called "the greatness of Keynes") didn't advocate a housing bubble to replace the dot-com bubble, since doing so would dovetail perfectly with basic Keynesian doctrine. As a Keynesian, Krugman should have wanted lower interest rates (as he actually did want, as is revealed by the previous quote). To quote Keynes himself,

Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom. (General Theory, p. 322; emphasis added, but the exclamation point is Keynes's own.)

To be true to his Keynesian principles, Krugman ought to have to welcomed the housing bubble, since to him,

1. it was a good way to achieve his coveted "soaring household spending", and
2. it was the likely result of Keynesianism-prescribed lower interest rates.

Now let's take a look at some even more directly damning evidence of Krugman's pro-bubble economics. Above, I pointed out that in Krugman's 2001 editorial, he implicitly agreed with the Onion's facetious call for a new bubble to replace the old one. In a brilliant comment left in Krugman's own blog (which you can still read), one "M Ingelmo" reveals that in 2009 Krugman explicitly agreed with the Onion piece.

Mr. Krugman,

I don’t know if you were on the grassy knoll, too, but you certainly were in Spain in March, chatting with that most fervent of your admirers, Prime Minister Mr. Zapatero, and interviewed in the Spanish public TV channel.

Since these days a video is worth a thousand words, allow me to quote you and say: "guys, watch it for yourselves". The program is about other things, innovation, and in Spanish (sorry), so go straight to the 35 seconds in the interview after minute 2:50. Under the Spanish translation I’m sure you’ll be able to hear the English original. Quite enlightening:

To be honest, a new bubble now would help us out a lot even if we paid for it later. This is a really good time for a bubble…

There was a headline in a satirical newspaper in the US last summer that said: "The nation demands a new bubble to invest in" And that’s pretty much right.

http://www.rtve.es/mediateca/videos/200 ... 5712.shtml

Not a piece of policy advocacy? Just economic analysis? Will it look like it to all your defenders and commentators here? Personally I am delighted with the words "pay for it later"; are we paying right now for the last one, advocated in 2002, or maybe not enough yet, Mr. Krugman?

If governments follow your "not-a-piece-of-policy-advocacy-just-economic-analysis", (as it seems certain at least with ours), when that new bubble thus inflated eventually bursts, and we are "paying for it" in a few years time, what will you write in your blog then, Mr. Krugman?

But perhaps the most instructive lesson out of all this is that, implicit in Krugman's quotes, there is a big fat finger of blame pointed directly (and correctly) at the Federal Reserve. Krugman himself would only admit to blaming other factors for our present crisis. But, if "It would be surprising if such an arch-Keynesian economist as Krugman didn't adovocate a housing bubble to replace the dot-com bubble…"


1. as any sane person will recognize in hindsight, the housing bubble was disastrous for the economy
2. as Krugman himself stated, the Fed can induce such a bubble by lowering interest rates, and
3. as the public record shows, the Fed did drastically lower interest rates in the time leading up to, and in the thick of, the housing bubble,

...then according to the vanishingly few economic principles Krugman actually gets right, he should blame the Fed for the present crisis.

As it turns out, Krugman's apologists shouldn't demand more context for his notorious quotes, since it only shines even more light on how backward are his economic doctrines and prescriptions.

[_Droopy]

http://archive.mises.org/010153/



Here is Paul Krugman from his blog trying to deny that he was a persistent advocate for the housing bubble and below that are quotes from him just prior to the bubble taking off. ht Benjamin Lee
==============================================
“And I was on the grassy knoll, too”

One of the funny aspects of being a somewhat, um, forceful writer is that I’m regularly accused of all sorts of villainy. I was personally responsible for the demise of Enron; my nonexistent son worked for Hillary; etc.. The latest seems to be that I called for the creation of a housing bubble.

Paul Krugman

=================================================

German Interview, undated

http://www.pkarchive.org/global/welt.html

“During phases of weak growth there are always those who say that lower interest rates will not help. They overlook the fact that low interest rates act through several channels. For instance, more housing is built, which expands the building sector. You must ask the opposite question: why in the world shouldn’t you lower interest rates?”

May 2, 2001

http://www.pkarchive.org/column/5201.html

I’ve always favored the let-bygones-be-bygones view over the crime-and-punishment view. That is, I’ve always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. But I had to face the fact that speculative bubbles usually are followed by recessions. My excuse has been that this was because the policy makers moved too slowly — that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum. That was why I, like many others, was frustrated at the smallish cut at the last Federal Open Market Committee meeting: I was pretty sure that Alan Greenspan had the tools to prevent a disastrous recession, but worried that he might be getting behind the curve.

However, let’s give credit where credit is due: Mr. Greenspan has cut rates since then. And while some of us may have been urging him to move even faster, the Fed’s four interest-rate cuts since the slowdown became apparent represent an unusually aggressive response by historical standards. It’s still not clear that Mr. Greenspan has caught up with the curve — let’s have at least one more rate cut, please — but the interest-rate cuts do, cross your fingers, seem to be having an effect.

If we succeed in avoiding recession, this will mark a big win for let- bygones-be-bygones, and a big loss for crime-and-punishment. And that will be very good news not just for this business cycle, but for business cycles to come.

July 18, 2001

http://www.pkarchive.org/economy/ML071801.html

“KRUGMAN: I think frankly it’s got to be — business investment is not going to be the driving force in this recovery. It has to come from things like housing, things that have not been (UNINTELLIGIBLE).

DOBBS: We see, Paul, housing at near record levels, we see automobile purchases near record levels. The consumer is still very much in this economy. Can he or she — or I should say he and she, can they bring back this economy?

KRUGMAN: Well, as far as the arithmetic goes, yes, it is possible. Will the Fed cut interest rates enough? Will long-term rates fall enough to get the consumer, get the housing sector there in time? We don’t know”

August 8^th 2001

http://www.pkarchive.org/economy/ML082201.html

“KRUGMAN: I’m a little depressed. You know, inventories, probably that’s over, the inventory slump. But you look at the things that could drive a recovery, business investment, nothing happening. Housing, long-term rates haven’t fallen enough to produce a boom there. The trade balance is going to get worst before it gets better because the dollar is still very strong. It’s not a happy picture.”

August 14, 2001

http://www.pkarchive.org/column/81401.html

“Consumers, who already have low savings and high debt, probably can’t contribute much. But housing, which is highly sensitive to interest rates, could help lead a recovery…. But there has been a peculiar disconnect between Fed policy and the financial variables that affect housing and trade. Housing demand depends on long-term rather than short-term interest rates — and though the Fed has cut short rates from 6.5 to 3.75 percent since the beginning of the year, the 10-year rate is slightly higher than it was on Jan. 1…. Sooner or later, of course, investors will realize that 2001 isn’t 1998. When they do, mortgage rates and the dollar will come way down, and the conditions for a recovery led by housing and exports will be in place.

October 7, 2001

http://www.pkarchive.org/economy/ML071801.html

“Post-terror nerves aside, what mainly ails the U.S. economy is too much of a good thing. During the bubble years businesses overspent on capital equipment; the resulting overhang of excess capacity is a drag on investment, and hence a drag on the economy as a whole.

In time this overhang will be worked off. Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. But it seems inevitable that there will also be a fiscal stimulus package”

Dec 28, 2001

http://www.pkarchive.org/column/122801.html

“The good news about the U.S. economy is that it fell into recession, but it didn’t fall off a cliff. Most of the credit probably goes to the dogged optimism of American consumers, but the Fed’s dramatic interest rate cuts helped keep housing strong even as business investment plunged.”

[_Kevin Graham]

Old news, as Mises proves once again that it is desperate for fodder to continue its corporate propaganda campaign. Krugman on this issue back in 2009:

And I was on the grassy knoll, too

One of the funny aspects of being a somewhat, um, forceful writer is that I’m regularly accused of all sorts of villainy. I was personally responsible for the demise of Enron; my nonexistent son worked for Hillary; etc.. The latest seems to be that I called for the creation of a housing bubble — in fact, the bubble is my fault! The claim seems to be based on this piece.

Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.

Update: A gracious, sensible explication from Arnold Kling.

From Arnold King

In 2002, he passed along a joke that the economy needed a housing bubble. Krugman is controversial, so the post generated comments on this blog and elsewhere, some of which are overly "gotcha" in character.

Some points I would make:

1. Krugman was mainly expressing pessimism. He was not cheerfully advocating a housing bubble, but instead he was glumly saying that the only way he could see to get out of the recession would be for such a bubble to occur.

2. In the event, we had a housing bubble and we got out of the recession. To me, this raises the question of whether a distorted recovery is better than an undistorted recession. That question might be asked in the context of fiscal stimulus as well--at what point do the distortions of the stimulus outweigh getting out of a recession?

3. I personally do not think that Greenspan caused the housing bubble. I do not believe that monetary policy and short-term interest rates are as all-powerful as many economists do. What I was writing in August of 2002 was this.

4. Paul Krugman and Brad DeLong thought that Greenspan kept rates too high in 2002. This makes them poorly positioned to criticize Greenspan now for keeping rates too low. I am pretty sure that Brad is guilty of this hypocrisy. I believe that Paul is not.

[UPDATE: Brad denies committing this hypocrisy, and he is right. He has stood by his views that interest rates in 2001 and 2002 were, if anything, too high. I stand corrected.]

5. The main reason I put Paul's quote on my blog was because I am compiling a history of the events that caused financial crisis. I have a paragraph that says:

the current crisis led to a sharp recession that could not be mitigated with monetary expansion. This suggests that in hindsight more should have been done to prevent the housing bubble from expanding as much as it did. This in turn suggests that the monetary easing that took place from 2001-2003 was excessive. However, at the time, the sluggish growth in employment (the 2001-2003 period was commonly referred to as a "jobless recovery") was thought to justify the monetary expansion and low levels of interest rates.

The Krugman quote can help to support that paragraph. I can pick other quotes, obviously, but the one about needing a housing bubble is particularly poignant.

[_Kevin Graham]

If you are a right-winger you probably "remember" it well, in that way one "remembers" things they wish had happened.

Did Krugman say that? Yes, in a NYT column in 2002. The quote is accurate. The following line was: "Judging by Mr. Greenspan's remarkably cheerful recent testimony, he still thinks he can pull that off."

The 2002 column was about the Fed's difficulties in fighting a recession caused by the NASDAQ bubble bursting, and that since the NASDAQ bubble was unsustainable, that the only way to return to the same level would be another bubble, and that perhaps Alan Greenspan was trying to do just that.

"Greenspan needs to..." was what Greenspan "needed to do" to make his rosy predictions come true, not what he needed to do for the good of the nation of the health of the economy.

The comment by Pimco's Paul MCulley to which Krugman was referring was:

"There is room for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing."

Does that sound like someone saying a housing bubble would be a good idea?

This was two guys (Krugman and McCulley) theorizing, in 2002, that Alan Greenspan intended to replace the internet bubble with a housing bubble to keep the numbers up.

I wish I had predicted in 2002 that Greenspan thought he could get away with creating a housing bubble to replace the NASDAQ bubble. That's an impressive prediction.

But the quote appears on dozens or hundreds of right-wing web-sites as proof that Paul Krugman called for the creation of a housing bubble in 2002.

And Jonathan Swift called for eating Irish children. He did. I've seen the quotes!

[_Kevin Graham]

Krugman Identified the Housing Bubble in 2006

[_EAllusion]

Here's the most spectacularly wrong thing Krugman has said to my knowledge:

http://web.archive.org/web/199806101000 ... omics.html

This was a prediction he made in 1998:

The growth of the Internet will slow drastically, as the flaw in 'Metcalfe's law'--which states that the number of potential connections in a network is proportional to the square of the number of participants--becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.

It's couched in a series of other predictions that range from mostly wrong to just wrong, but this one takes the cake.

[_Droopy]

Old news, as Mises proves once again that it is desperate for fodder to continue its corporate propaganda campaign.

Is this just more of your shredded tinfoil, or do you have some documentary evidence to back this up?

Go ahead and defend, Krugman, Kevin, as he's been all over the map on this, as the winds shifted, you can cherry pick to your heart's content.

His words, however, and the dates upon which they were written or spoken, remain.

[_Kevin Graham]

You ignore context like you do everything else that refutes your desperate attempts to appear relevant. It takes a true idiot to say Krugman "called for a Housing Bubble" when he was on record predicting it from 2005 on, never once suggesting it would be a great thing for the country. You have to take a citation from its context, isolate it with your idiot style rhetoric, and then spin it to suit your purpose because you cannot come to grips with Krugman's expertise on economics any other way. That makes you pathetic... and kinda funny.

[_Droopy]

You ignore context like you do everything else that refutes your desperate attempts to appear relevant. It takes a true idiot to say Krugman "called for a Housing Bubble" when he was on record predicting it from 2005 on, never once suggesting it would be a great thing for the country. You have to take a citation from its context, isolate it with your idiot style rhetoric, and then spin it to suit your purpose because you cannot come to grips with Krugman's expertise on economics any other way. That makes you pathetic... and kinda funny.

Oh yes, and here we go with the classic leftist cry of anguish, "You took me out of context!"

This has now become so De Rigueur on the Left when a mask comes off or anyone is caught in a major gaff or statement that ends being dead wrong, if not horrendously destructive because it was used as input for policy decisions, that one can safely put the vast majority of its uses down, as the present case, as nothing more than a knee-jerk meme.

[_Gadianton]

Interesting post Droopy. I think Krugman and Lew are both up in the night.

First of all with Krugman, yeah, the guy needs to take his stripes for some of the stupid crap he says as the Left's Rush Limbough, so I'm all for the Austrians giving him hell for this. Especially after he called Austrians a cult a couple days ago, lol - was kind of funny though. With Krugman, you have to wonder, is there ever going to be a time when we don't need the Fed to drop rates to 0 and spend a trillion in stimulus? I mean really, it seems like he says half this crap just to piss off the Right, like Rush does for the Left, and his constituents just take whatever he says at face value and defend him.

But ultimately, it's obvious to me that Krugman was saying this in jest. Wasn't serious.

1. He did not support inducing a housing bubble, and wanted the Fed to not fight the recession.
2. He did support inducing a housing bubble.

No. Those aren't the only two options.

Lew needs to understand that Krugman is not an Austrian, Krugman does not believe that lowering interest rates will cause a bubble. What the Austrians and Krugman will certainly agree on is that bubbles represent prices that are irrational. Austrians believe that interest rates below the "natural rate" distort our ability to invest rationally, therefore, we overextend ourselves, in this case, in houses, and push the prices up to points that are irrational.

Krugman is a Keynesian in the crudest way. Keynesians most certainly do not believe that low interest rates will cause people to be irrational, they believe in a recession the market has failed, and low rates or stimulus will give the right incentives so that people will respond rationally and work their way out. The market is irrational in a recession, and stimulus fixes this. So obviously, Krugman was using the word "bubble" rhetorically. For a Keynesian, a bubble will happen when markets are irrational, and markets are irrational because people are irrational on their own (in the new new Keynesian doctrine, not the original, i plan on pointing out the contradictions here at some point).

It's funny Droopy posted this because I was thinking about posting something on Krugman, the Austrians, and hedge funds on bubbles, and I may still do so. Not the housing bubble, but the gold bubble. After housing crashed, gold shot up. was it the next asset bubble? Well, someone had pointed it out that Fox news and the hardcore right had become obsessed with government causing epic inflation so right-wingers went into gold hardcore. Because this was irrational of them, they were driving gold way above its justified price, and thus causing a bubble in gold. Krugman probably wasn't sure when he agreed with the theory whole-heartedly if he was just scoring a cheap shot, or if he really believed it. But this would be consistent with his view as a new new keynesian that "irrational exuberance" by the market in gold is a bubble in gold. it makes no sense for a Keynesaion to recommend "irrational exuberance" in the housing market via monetary policy. A few days later, Krugman came up with an unoriginal theory linking gold prices to interest rates, and he had to back off on the bubble talk because in his model, gold prices made more sense on fundamental grounds.