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.
As Arnold Kling says, there's a paragraph I'm sure glad I didn't write.
Wow indeed. Krugman knew what the hell he was talking about long before it was apparent. He must be really embarrassed to have said in 2002 that the goal was to create a housing bubble to replace the stock bubble. And clearly he was proposing it as a permanent solution. Oh, what's that? A couple years later he wrote an article called Running Out of Bubbles that followed up on the 2002 article?
http://query.nytimes.com/gst/fullpage.html?res=9507E4D61039F934A15756C0A9639C8B63
"As Mr. McCulley predicted, interest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst.
Now the question is what can replace the housing bubble.
Nobody thought the economy could rely forever on home buying and refinancing. But the hope was that by the time the housing boom petered out, it would no longer be needed."
I'm sure you can find plenty of predictions/recommendations of any 2-days a week economic writer that turn out wrong, but you chose a really bad one here to make an example of Krugman. The 2002 article was explaining what the Fed was doing at the time. And he was dead on.
Most people I talk to say that the next bubble will be in "green."
Health care can't be a bubble because it's already too large and we can't finance it. Alternative energy, alternative transportation, and perhaps some of the material sub-industries (nano, super-conduction) will become the darlings of the next few years if Obama has anything to say about it.
He'd just better hope that the sunspots come back so that the giant Gore Canard that the planet is warming can remain "unchallenged."
OTOH, an irradiated Iran (presuming they have an exchange with Israel) would certainly put the spurs to finding non-oil energy. Unfortunately the game then would be "how do we get out of this depression?" and not "what bubble will buoy us out of this recession?"
Either way, it appears that all of the elements of a good bubble are there: overly high expectations, plausible but not defensible business plans, complicated technology and dependencies that are way beyond the ability of press-flunkies to accurately describe, and a public that is keen for a recovery - even if it's built on sand.
Green might become a bubble. But at the same time, innovative energy is one technology that can be effectively developed with massive investment on the scale only a government can give; there would be no nuclear power without the Manhattan project.
Also, it is interesting to note that one of the major drivers that is putting alternative fuel (i.e. non-oil energy) on the map is the US military looking to become less dependent on hostile governments.
Remember that the .com bubble *did* generate quite a few .com's that are with us to this day. Amazon, Yahoo, Google, etc. were all born, grew, and continue to flourish.
And the housing bubble most certainly resulted in a lot of houses being built. There is certainly no shortage of housing in this country.
The trouble is that in both cases the speculation was all out of proportion to the reality. .com's were financed in the millions and tens of millions when they were nothing but a URL and an "under construction" page. Corning was cranking up fiber production capacity as if they were wiring the moon - and their stock was certainly in orbit.
And then reality set in.
Ditto the housing market. The inflation was all out of proportion to any test of reasonableness, and people treating their equity as a "money machine" was madness.
And so it could well be with "green." We've already seen significant speculation in ethanol, even though rudimentary analysis tells you that moonshine is hardly an efficient way make fuel on an industrial scale. We don't need a manhattan-sized project to start over-pricing wind turbine and solar companies.
Coal, otoh, is available right now. There is still a huge amount of oil in North America. And nuclear? Our Pinocchio in Chief is talking out of both sides of his face (again), or we'd see plans for reactors moving forward, right now. These are all far more "shovel ready" than any of this other stuff.
But they will be ignored, right up until the green bubble bursts.
In the meantime the race is on to see who can get algae to produce more and more oil ("bio-diesel"), even though the technology simply doesn't scale to industrial levels.
I think green energy is great, and a great supplement. I just don't like bubbles.
You've lost me, Megan. I just read the column. Krugman predicted exactly what Greenspan would do, and made it perfectly clear that it would be disastrous. Greenspan did what Krugman predicted, and lo, it was just as disastrous as Krugman said it would be. Am I missing something?
melwrc, Butarski:
Umm, guys? It was a prescription, not a prediction. He was pessimistic about Greenspan's ability to actually do it. So he was supremely wrong on both counts. Krugman is a hack.
No, it was a PROscription. You don't call something a "bubble" if you think it's a good idea. Bubble's burst.
Wow Clay, you're able to discern Krugman's intent based on a single paragraph? I know you didn't read the whole article before calling him a hack. It's very neutral and sets out to explain what was in the works at the time. Anybody that thinks this is a gotcha needs to read the whole article.
Of course I read the whole article. And for the life of me, I can't find the ambiguity you're apparently seeing. How is discerning his intent difficult?
"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."
Ah, much clearer with the last two sentences of the same paragraph in italics. CLEARLY Krugman was SUPREMELY wrong and is a hack.
"But wishful thinking aside, I just don't understand the grounds for optimism. Who, exactly, is about to start spending a lot more? At this point it's a lot easier to tell a story about how the recovery will stall than about how it will speed up. And while I like movies with happy endings as much as the next guy, a movie isn't realistic unless the story line makes sense."
Hmm, looks like that's a paragraph you wish you had READ, huh? Think it echoes the sentiment in the comments above IN THE VERY SAME ARTICLE YOU QUOTE.
Wow, so Kling is trolling Krugman's old columns looking for 'gotcha' zingers?
Does he assume everyone who reads his blog will pile on because they're predisposed to hate Krugman and no one will read the actual column?
If you read the column, what he's saying is quite clear.
2nd from last graf of the original column:
"Bear in mind also that government officials have a stake in accentuating the positive. The administration needs a recovery because, with deficits exploding, the only way it can justify that tax cut is by pretending that it was just what the economy needed. Mr. Greenspan needs one to avoid awkward questions about his own role in creating the stock market bubble."
I'd be glad I wrote that paragraph in 2002 as long as it's in the context of the whole thing. I don't think Greenspan deserves total blame for the housing bubble and the subsequent fallout, but I'd have to say if Joshua Green's little idea were to come true, Krugman would get this one in his favor. . The 'double-dip' he said was likely didn't happen, but the runup in housing he suggested would be needed to avoid it did. He's clearly not saying we needed it, he's saying Greenspan/the administration needs it to justify it's ideological views on the economy.
For what it's worth, I think your imputation of Kling's motives is out of line. Don't forget that earlier this year he was similarly criticized (with accusations of hypocrisy) for comments he made on the same recession at about the same time, so I think it's safe to say that he is quite plainly glad that he did not say this, as the title of his post: "Things I'm Glad I Never Said", would seem to indicate, since he knows what it's like to be exposed to this sort of negative attention, especially when you think you are also being subjected to contextomy.
If you want to write a post about being glad you didn't say something because it will be taken out of context, you really ought to put it in context in your post. Otherwise when you headline something 'Things I'm Glad I Never Said' and then don't write an explanation of how you can see something will be taken out of context, then it's quite logical to infer he's posting it because he agrees with the string he's linked to.
I missed his tip to the commentor, but it doesn't change the fact that he's either not doing what you say he is, or he's doing a dismal job of it.
Kling's followup post should be adequate to clear him of dastardry. I suppose, however, if the dominant portion of one's reading consists of slyly ironic fulminations that it would be natural to assume that no one would ever write exactly what they mean and expect it to be interpreted as such without some sort of extensive disclaimer. Kling, however, is actually notable for blogging, as it where, in the plain and with some clarity, which is what I like about him.
Now he's put it right. Given the mini-storm the post created, I'd say my inference was the same as nearly everyone who read this other than Kling and yourself, though. One person misreading is one thing, hundreds all misreading the same way might speak to a need for more clear original message, no?
The article also says he doesn't see how anything anyone was doing will work right at the end, right before the upswing.
I haven't clipped his columns or anything, but remember reading him, expecially pre 9/11 when he thought Bushes tax cuts weren't just bad policy for one reason or another, but the end of the world, and was stating rounded to nearest penny deficit projections they would cause, 10 years out, is where did this guy's great reputation come from?
I think if Jon Stewart wanted to prove he's the straight shooter he says he is rather than a left wing Rush Limbaugh, he could do the same thing to Krugman that he did to Cramer, it would be easier in Krugman's case, but somehow I doubt that's going to happen.
It was an artificial upswing jmct. Where have you been the last 12 months? And about those deficit projections, did you notice we were running a 500B annual deficit throughout that "upswing"?
Wow, exaggerate much? Everything Krugman wrote for the Times is available for free, I think all the Slate stuff is, too. If you want to provide a serious criticism, maybe you should cite something specific. On the other hand, you coulld more broadly state 'I don't like him because he's a lefty and I'm not' or if you want to sound smart 'I think he's pedantic and has stopped writing his columns on economics in favor of partisan hackery' instead of making vague claims that you pulled from the air?
Plinko, you haven't been around here much, have you?
Long enough, just feeling troll-ish today.
If ever there was an argument for market-driven monetary policy, the Fed's errors of the last 10 years are that argument:
Loose policy during the internet bubble.
Over-tight policy when y2k was not a disaster.
1% Fed Funds for 18 months post 9/11, fueling the housing bubble.
Benign neglect of the shadow banking market.
Only the aggressively easy policy of last summer seems accurate.
In most instances, price-fixing fails. Either prices are too low, creating shortages, or too high, creating surpluses. Right now, we have an excess of investible funds, suggesting interest rates should be lower. We *can* have effective negative interest rates, though user fees, etc. By happenstance, the Taylor Rule indicates rates should be negative as well.
But by functioning as a Fed Funds clearinghouse and paying interest on reserves to member banks, the Fed is once again keeping rates artificially high.
Why do we trust the market to determine clearing prices for most things, but trust twelve wise women and men to set the price of money. Is it any wonder that more and more people are flocking to gold as an alternative currency, in spite of its dismal long-term record?
It's the article Arnold Kling quoted. Megan just grabbed it without reading the whole article while drinking her morning coffee. Libertarians are eager to attack Krugman. Context be damned. I don't share Krugman's views on the gov't role in finance, but the man knows his Fed Reserve policy and macroeconomics better than the vast majority of economic writers. So even if you don't share his views on a particular solution, he's a great source for pointing out the problem.
So where's the article from a prescient libertarian economist in 2002 who both saw the coming housing bubble and wanted it to not be initiated by the Fed? Oh, they were too busy praising the stimulating tax cuts that provided a structural deficit.
So where's the article from a prescient libertarian economist in 2002 who both saw the coming housing bubble and wanted it to not be initiated by the Fed? Oh, they were too busy praising the stimulating tax cuts that provided a structural deficit.
Well, since you ask: http://kevincolby.com/2008/12/01/ron-paul-on-fannie-and-freddie-september-10-2003/
Okay, it's from 2003, not 2002. Got me there. Nonetheless, the Austrians are the only ones with credibility on this. Might help if you read some of them.
How does Ron Paul in that congressional testimony contradict Krugman's article from a year earlier calling the Fed move a "housing BUBBLE"? Ron Paul also calls for the end of the Fed Reserve entirely. When you only criticize the Fed, at some point you will be right, just like a broken clock.
Um, except for Paul is just being his usual anti government spending self. This housing bubble was driven primarily by private investment. Fannie and Freddie had to lower their standards for mortgages in order to maintain market share. They did not drive this wave, they merely got caught up in it. Paul mentions 13.6 billion dollars in their somewhere. This bubble was overinflated by a trillion dollars or more.
The world doesn't change just because you filter everything you sense of it through your ideological lens.
"Fannie and Freddie had to lower their standards for mortgages in order to maintain market share."
This doesn't fit the subprime market, which was almost entirely Fannie and Freddie in the 1990s. It was only after 2000 that the private banks began to take significant market share from the GSEs in the subprime market.
As for who was leading the changes, see for example this NYT article from Sept., 1999:
http://query.nytimes.com/gst/fullpage.html?res=9c0de7db153ef933a0575ac0a96f958260&sec=&spon=&pagewanted=1
A few select quotes from the NYT article:
“Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people.”
“''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ”
“By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.”
The banks that followed the lead of the GSEs are also at fault, of course, but it's ridiculous to paint Fannie and Freddie as reluctant followers rather than deliberate and enthusiastic leaders in the process.
Interestingly, Krugman has 2 entries on his blog about how putting responsibility for the bubble on Fannie and Freddie doesn't stick.
"Fannie/Freddie did some bad things, and did, it turns out, get to some extent into subprime. But thanks to the accounting scandals, they were actually withdrawing from the market during the height of the housing bubble — the vast majority of the loans now going bad came from the private sector."
The post you linked to contains Krugman pointing to another post that doesn't really says what he claims it says, and contains a graphic that doesn't defend his point.
Quell surprise?
The linked post doesn't have to mirror what Krugman is saying. He's pointing to the graph.
The graph illustrates exactly what Krugman is saying. If you don't think so, next time perhaps you'll bother to state your reasons. If you can't interpret a graph, writing an unjustified claim topped with a snarky remark are a bad way of having someone take the trouble of explaining it to you.
Come on, Nimed, don't patronize. For one, you're not very good at it. For another, Krugman is applying a narrative to the graph data rather than trying to examine what the trends really represent, which leaves neither you nor him in a good position to defend his claim.
Yes, the graph does do what Krugman literally observes: The Agency/GSE-Backed Pools do pull back in 2003, and Asset-Backed Securities Issuers do pull forward at the same time. However, the reason Krugman links to the graph, and the conclusion he draws from it, are "Some readers have asked for data showing that Fannie and Freddie did not play a key role in the housing bubble....the whole Fannie/Freddie/liberal mandates story is phony."
The whole story? Really?
In that case, let's explore what Krugman and you are both missing: Trends have a dynamic element, and graphs have a thing called scale. (If I remember my Opposition Debate Handbook from the past eight years, these things qualify as "nuance".) First, notice that even after the Agency/GSE Pools pulled back, in '03-'04 they were still controlling 35-38% of the market, and almost twice as much mortgage share as any other single entity.
Second, notice how in direct proportion to the '03 pullback, the ABSIs filled in the demand in direct correspondence. We don't know from this graph which one was the chicken and which one is the egg at that point, but in any case, it is clear that the market dynamic that had been established with the GSEs as dominant players simply began transitioning from one to the other. Mark Thoma's piece explains it as the GSEs losing market share from ABSI competition, which they then briefly rebounded against by purchasing additional subprimes, but I'm not particularly compelled by a claim that an already dominant, government-secured player was forced to engage in dirty pool to stay ahead of them smarmy upstarts.
In short, there were many elements to the current financial crisis and recession, and those elements included a noteable role by the GSEs, as demonstrated by the post and graph that Krugman is claiming show otherwise.
Check.
Mouse, I'm glad you finally decided to make an argument. Was that so hard? Now, all you have to do the next time is skip the useless middle post.
Yes, really. That's it, you got it.
Or maybe not:
You seem to be saying that whoever holds the greatest share of mortgage debt during the bubble is responsible for bubble. Now that's just silly. Well, at least it explains your misguided lecture about scale and dynamics. But talk about delusion: do you think the Nobel prize in Economics needs a lecture from you in scale and dynamics? Incidentally, I don't think you know very well what dynamic means in this context.
I can see your confusion in this sentence. You see, there was no GSE pullback in absolute numbers. You think there was because you see the light brown line in the graph going down. But it's going down in percentage, not in absolute value. As you can see here, up until roughly 2002 there was no housing bubble, with the GSEs controlling almost 50% of the housing market. But, around that time, the absolute value of the subprime market started shooting up. Why? Because ABSIs didn't "fill in the demand in direct correspondence". Proportionally, of course, they did (reflecting the mathematical identity that relative contributions of all sources of loans must add 100%), but they did not get their clients from former GSE markets. They starting lending to new people (who now could get a loan due to the lower lending standard), increasing the absolute number of total mortgage debt. Only later the GSEs followed, because they didn't like losing market share:
We need to understand why the overall market - the part outside of Fannie and Freddie's domain - was able to lower lending standards (and increase their risk exposure in other ways as well), and how regulation which had worked up to that point failed to keep Fannie and Freddie from dutifully responding to the market pressures on behalf of shareholders by duplicating the strategy themselves, but again, they were followers, not leaders.
Now, roughly around the same time that the ABSIs start lending money to this new market, house prices start shooting up (easy mortgages naturally translate into increasing demand). But GSEs, OTOH, have a pretty large (and increasing) market share since the 80s. Do you see a housing price trend accompanying the rise of the GSE market share?
You really should read Mark Thoma's post again. Mark Thoma is being misquoted by a guy from Cafe Hayek saying Krugman got the facts wrong. The purpose of the post is to clear up the confusion. During the post, Thoma says
There is no excuse for the actions of the management of Fannie and Freddie, and I'm not trying to defend them or their choices, but the idea that Fannie and Freddie caused the general credit crisis is wrong.
and ends the post with a conclusive
It wasn't Fannie and Freddie.
So let's see that Krugman sentence again:
[Schwarznegger] asserted, as a simple matter of fact, that “government created the housing bubble”, because Fannie and Freddie made all these loans to people who couldn’t afford to pay them.
This is utterly false. Fannie/Freddie did some bad things, and did, it turns out, get to some extent into subprime. But thanks to the accounting scandals, they were actually withdrawing from the market during the height of the housing bubble — the vast majority of the loans now going bad came from the private sector.
and
Once again, the whole Fannie/Freddie/liberal mandates story is phony.
Nimed - You’re saying that Fannie and Freddie had nothing to do with this mess because, after all, they simply led the way but others followed, and how can you blame the leader, even slightly, if there were followers? Fannie and Freddie built the subprime market, with other banks coming in only later, after they had established it (and after they were caught cooking their books and had to lie low for a bit). The article I cited earlier describes them as making efforts to get the entire industry to lower its lending standards, but you’re saying that the fact that their efforts were so successful somehow exonerates them.
I fully agree that the other banks shouldn’t have followed the lead of Fannie and Freddie, and none of them, not even Fannie and Freddie, should have responded to the policy initiatives of Clinton and Barney Frank. If the banks hadn’t eventually responded to the repeated urgings of certain politicians and their stooges, the crisis wouldn’t have happened. But at the same time, if the politicians and their stooges hadn’t worked so hard to force lower lending standards, the banks wouldn’t have had anyone to follow, and the crisis wouldn’t have happened.
I’ve used this comparison before – if a doctor literally forces a patient to use an ineffective, unnecessary and highly addictive drug, is the doctor automatically free from blame simply because the patient, once addicted, continues to use the drug on his own? The politicians forced (though the CRA, among other tools) and enticed (through Fannie and Freddie) banks to lower their lending standards. Once addicted, the banks kept using, but they wouldn’t have gotten addicted without policy initiatives beginning with Clinton.
It’s not enough to quote Thoma (is he some sort of ultimate authority?) making assertions. Let’s deal with the facts. Who started this? Saying that Fannie and Freddie later lagged behind, hampered by the revelation of their dishonest accounting practices, doesn’t change the fact that they built the subprime market for the express purpose of getting banks to lower their lending standards.
I was saying the opposite - Fannie and Freddie were the followers, and not very strong followers. Private institutions were the ones who lead the way in lending with lower standards. They detain the bulk of the loans that defaulted. Fannie and Freddie's lending standards were never responsible for the skyrocketing housing prices - they have a large share of the market since the 80s, and the prices didn't begin to climb until 2002, when ABSIs entered the picture.
That was Thoma's and Krugman's position on this. Furthermore, I cite Thoma as an authority because amouseforallseasons was under the impression that Thoma was stating the opposite of what he wrote.
Nimed -
Do you have any evidence whatsoever for Fannie and Freddie being followers rather than leaders? If so, you haven't offered any yet, whereas I've offered evidence that they were leaders. They built the entire subprime market from scratch in the late 1990s, with private banks only coming in after 2000 and then taking a few years to attract substantial market share. How does the fact that Fannie and Freddie began the market but lost relative market share later mean that they were following rather than leading?
And let's remember that, according to Krugman, the main reason Fannie and Freddie weren't able to keep up their market share in subprime was because they were caught cooking their books and forced to cut back for a while because of their accounting scandals.
I also gave you a quote from a 1999 NYT article saying that Fannie and Freddie were explicitly trying to get other banks to lower their standards. Franklin Raines took personal credit for lowering down payment requirements!
All you've said is that they couldn't have been leading because others eventually caught up. If you're going to keep claiming that Fannie and Freddie didn't lead the lowering of standards, surely it's well past time for you to give some evidence to support that claim.
More, in case you want to educate yourself:
http://mises.org/story/3128
Thanks Clay for the education. I had no idea we could be saved by reverting to the gold standard. Shiny metal that is unevenly distributed throughout the world is certainly what the global financial system should revolve around. We want it to sit pretty in a vault rather than use it for industry.
I also now know the Fed and Community Reinvestment Act are the primary causes of the hell we are currently in. Thank you so much. Krugman is a total hack...
Okay, I shouldn't have been so snide. But, again, I do recommend those articles. I think you'll find them interesting, even if the political implications are distasteful to you.
It's worth understanding Austrian Business Cycle Theory and their hard money advocacy before dismissing it as loopy lunacy, that's all.
But yes, Krugman is still a hack.
This is fun. Now it's my time to recommend an article. Oh, my... it's Krugman again!
On the Austrian theory of business cycle, which he calls the Hangover Theory - "a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire."
"As is so often the case in economics (or for that matter in any intellectual endeavor), the explanation of how recessions can happen, though arrived at only after an epic intellectual journey, turns out to be extremely simple. A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time. Yet, for all its simplicity, the insight that a slump is about an excess demand for money makes nonsense of the whole hangover theory. For if the problem is that collectively people want to hold more money than there is in circulation, why not simply increase the supply of money? You may tell me that it's not that simple, that during the previous boom businessmen made bad investments and banks made bad loans. Well, fine. Junk the bad investments and write off the bad loans. Why should this require that perfectly good productive capacity be left idle?"
"The hangover theory, then, turns out to be intellectually incoherent; nobody has managed to explain why bad investments in the past require the unemployment of good workers in the present. Yet the theory has powerful emotional appeal. Usually that appeal is strongest for conservatives, who can't stand the thought that positive action by governments (let alone—horrors!—printing money) can ever be a good idea. Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism. And some people probably are attracted to Austrianism because they imagine that it devalues the intellectual pretensions of economics professors. But moderates and liberals are not immune to the theory's seductive charms—especially when it gives them a chance to lecture others on their failings."
The following quote is particularly illuminating.
"The hangover theory is perversely seductive—not because it offers an easy way out, but because it doesn't. It turns the wiggles on our charts into a morality play, a tale of hubris and downfall. And it offers adherents the special pleasure of dispensing painful advice with a clear conscience, secure in the belief that they are not heartless but merely practicing tough love.
Powerful as these seductions may be, they must be resisted—for the hangover theory is disastrously wrongheaded. Recessions are not necessary consequences of booms. They can and should be fought, not with austerity but with liberality—with policies that encourage people to spend more, not less. Nor is this merely an academic argument: The hangover theory can do real harm. Liquidationist views played an important role in the spread of the Great Depression—with Austrian theorists such as Friedrich von Hayek and Joseph Schumpeter strenuously arguing, in the very depths of that depression, against any attempt to restore "sham" prosperity by expanding credit and the money supply."
Thanks for that great find Nimed. Didn't realize Krugman had already demolished the simplistic explanations from the austrian school and the libertarians who love it. I could have saved some time if I had that in front of me earlier.
Thanks for that great find Nimed. Didn't realize Krugman had already demolished the simplistic explanations from the austrian school and the libertarians who love it. I could have saved some time if I had that in front of me earlier.
In other words, now you don't need to read the actual theory? :) This is a pretty low standard for "demolishing" the "simplistic" Austrian theory. It's alright though, Krugman manifestly hasn't read it either. This particular "critique" was addressed here: http://mises.org/misesreview_detail.aspx?control=53 and here: https://mises.org/story/103
... among other places.
Clay, I did read the actual theory and arrived at the same conclusion, that it's overly simplistic and embraced by ideologues. The waste of time was in using my own words rather than Krugman's similar and more thorough discussion.
As for the brilliant counterarguments to Krugman's slate article, they flat out suck.
"Paul Krugman smears with a broad brush when he condemns the Austrian theory of the business cycle as the "hangover theory" (Slate, December 3, 1998). Does he intend to reject wholesale the idea that artificial booms (and drinking binges) lead to busts (and hangovers)?"
This is a strawman. Not surprising for ideologue. What's amazing is how so many Austrian followers believe they've come upon THE truth by reading simplified economics theory (distilled on ideologue websites) from the early 20th century.
Oh, and BTW, since you're all about taking people to task for their wrong predictions, when are you going to man up about this "http://meganmcardle.theatlantic.com/archives/2008/07/i_know_i_saw_that_recession_ar.php?"
Wow... just wow. Haven't seen that post before. It's not even taken out of context.
Written in 31 July 2008. Krugman was giving talks about the eminent burst of the housing bubble in December 2007.
A little Europe bashing, and... "Barack Obama's campaign team is probably doing some serious rethinking this morning"
Like someone said, sure glad I didn't write it.
Hm, no one responds to defend our muse or tell her she was blinded by ideology when she wrote it. D'oh.
I generally prefer Kling to Krugman, but I don't see the quote as that much of a gotcha.
Krugman is a Keynsian, or maybe neo-Keynsian. In his model of the economy, consumer psychology more or less drives demand at the margin, which then drives investment/disinvestment, leading to either boom or bust.
Krugman was more or less right that the fed's easy money policy in the early 00s would contribue to increasing home values, which helped sustain consumer spending.
It's true, Krugman doesn't sound particularly alarmed by this policy. Depending on how you read him, he's somewhere between positive and neutral, and certainly does not start shouting that a "housing bubble" would be a terrible mistake.
Still, I'm not that shocked. Krugman could easily have believed that the bubble would deflate gently, or that if it deflated sharply, it wouldn't be any more damaging than the bursting of the Clinton tech bubble. Alternately, he may have had some misgivings that were not, at that point, sufficiently strong to put into an 800 word article.
All in all, most people who read that article in 2001 would come away accurately informed, and understanding more about the economy than they did before they read it. I don't see how you can ask for much more than that.
Yes, this was exactly my interpretation of that essay- he was neither cheerleading nor criticizing what he thought was Greenspan's solution to the tech bubble deflation.
Now, was this what Greenspan was trying to do? I certainly don't think anyone can really prove that with any degree of certainty- Greenspan simply didn't know at the time where his loose monetary policy was going to lead. He might have guessed the reflation would have been more broadbased and, thus, less dangerous.
What Krugman deserves criticism for is this- he was criticizing the Bush deficits in a time of economic recession, but he now thinks deficits 3 to 5 times larger might be too small now that we have a Democrat president? He is a political hack, and a hypocrite to boot.
He was criticizing the creation of a structural long term deficit using tax cuts and silly little checks, which do nothing to get people to spend and invest in a downturn. When private spending tanks and everybody is afraid, only the government has the ability to offset the crash through its own spending in the form of investment and safety nets. You can disagree with that level of government intervention (as I expect on a libertarian blog), but you should at least see the differences are more than just who was president at the time. For that level of hypocrisy based on who's in charge, you need to look at our suddenly fiscally conservative, NOW deficits matter GOP congressmen/pundits.
Hey, I make no excuses for Republicans- they embarrassed themselves during Bush's time in office with their profligacy (and I criticized them openly for it), but, they are now, at least, back on the right side of the issue.
Krugman is famous for saying that it didn't really matter what the present stimulus was spent on, as long as it was larger, and yet he repeatedly criticized Bush for running much smaller deficits in those times of recession, and if Krugman is really correct about the efficacy of deficit spending, then he is in no position to criticize Bush's deficits in 2001/2002 since the recession did, in fact, end. Now, I think this Keynesian belief system is a crock of shit, but Krugman only thinks so when Republicans are the ones practicing it.
Well if one wants to troll for awkward passages one could take Kling's support for a modest $100B or so stimulus package when the economy was a bit soft at the beginning of Bush's first term but when the subject was a $700B stimulus package at a time when the economy was fifty times worse he wanted to talk about thugs breaking into his daughter's room to rob her piggy bank....
But here's the question(s) I keep asking when this idea is presented:
1. How do you 'create a housing bubble' with low short term rates? Seriously, this sounds like the Southpark underpants theory of profit here.
If the Central bank pushes short term rates very low, two possible results:
a. The market will fear the economy will be overstimulated and inflation will pick up. That means *long term* rates will go up. High long term rates are fatal for the mortgage markets.
b. The market thinks the cuts are needed because the economy is soft. Long term rates may go up a bit but not much and the improved outlook makes banks more willing to lend which could set off a bubble.
Long story short, the Fed cannot simply create a bubble by keeping interest rates 'too low'. Interest rates are too low if inflation is not going off. If inflation is controlled interest rates are where they should be. Bubbles are a choatic trait of *normal* economies...not a byproduct of bad policy by the central bank.
The Fed can stimulate the housing market indirectly through a phenomenon known to investors as "reaching for yield." That is, since s/t rates are so low, some investors go out on the yield curve. Others purchase spread products. In an era of financial stability, you have a "Minsky moment" and spreads collapse.
This brings MBS rates down, resulting in lower mortgage rates, fueling the housing bubble. Risk-management goes out the window in a drive to capture market share. The Fed's 1% Fed Funds rate doesn't *cause* the bubble, but it adds fuel to the fire.
"In an era of financial stability, you have a "Minsky moment" and spreads collapse."
But this cannot happen if rates are 'too low'. By definition too low rates means future expected inflation and diminishing returns on investment. If the market is causing spreads to collapse it is essentially saying everything is 'just right'.
You're saying the Fed can stop a bubble if it destroys the economy. If the Fed's job is to take the punch bowel away when the party gets out of hand, then maybe the Fed should also stop a really bad karokee singer by release serin gas!
I didn't say rates were "too low." I said they were low. And when investors get impatient, they go out on the term curve and risk curve, reducing spreads and spreading the irrational exuberance joy. Until they don't and you get instability and a reverse "Minsky moment."
I'm saying that the Fed's 1% Fed Funds rate contributed to the housing bubble through "reaching for yield." I do like your analogy of stopping a bad karaoke party by releasing serin gas. It goes to the heart of my issue with the "wise man" theory of Fed policy. (Sorry about the sexism, but hear me out. The phrase works.)
No "wise man" is wiser than the market. Market-set prices result in more efficient resource allocation than any "wise man" or, worse, committee of "wise men." The only thing wisdom can do is establish structures whereby resources can be allocated wisely over time. But it is better to have the interested actors allocate the resources based on the wonder-of-prices, rather than administrative guidelines, set-asides, and artificially high or low prices set by a "wise man." (Perhaps a "wise woman" would do better, especially if she were a Latina, but I digress.)
I don't advocate a gold standard or basket, but a simple Taylor rule would do a better job, IMHO, than any committee in setting the price of money.
Who was it that said a cynic knows the price of everything and the value of nothing?
The "thug" statement was referring to the bank bailout bill (TARP), not the stimulus.
http://blog.heritage.org/2009/02/10/why-the-stimulus-wont-work-thugs-ransanking-my-house/
And second, you can support "a" stimulus while simultaneously not supporting "the" stimulus; the one that actually passed. And Kling did so, and continues to do so:
http://econlog.econlib.org/archives/2009/06/audience_questi.html
What's more interesting to me is that he's so fantastically incorrect in asserting that the recession of 2001 was not an inflationary hangover. Where do you think that irrational exuberance came from, Paul? Maybe the Fed running the money pumps wide open 24/7 since 1994? And the fact that interest rates climbed some 5 percentage points from their boomtime lows, due to Fed tightening, was totally irrelevant. Sure.
And ultimately he was right that what you need to climb rapidly out of a recession is another artificial boom. I hope it's now obvious that's not a good thing.
Wow . . . just wow. I am glad I did not write a blog entry like this one without any apparent thought or insight into the statement being made. Perhaps it is just that I am generally aware of Krugman's writings in that era, but even so, it doesn't strike me as particulaly difficult to understand: Krugman was not suggesting that the Fed should create a housing bubble. He was stating that the only way the Fed left itself out of the then-current problem was by moving around the proverbial deck chairs on the Titanic. That is by steering a bubble in one area into a bubble in another area. Krugman's analysis was accurate and prophetic, regardless of whether we agree with his proposed solutions to all these problems. Geez, pleae apply at least a little intuition or research before posting.
He correctly identifies the Fed's strategy to avoid a double dip recession and seems to suggest that another bubble might be preferable to a stagnant economy. In retrospect, not so much, but I fail to see how it's such a "gotcha". He analyzed the situation quite accurately, but didn't foresee the entire financial industry building an imaginary house of cards on top of said bubble, and what a catostrophe that would be. Oh snap? Hardly.
What were McArdle's and Kling's predictions from around the same time for comparison's sake?
"Wow. Just . . . wow." Have you hired a High School girl to write your headlines?
No, FFS, just perfectly intelligible English that any linguist with an MA or PhD in the subject would scorn you for scorning. Get with the times, my Prescriptivist friend. ( But thanks for the sexism, ageism, etc. )
In any event, it's worth pointing out that this is exactly the same rationale for Obama's silly stimulus plan. The government doesn't have the information to allocate resources as efficiently as the market does. A shame that we never learn.
Wow...I just can't even mentally simulate the thinking of Krugman's defenders in this thread. There's no suggestion at all in the column that Krugman thinks that creating a housing boom to take the place of the dot-com bust is a bad idea. He worries that Greenspan won't be able to pull it off, but nowhere does he even hint at worrying about disaster if Greenspan does manage to create a housing boom.
I guess this is why partisan pundits really need never worry much about being wrong -- since their fellow partisans are willing to go a long way to explain away their mistakes.
There is no policy judgement at all. It's just economic analysis. He says that the Fed and Bush Administration had a strong incentive to inflate a housing bubble to stimulate a strong recovery. They did and they did.
Why is that so hard to understand through the Krugman hatred?
As for who accurately forcast the present situation, that would be the Austrian economists, who have been in the forefront in criticizing various low interest rate induced bubbles from the very beginning.
This is a silly cable-news style "gotcha" by quoting out of context. I find the gotcha game boring boring boring even when its based on facts. But when its played by twisting things out of context it goes beyond just being boring and becomes an insult to my intelligence. I am not some couch potato interested only the cheap thrill of seeing a public figure embarrassed who can be fooled by some sound-bite.
By the way, at the very least this refutes all the pundit blather about how the housing bubble and financial crisis were not foreseeable. Everyone saw it, but no one wanted to be the one ruin the parade by pointing out that the Emperor has no clothes. Though to be fair, Paul Krugman admitted in his recent lecture series that while he knew it was a housing bubble that would end badly he didn't think the consequences would be as awful as they were.
Publius
I don't advocate a gold standard or basket, but a simple Taylor rule would do a better job, IMHO, than any committee in setting the price of money. Who was it that said a cynic knows the price of everything and the value of nothing?
I get what you're saying but what then is the problem with 2001? unemployment was kind of high, the economy weak and inflation low. Hence you get lower interest rates. The problem here is that the whole model many of you guys are presenting makes no sense at all.
If you advocate a Taylor rule and the Fed pushes rates lower than that the model would predict inflation. Not a deflationary crash.
What we got was asset inflation. And the Fed's rental-equivalent model for the shelter component of CPI took the housing bubble and translated it into rental disinflation because so many investment homes came onto the rental market and pushed rental rates down.
I also don't advocate a wholesale scrapping of the CPI formula. It generally works, although it was distorted in this case. But artificially low rates from 1/02 to 10/05 (rates started to rise 7/04, but too slowly) fed [little pun there] the increase in inflation that really began in the first quarter of 2004, although it wasn't clearly in the YOY numbers until 2005.
By then, the "wise men" were well behind the curve. We had our conundrum of low long-term rates and compressed spreads. The Fed was reluctant to release serin gas during that really, really bad karaoke party [can I suggest that the salsa dancing was also deplorable?].
And the rest is history.
There are plenty of stopped clocks that are right twice/day. And they seem happy to be perma-bears. Think of the great books of the past:
"The coming crash of 1995."
"How to survive the Depression of 1999."
"The End of the World and Y2K."
"The Great Deflation of 2006."
I guess it sells books, so they can be happy. Like diet books, books that predict economic armageddon seem to be perennial best-sellers. Sigh.
http://krugman.blogs.nytimes.com/2009/06/17/and-i-was-on-the-grassy-knoll-too/
Krugman answered this latest BS on him advocating the housing bubble. I guess he monitors the various libertarian blogs for the latest anti-Krugman stuff.
Are any of you "abolish the Fed" / Austrian economist people aware of economic history pre-1930s? I know your school generally dislikes numbers and statistical modeling, but why can't you look at the difference between the 50 years before and after the end of the gold standard? Booms/busts came much more regularly and harder pre-Fed. Don't get me wrong, the Fed (in large part due to special interests and political pressure from politicians (D&R) elected by those special interests) has made some really bad moves. That doesn't mean we should return to the financial stone age by abolishing the central bank and forcing a set value on our currency. If it wasn't for the fear of the Jewish banking conspiracy common amongst the abolish the Fed folk, you could see that we're better off with a currency that floats (and a gradually expanding monetary base) relative to other countries. Our special status as the global currency has been particularly advantageous, though we've gotten ourselves in some trouble by taking advantage of it too much the last 20 years.
Again, if you want to understand ABCT, then read it. Don't rely on third parties who charactarize it simply as "abolish the Fed." Its origins pre-date the Fed (1912, with Mises' The Theory of Money and Credit, and really with Ricardo before that).The basic proposition is that artificial credit expansions cause the boom-bust cycle. These happened before the Fed as well, and are covered succinctly in Woods' Meltdown, if you want a good contemporary intro. If you want a more meaty recap, see Rothbard: http://mises.org/tradcycl/econdepr.asp
I agree with the premise that artificial credit expansions are a primary component of the boom-bust cycle, but not that the Fed is solely responsible. Although the Austrian school pre-dates the Fed, its teachings are latched onto by the "abolish the Fed" folk based on simplistic reasoning and a lack of empirical analysis and statistics. Modeling is not predictive, but it's helpful in understanding dynamics if examined while knowing the predictive limits. I'm not saying only idiots subscribe to the Austrian school, just that it's teachings have been adopted by people looking for simplistic explanations to complex economics they can't comprehend, especially if those simplistic explanations are "gov't bad," Jewish conspiracies, and/or poor folk (esp if brown). Look at some of those articles you linked to on mises.org. Blame ACORN and CRA? That crap takes away from the core teaching about caution with artificial credit expansions and the resulting boom/bust cycle, which by itself is reasonable and useful for understanding the limits of intervention. Thinking the gov't can do no good in the economy is just as bad as those that think the gov't can perfectly manage the economy.
But Publius, your model still isn't making any sense.
You're saying that we had inflation after 2001 but it was showing up in assets, specifically housing. OK but what are the standard story lines for inflation caused by printing too much money? More inflation and only a deflationary crash if the gov't decides to get serious and raise interest rates to kill the inflation monster.
That's not what we say in 2008 and 2009.
I should have wrote 'that's not what we saw in 2008/9'. Instead of popping the bubble should have either remained and exploded or if it did deflate it would have to inflate other prices (and briefly maybe that's what seemed to happen in 2008 with gas prices shooting up and all). But if you have inflation you don't just get a big crash. On the contrary, if you don't hike rates to stop inflation you end up with hyperinflation. The Fed didn't hike rates in 2008/9 so this crash was not similiar to the early 1980's when the Fed hiked rates to manufacture a recession to wring inflation out of the economy.
A commenter at Econolog put together this string of comments from Krugman that strongly support the notion that Krugman was in favor of creating/stimulating a boom in housing:
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?”
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 8th 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.”
Posted June 16, 2009 9:49 PM
Ja ja ja, what a prophet...
Sometimes I think the left-wing is willfully ignorant of the English language.
When a writer writes that Person X "needs to" do Policy Y, there is no doubt whatsoever that the writer is encouraging Person X to do Policy Y.
The idea that Krugman is providing some kind of dispassionate analysis, without advocating any particular, is just inconsistent with the language Krugman used in his column. There is no doubt, from the language Krugman ujsed, that he thought, in 2002, that Greenspan ought to create a housing bubble, because that policy would be best for the country.
As usual, Krugman's policy prescription was proven by history to be spectacularly wrong.
I'm not a Krugman fan, mainly because his short-term economic insights follow the party in power like flipping a switch, but my own grasp of the English language does not include this tenant:
When a writer writes that Person X "needs to" do Policy Y, there is no doubt whatsoever that the writer is encouraging Person X to do Policy Y.
Sometimes, when a writer writes that, it is a blunt observation that Person X has run out of other options within the course of action s/he has chosen or fallen into, and must persue Policy Y if Outcome Z has one faint hope left of coming to pass. A spade, as it were, described as looking very much like a digging implement.
That said, it does appear based on the cumulative evdience that Krugman was optimistic about the ability of housing to cushion the fallout from the tech recession, but that is not the same thing as outright advocating a gigantic bubble, or the Tower of Derivatives that was built up under it. He might well have been expecting a modest kinetic bounce that would not reach the height of the original drop.
Couple of similar examples in the same article:
"The administration NEEDS a recovery because, with deficits exploding, the only way it can justify that tax cut is by pretending that it was just what the economy needed. Mr. Greenspan NEEDS one to avoid awkward questions about his own role in creating the stock market bubble."
I always knew that Krugman was in favor of those Bush tax cuts.
I suppose if you were to narrow in on two words, it would be possible to assert that this was statement was prescriptive. The entire section, however, is for all intents and purposes an "if-then" statement: if the Fed wants result X, then condition Y must be met. Perhaps it would be clearer had Krugman used the subjunctive explicitly, but a person with a decent grasp of English grammar, both formal and informal, could reasonably conclude that this statement was not prescriptive.
To repeat from Yancey's post above: "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."
If that doesn't conclusively show that his words were prescriptive, I don't know what could.
How is "promot[ing] spending on housing and other durable goods" a bad idea, in abstract, and especially when being discussed in the context of the 2000-2003 market? That's not the same thing as forseeing a lending firestorm that would allow people to bid up housing at levels two or three times a normal market rate by obtaining mortgages at debt-to-income ratios of 10 or 12.
Prescriptive of low interest rates, perhaps. Prescriptive of a housing bubble, less so.
In a prescriptive piece, on the question of how to get out of the 2001 recession, Krugman would not have been speaking solely of the Federal Reserve. The Fed isn't everybody, and monetary policy isn't the only thing.
Likewise, lowering interest rates isn't the only thing that went into creating the housing bubble. Relaxing regulation & promoting loose credit & wild securitization had their parts. Rampaging fraud in all facets of the real estate business had s role, too.
In Bushworld, that scary land of limited choice & Newspeak, Krugman knew with utter certainty that nobody with any power (Which was pretty much limited to Cheney, Rove & Greenspan) was listening to him. To assume that he was advocating policy, rather than letting his readers know what to expect, is not something I'd do.
Colin, fair enough. But in the quote he admits that low interest rates "promote spending on housing," and the magnitude of spending on housing is what caused the bubble. Isn't it only reasonable then to conclude that his prescription of low rates contributed to the bubble?
Clearly he wasn't advocating the exact condition that came to pass, which we now know was unsustainable. In other words, a condition or end state is not a policy prescription. But by his own claims, his policy prescription must have promoted the condition. So either he was wrong that low rates promote spending on housing, or he was wrong to have advocated them.
Good post. This 2001 article must really be read in conjunction with the follow up, 'running out of bubbles'. Krugman obviously knows what he's talking bout. However, though not stated exactly, I do get the feeling that Krugman thinks it's possible to avoid paying the pied piper after an economy has reached unsustainable levels.
Actually those quotes don't support what you say it does. Krugman is talking about individual sectors of the economy and trying to see if they are likely or unlikely to generate an expansion.
For example:
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?
Housing is built with lower short term rates because builders borrow for the short term and pay back their loans after they have sold the building or house they built. The housing bubble, though, was not a building bubble but a sustained increase in the general price of all housing existing and new. What's interesting here is that Krugman is not being prescriptive but descriptive.
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
Notice the disconnect. Krugman recognizes that the Fed controls short term rates but the market controls long term rates. He is saying he doesn't know if lower short rates will result in lower long rates.
The quotes indicate that Krugman recognized the recession in 2001 was ending and housing was leading the way. Again you have descriptive economics. To notice that it gets warmer in summer is not to be an advocate for global warming....
It seems like the critics here are making a rather odd case. They are showing that Krugman had an excellent understanding of the economy in real time but had an imperfect ability to predict events 5-10 years into the future. Considering how bad economic forecasts are, that actually speaks very well of Krugman.
No one proves "less is more" better than Paul Krugman.
I don't know whether Krugman realizes this or not, but somehow thinking that 'bubbles' and 'stimuluses' are somehow different and that stimulus can lead to a bubble but might not is a bit off the mark. The entire point of any stimulus, monetary or fiscal, is to create a bubble either in the credit market for a monetary stimulus, or in the labor market say for a relief program where one pays people to dig ditches and fill them in again, one is 'inflating' wages. It doesn't mean that one might think that creating a bubble in some market is always bad one, inflates wages to keep the people who are getting more than their fair share of the economic hit from starving. Hopefully a bubble like that will hopefully pop nicely, in the labor market that would mean nominal wages catch up to the inflated wage through the 2% or so inflaton that it's policy to run. The basic fact of the matter is that 'stimulus' is bubble creation, they're the same thing.
Wow indeed, even if it only foresaw "a decline" instead of "the decline". But since declines can look the same, I really wonder which WOW this really is.
Boonton,
It is very difficult to take the following quote as anything other than advocation for getting housing going full-steam in the 2001 era:
I will willingly grant that Krugman didn't think housing would get as out of control as it did, but then neither did Greenspan; and neither thought the tech bubble would get out hand the way it did prior to that, and the same applies to a whole host of the so-called mainstream economics field that consistently promote loose monetary/spending policies as nostrums for the ensuing busts.
Now, do you even take seriously the possibility that Krugman is wrong once again about how easy it will be to keep the newest bubbles from creating the next and larger crisis? I certainly don't have any faith whatsoever in his preferred policies- policies we have been following ever since the recession in 1982.
Anyone for a Green energy bubble?
Wow... wow. Just a tad disingenuous, this Wowed McArdle! What on earth is she implying?
It is perfectly obvious what Krugman meant. Many people used this same criticism of Greenspan replacing one bubble with another, the natural consequence of his faith in the miraculous new capital markets. Just take your hands off the steering wheel and press the gas pedal to the floor and everyone will soon be rich.
Or at least everyone you know. But you have to hand it to him, the arrogant old Randian. Probably the best market timing of this whole financial crash outside of Goldman Sachs' maneuvers was the publication of Greenspan's book. About a month or two of basking on the bestseller list before the horrifying collapse.
Oh, for crying out loud.
I would like to think of these posts as McArdle Tests. Every once in a while, Megan posts (or, in this casem echoes) something blatantly out of context, just to see which commenters take the bait. If only it were so...
73,d&52 and melwrc, despite their dubious taste in nicks, win the "Voice of Reason" award in this thread.
73,d&52
melwrc links this, and says in another comment
Now the eternal question in these cases - was Arnold Kling dumb or dishonest? Because I'm partial to this blog, I'm inclined to think that Megan trusted Kling and just skimmed through Krugman's article before posting. Which is bad enough, of course.
Now, I suppose a blogger has 2 options in this sort of thing: a) to write an update admitting a mistake; or b) to do nothing, and just for the whole thing to go away. Meanwhile, the "OMG Krugman recommended the housing bubble" disinformation gets amplified.
Of course, each time you pick option b, a fairy dies. And with it some of your credibility as a blogger.
The same thing happened with the bankruptcy study that Megan misunderstood. Out of dislike for Warren she mistakenly thought Warren was talking abour number, not percentage, of bankruptcies, and then never acknowledged her mistake.
Nobody expects a blogger to be a real journalist, but people being paid for their opinions should still try to be as accurate as possible. In the "real" world of journalism such mistakes get you fired.
Do stop engaging in fly-by-night charicature assassination [sic]. If you actually read and understood that exchange, then you would know that she was aware that Warren was talking about a percentage of bankruptcies, and asserted that the drastic drop in the absolute number made the understanding of that percentage change much more complex than the simplistic picture Warren's study appeared to be presenting. You are welcome to disagree with that claim and present your evidence, but there was no ""mistake"" which she then refused to ""correct."" (Double scare quotes provided for scary emphasis.)
Your loyalty is very admirable.
The whole thing ended up as an argument on the academic merits of the Warren article (specifically, on how legitimate it is to compare bankruptcy proportions of 2 different time points when a change in the law between those points caused a decrease in the absolute number of filled bankruptcies).
But the original post had much more serious accusations:
This is false. The supposedly obscured facts are, in fact, mentioned in the article.
I read the article in question at the time, and found it pretty amazing that you could deduce from it the deliberate mischief attributed to Warren.
But hey, I suppose our perception of other people's hidden agendas is highly subjective. However, this is manifestly not the case in Krugman's quote.
The post implies that Krugman defended the creation of a housing bubble. Reading the quote in context, it's pretty obvious he didn't. If Megan doesn't update the post with a correction, there's no way to look at this other than pure and simple intellectual dishonesty.
Nimed, I didn't even refer to the Krugman post. Since my opinion on it is apparently considered important, I say it looks like a hit-and-run that the hostess posted on her way to something else without stopping to question the premise, and I agree, it's sloppy. However, the Warren posts did question the premise, and spent a good deal of time exploring those questions from a methodological standpoint. All I see in your selective quotes is an effort to bash one opinion against another without respect for detail or context, producing sparks but no light. Judging by Susan's response above yours, I don't think she has anything else, either.
But feel free to prove me wrong, seeing as how, a few subthreads up, you had some strong and possibly even fair words of rebuke for me about snark and unjustified claims.
I did respond it.
Well, what can I say? my comments aren't written with you exclusively in mind.
Huh... I'm sorry if I produce sparks and no light. But watch that sleight of hands in the Warren posts. As I said, the whole thing turned into a debate of Warren's article. That happened after the original post. I welcomed the debate and participated in it. It's the vehement opinion on Warren's intentions and the misplaced questioning of her credibility that I found objectionable. That and the accusation that Warren was trying to obscure facts in her article, when not only she wasn't, she addressed them specifically.
But this is not selective quoting - it's the original post. The first one, you know. And I don't know what you call selective quoting. Am I distorting the post's meaning? If I am, please illuminate me. Light, not sparks.
As for Krugman, I'm with you: the passage out of context was sloppy. But the absence of correction is intellectually dishonest.
Very shoddy post, Megan. I thought you were better than this.
Some More Prophetic Prescience
http://www.youtube.com/watch?v=v1YhJRXqnXI&feature=PlayList&p=55EB5BC0EAFF7CE4&playnext=1&playnext_from=PL&index=2
I guess it doesn't matter that since the "Wow...just,wow" post was put up, Kling has clarified his intention...
http://econlog.econlib.org/archives/2009/06/defending_what.html
The opening paragraph pretty much says it all:
"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."
Wonder who he is talking about here when he writes, "overly gotcha"....
Gee, what's next?
Should we start digging up old junior high yearbook pictures and laugh at how folks looked at that time and place. Always good fun.
So...who hasn't made statements that a few years down the road and in different circumstances/context might be looked at as wrong, off, idiotic, etc?
Even the best of us make an occasional misstep.
Reminds me of the old comedian who said that if you get a laugh at EVERY joke you're just not working hard enough.
Krugman doesn't really weigh in against the housing bubble. He seems to be arguing it may be desirable, but that Greenspan may not be able to accomplish it.
Economically, he's made some good calls (Japan in the 1990s) and some bad ones (he's a former Enron adviser, enough said). Politically, he's a reliable lefty hack.
Yancey
It is very difficult to take the following quote as anything other than advocation for getting housing going full-steam in the 2001 era:
I take it for a statement that low short term interest rates were the best hope for the economy in 2001 and the place that those low rates would probably show their impact first was the housing sector. That is not a statement that housing should be 'made' into a bubble, that such a bubble would be a thing without problems or any such nonsense.
As for economics, it seems like you guys are mostly saying Krugman was right on the mark. There was a recovery after 2001. It was not great. It was lead by the housing market and finance as an industry.
Now ask exactly what it is you wan to judge Krugman on? Just that one column? Well one column from nearly 10 years ago got quite a bit right onthe money. If you want to evaluate Krugman as a public economist well then you have to include all of his statements including his post 2001 quotes indicating that the housing market was something to worry about. Again hitting the nail pretty much on the head.
Now, do you even take seriously the possibility that Krugman is wrong once again about how easy it will be to keep the newest bubbles fromcreating the next and larger crisis?
And do you take seriously the real possibility that it isn't the bubble that causes the problem but its collapse?
Economically, he's made some good calls (Japan in the 1990s) and some bad ones (he's a former Enron adviser, enough said).
Heh, not quite
http://www.pkarchive.org/personal/EnronFAQ.html
Essentially what he did was give Execs briefings on economic and political issues. He wasn't an advisor in the sense that he was giving telling the company how to use that information or what strategies to employ etc. Granted it was a good gig for him ($37K+ for essentially speaking fees) but hardly unusual for what big corporations do.
The disingenuous reaction of Krugman and his defenders to Krugman’s 2002 quote is beyond astonishing. Krugman clearly PROPOSED monetary dilution as THE solution to perceived economic problems (as he always does) and Greenspan implemented it because central bank monetary dilution is unfortunately the primary Keynesian response to all economic problems. Interestingly, this is also an admission that the Fed is the instrumentality that causes housing (and all other) bubbles in the first place.
Krugman wrote:
“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.”
Which is the same as saying:
“To fight this recession…[the Fed] needs soaring household spending to offset moribund business investment…and to do that…Alan Greenspan
needs to create a housing bubble.
Which is the same as saying:
“To fight this recession…Alan Greenspan needs to create a housing bubble.”
Tell Mr. Kling that whether Krugman’s proposal was put forth glumly or cheerfully is irrelevant.
Actually in your quote you have Krugman stating the proposal was Paul McCulley's. Nice....
The accusation is that Krugman was advocating 'monetary dilution' but advocating the creation of a housing bubble. There's no such thing in the passage. First there's no evidence to indicate that a rebounding in housing in 2001 could only be accomplished through a bubble. Second nothing has been presented to support the charge that all bubbles are caused by monteary policy.
This reminds me of something I posted recently, "Did 9/11 Delay and Economic Day of Reckoning?". In that post, I quoted excerpts from a 2001 interview with San Francisco Fed economist Jack Beebe on how the post dot-com recession was similar to the Great Depression, and I speculated that the Fed rate cuts that were accelerated by 9/11, combined with the subsequent war spending, may have merely delayed the huge recession we were heading for after the huge expansion of the late 1990s.
Krugman made a great prediction. Megan McArdle should be so lucky to have a record remotely that good.
After Kling himself clarified the issue, I don't understand why McArdle didn't retract this post.
It's not like this is going to get even more embarrassing or something. But a retraction/apologize would allow McArdle to keep a modicum of dignity.
This is like the 100th person who got burned playing gotcha with Krugman. The funny thing is, Krugman himself cited a big gotcha in his Robbins lectures:
"...if you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God." Krugman, 1997, Slate
So there you go. The man is not infallible. He's just a much, much, much better thinker than McArdle or Kling. So your "wow, just wow"s will most likely backfire.
Yes, it’s always a good idea to check the accuracy of Mr. Krugman’s predictions. He predicted, along with Larry Summer in October 1982, imminent massive inflation.
Krugman was never less wrong than about 6 percentage points of inflation. At his worst, he was almost 10 percentage points wrong.
Let’s see. Krugman has been exposed as a liar, a fraud and a dissembler over his 2002 proposal for a housing boom. Now he’s been exposed as an incompetent for his 1982 inflation prediction. The man’s a genius. How else can one explain all of his mindless acolytes?
Sadly there is no medical cure for those suffering from Krugman Derangement Syndrome. We can only prey that Bob's mental suffering is kept low...and while we are at it we should prey that people like him inflict even less suffering on the rest of us.
Indeed. And to make the point perfectly clear, it was reiterated in the second post:
And then yet again:
In fact, of course, this was mentioned, and several people pointed this out, with a few even quoting the relevant section of the paper:
Nary a peep about a retraction. Same pattern with the story about Republican-owned dealerships being preferentially closed:
Not a word in the days and weeks that followed that would indicate a retraction, or any mea culpas about jumping the gun on this one. The same with Krugman now, apparently. That's three extremely dicey stories in just two and a half weeks with nary a retraction or a followup.
Shrug.
It would seem Megan is not paying close attention to the comments. That's a shame. Since she's running this section of the Atlantic, maybe she could have an assistant keep track of the comment threads and notify her when the readers start revolting!