At This Point Paul Krugman Is Just Playing With Us About Housing
OK so let’s refresh everyone’s memory. Back in 2002, Paul Krugman infamously wrote in a NYT article:
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.
Now when this quote (from 2002) somehow got resurrected years later by his critics, Krugman denied that he had ever called for a housing bubble. He mocked the idea; this was just another smear by his critics.
That always seemed a bit of a weak defense to me, in light of his quote. (And by all means, go read his full article if you’ve never done so. The only way Krugman can defend himself, it seems to me, is to say, “Hey, I didn’t think Greenspan would be able to do it! So I wasn’t really calling for it.”)
The real kicker, though, was that in 2006, Krugman seemed to admit that there had been a housing bubble, that Greenspan had caused it, and that Greenspan had been right to do so (with caveats). I saw “seemed to admit,” because again, the English language has different rules when it comes to Krugman’s past writings, or so we are told by him and his fans. Anyway, here’s the relevant excerpt from an October, 2006 blog post, where Krugman is fielding questions from readers:
Neeraj Mehra, Amritsar, India: Mr. Greenspan has done a disservice to the nation by creating the housing boom. As a layman-observer, that’s the lingering thought I’ve had. Your article reaffirms it.
The question I have is this: Did he do the right thing — acting morally by engineering a housing boom, more as a bridge loan, until something else showed up at the horizon to shore up the economy — because he didn’t have a choice, or did he undertake a path of mere political expediency? And, that’s a question that’s nagging me for a while.
Would appreciate it if you could shed some light.
Paul Krugman: As Paul McCulley of PIMCO remarked when the tech boom crashed, Greenspan needed to create a housing bubble to replace the technology bubble. So within limits he may have done the right thing. But by late 2004 he should have seen the danger signs and warned against what was happening; such a warning could have taken the place of rising interest rates. He didn’t, and he left a terrible mess for Ben Bernanke.
But now we’ve got something even more recent, and it’s not talking about the past. It’s talking about what the Fed should do right now. And there’s no longer Paul McCulley to hide behind.
From Ezra Klein’s May 4, 2012 interview with Paul Krugman:
[Ezra Klein:] I’m very pessimistic about Congress deciding to do anything serious anytime soon. But I think there’s more possibility for movement at the Federal Reserve. So if Bernanke really decided to pull a Professor Bernanke, if he could do whatever he wanted, how much could the Fed do? What kind of improvement in the unemployment rate could Fed policy lead to?
[Paul Krugman:] That’s wildly uncertain. Partly because you do see that getting credibility on that commitment to future inflation is an iffy thing. Worth trying, but an iffy thing. The great thing about fiscal policy is that it has a direct impact and doesn’t require you to bind the hands of future policymakers. And there’s the problem that the main channel through which interest rates affect the economy is housing. Are we ready for a housing boom? Maybe. It looks better than it did a few years ago, because we have less housing overhan[g]. So it might do the trick. But it might not. I don’t really have a number on it.
If I didn’t have several assurances from Krugman that that’s not what he was saying back in 2002, I would think he was saying the same thing right now: That yes, if the Fed could get people to generate a boom in housing, then it would pull the economy out of recession, but aww shucks it doesn’t seem like that will be possible at this time.
OK Krugmaniacs, tell me how I’m totally misreading him out of spite.
I totally agree with you. I really don’t understand how Krugman could deny the call for housing bubble in the first place. He is per definition for stimulus after an economic crash which is reflation. Every reflation that follows a crash from a bursting bubble must create another boom/bubble in some other sector. He just doubted in 2002 that it would work.
@ Daniel K
I am sure you are reading this. Please can you tell me if it is possible to pull of massive monetary and/or fiscal stimulus without creating a bubble elsewhere? And if so how could you prove this?
The only way I could understand the Keynesian remedy to work and be good is that to kick start the economy (means create a false boom/bubble in some sector) you somehow create a genuine real growth in the whole economy. When this growth is stable in progress you slowly deflate (or hope that it does it itself) the false boom created that was only set deliberately in place to give the whole economy a nudge in the “right” direction. But this implies to call for a false boom (bubble) in some sector in the first place, you just cannot deny it.
I mean it is ridiculous. What would happen if we really did massive spending on defense to prepare for an imaginary alien invasion? What would you call the rise of the alien defense industry? Genuine growth?
sigh… it’s *pull off* of course…
Fiscal stimulus and “bubbles?”
Possibly, with a caveat. For simplicity’s sake, let’s assume market allocation of resources to be optimal.
Optimal growth (increase in wealth, just as a simple conceptual definition?) ≡ X
Growth from fiscal stimulus ≡ Y
We know that Y will always be sub-optimal (my argument for this on Mises.org), such that X > Y. This, though, doesn’t imply out of necessity that Y ≤ 0. We could see growth between 0 < Y < X.
Let's, for the sake of argument, seriously consider the general Keynesian theory of industrial fluctuations. Let's say that depressed effective demand, a low marginal efficiency of capital, relatively high interest rates, and subdued "animal spirits" means that the private sector is incapable of recovering that demand gap. This is essentially that during recessionary periods growth will be sup-optimal.
Let's define recessionary private growth ≡ X2, such that 0 ≤ X2 < X. It could conceivably be the case that X2 < Y, and that therefore fiscal stimulus will lead to a "net positive" rate of growth (after considering opportunity cost).
I don't think it's a sound argument, but on the face of it one can certainly see the idea behind it.
I don’t agree. I would think this way. Say total growth is Z, real growth is X, and false growth (bubble) is Y. Now you have Z = X + Y.
Private spending and government spending is of course aimed at being part of X. But of course both can partly and in theory even completely be part of Y. The point that government tends to be less successful in spending to achieve real growth (part of X) is beside the point here. This is why:
I want to define two ways how government or theoretically even private people could spend money:
1: ‘Genuine spending’: This is spending that aims specifically at a certain ends, like building a road, because it reduces congestions etc, but not because it ‘stimulates the economy’. This is excluded from this one!
2: ‘Stimulative spending’. The only reason is to spend money to push demand.
Every Dollar spend in case of number 1 is really aimed at being part of X, while there is still the chance it will end as part of Y. In contrast every Dollar that is spent to stimulate is by definition part of Y. If I spend 10000 Dollar to only stimulate the economy e.g. to buy a car that I will never use and let it rot to the ground in my garden, then this was ‘stimulative spending’ and did not add any wealth. Though it did increase the price of this car on the market without justification. If I buy the car because I really like it, drive it and use it then it is genuine spending. Of course it can be mixed. Like I would only pay 8000 for the car, but because I also think it would be worth 2000 more Dollars to stimulate the economy, then the 2000 are part of Y.
My point is: Every Dollar spent only because it is aimed at stimulating the economy is causing a genuine bubble at that point in the economy. This is because everything else would be spent anyway. And if it is really about a special project that under normal circumstances was too expensive but because someone wants to increase demand to stimulate the economy, then the excess part is causing a bubble (part of Y), while the rest would have been spend on something else that would have yielded the exact same value that it yields in the special project.
Do you agree?
What is “false” growth? Not all investment during a period of severe intertemporal discoordination is malinvestment. And, again, fiscal stimulus/government spending is not the same thing as credit expansion (my discussion revolves around the former, not the latter).
Read my Mises Daily which I link to. I explain the reason why government investment is less efficient, on average, than private investment by relating it to the calculation debate. But, nobody is denying this, and in fact I explicitly made this same claim in my argument above.
This isn’t always true. Keynesians agree that we’re talking about an industrial fluctuation, so the major problem is a lack of investment. Stimulus is meant to increase D2 of aggregate demand, which is investment spending.
I guess we have a misunderstanding in terms of definition we use. I also did account for that not everything is malinvestment (car example 8000 -> 2000 Dollar), as well as I know why government is generally less efficient because of the calculation problem (lacking profit loss check). I’ll get back tomorrow, and try to be clearer.
I fully agree with your Mises article. I guess the problem is that I tried with somewhat redefined terms to express how impossible it is to be for stimulus spending without being for artificially propped up industries (=bubble!).
I guess I leave it at that since we fully agree as far as I can see. (My “I don’t agree” from above better should have been a “That was not was I meant”)
Very nice Mises article!
In this interview, Krugman alludes that only bubbles can restore demand. Emphasis below is mine.
New York Foreign Press Center Briefing with Paul Krugman, April 13, 2009
http://www.pkarchive.org/economy/NYForeignPressCenter041309.html
Here’s an October 2001 quote that is absolutely definitive:
“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.”
http://articles.businessinsider.com/2009-06-17/wall_street/30063851_1_interest-rates-housing-bubble-policy-makers
There is NO WAY that this can be construed as “descriptive.” It is an advocacy. (So are the quotes you have by the way. What is hilarious is watching Krugman’s acolytes try to apologize for the first one you have by saying “as Paul McCulley put it” means they’re somehow not Krugman’s own words!)
Hey Jackass
This is not advocacy it is FACT
look up your sources next time, dummy
I know, the truth can hurt.
The truth is that it is an advocacy.
When Krugman said economic policy should encourage spending in housing, by way of lowering interest rates as the main answer, this is him saying what he believes ought to be done.
no its not
he i saying that he thinks it will happen. Whether it should happen he does not sya.
Geez.
You Idiot
besides, that bold stuff is probably editor-manipulted
use your imagination
Geez.
I bolded those words for your benefit, since you are obviously rather slow.
Yes, it is an advocacy.
He is saying it SHOULD happen, and that low interests are the main answer.
Look at the quote:
“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.”
It’s right there in black and white.
Geez.
You Idiot
At least I can read.
Well I’m trying to understand why you seem to be identifying a “boom” with a “bubble”. There are a lot of people making the case after looking at the data that we have lower housing stock than we need. Banks are clearly more cautious about getting people into homes. Energizing this sector right now may be described a “boom”, but I don’t understand why you’re acting like it must of necessity be a bubble.
And that was the whole point of the Krugman defense of the 2002 comment. In 2002 one could reasonably make the case for monetary stimulus. By 2004 someone should have known something was wrong with the housing sector.
When you make a policy recommendation it’s not like what you say in 2002 has to be carried forward to 2007. You change your recommendations as the situation changes, right?
And the housing situation is very different now than it was in 2006/7.
Am I wrong? Why is a boom the same as a bubble Bob?
Booms cannot be controlled/regulated/harnassed, thus preventing them from turning into collapseable bubbles.
Ergo your point:
“And that was the whole point of the Krugman defense of the 2002 comment. In 2002 one could reasonably make the case for monetary stimulus. By 2004 someone should have known something was wrong with the housing sector.”
Since you think like a central planner it’s perhaps impossible for you to grasp, but regulators cannot know when “enough is enough”. They cannot know because there required information to make such judgments are unobservable. The Fed has essentially covered the price system with a blanket of foam. Regulators cannot know what’s really going on underneath.
re:“Booms cannot be controlled/regulated/harnassed, thus preventing them from turning into collapseable bubbles.”
Maybe they can be controlled, maybe not. It seems very easy to control housing booms to me: jack up interest rates.
But that’s besides the point. Even if you can’t “control” a boom, it doesn’t mean it has to turn in the bubble. You have not made that case MF. The 90s were boom years for a lot of sectors, only the tech sector was really a “bubble”. This seems like more MF just being argumentative for the sake of being argumentative.
re: “Since you think like a central planner”
OK, now I know it’s just MF being argumentative for the sake of being argumentative. I think I’m going to just skip the rest of this paragraph. A paragraph that starts off that dumb is unlikely to get any better.
When is fiscal and monetary stimulus anything other than central planning? Do you not believe that those tools should be used to “guide” the economy along its “potential” growth path?
It seems very easy to control housing booms to me: jack up interest rates.
If I may, the magnitude and timing of the rate increase is exactly what M_F is saying is impossible for policymakers to determine.
Impossible to determine, not impossible to approximate. Plus, as Bernanke has pointed out when he wore his academic hat -prudential macroeconomic stabilization policy will automatically help to reduce bubbles because bubbles are so closely associated with periods of strong growth.
No one thinks policy makers have access to the sort of information the market aggregates and uses. I don’t want to waste too much time on this false choice that MF seems to have confused with an argument.
prudential macroeconomic stabilization policy
This is too vague, if you have time I would appreciate your elaborating on this….I will make a point to come back again to read it.
I don’t understand – do you want me to provide a synopsis of monetary policy?
Is there something specific about monetary policy you don’t understand?
Money ought to be made tighter during growth periods and looser during busts. Insofar as asset bubbles usually come during growth periods, standard stabilization policy is already going to provide some action even if “knowing that you’re in an asset bubble” can be hard.
How much tighter and how much looser?
Why not leave it to the market to determine, and if not, why not?
No need to get smart DK. Your mention of monetary policy in your last post is sufficient. You said macroeconomic stabilization in the post above, however I didn’t know if you were referring to monetary policy or fiscal policy. Or regulation. The reason for my uncertainty is Krugman’s statement that Greenspan should have left rates low and instead issued a warning about a housing bubble. Which presumably would leave either fiscal or regulatory policy to deflate it. Do you agree with Krugman or with Bernanke? What would have been the appropriate policy response, in your opinion, to a growing asset bubble in conjunction with high unemployment?
Money ought to be made tighter during growth periods and looser during busts.
You have it backwards. It is loose money that generates the boom and it is tighter money that (more quickly) brings about the bust.
You can’t say we can have tight money during booms and loose money during busts. It would be like saying we should have more Sunlight during the night, and less Sunlight during the day, so as to balance out aggregate daily Sunlight.
Impossible to determine, not impossible to approximate.
It’s impossible to approximate as well, since it is impossible to separate a given price into a “non-boom” portion and a “boom portion”, when there is only one observable price, and unadulterated, unhampered market interest rates are not observable.
Plus, as Bernanke has pointed out when he wore his academic hat -prudential macroeconomic stabilization policy will automatically help to reduce bubbles because bubbles are so closely associated with periods of strong growth.
Only if you conflate an unsustainable boom with “strong growth.” If you don’t, then strong growth can occur without bubbles, and bubbles can occur without strong growth.
Inflationary periods typically see real output expansion for the reason that Murphy outlined in his Sushi model.
No one thinks policy makers have access to the sort of information the market aggregates and uses. I don’t want to waste too much time on this false choice that MF seems to have confused with an argument.
It’s not a false choice. You are the one presenting a false choice by saying we can either have better central planners and no bubbles, or worse central planners and bubbles. No, we can only have bubbles with central monetary planning.
Maybe they can be controlled, maybe not.
It’s maybe not. It’s why we have a boom bust business cycle, rather than a boom boom boom cycle.
It seems very easy to control housing booms to me: jack up interest rates.
Impossible to know when, because not only is it impossible to know just where in a bubble one is, but it is also impossible to predict future choices people make, and since lowering interest rates has a time lag in its effects, it is virtually impossible to not distort the economy.
But that’s besides the point. Even if you can’t “control” a boom, it doesn’t mean it has to turn in the bubble.
When you arbitrarily divorce a single unsustainable inflationary period into “boom” and “bubble”, then of course you can pretend to be really separating the two. But an unsustainable inflationary period is just that. You can’t say booms are healthy and bubbles are not. Inflationary booms and bubbles are just two words that refer to the same thing.
The 90s were boom years for a lot of sectors, only the tech sector was really a “bubble”.
No, you misunderstand. The reason why you in 2012 call the 1990s a boom period with a bubble in the tech industry, is due the historical outcome of the Fed reinflating a boom by again relowering interest rates and accelerating inflating.
The reason why we see bubbles like the tech bubble, is because the economy is complex in such a way that we see individual firms, sectors, and industries bust at their own times and their own speeds when the general bust phase takes place. Remember, we’re talking about many thousands of independently acting investors and capital planners, as well as many more individual consumers. While a bust phase takes place, each individual acts on their own time and in their own industry. Since each industry and firm are interconnected with each other like a puzzle, a particular sector that needs correcting, won’t correct until the sectors that directly affect it are corrected. But these won’t correct until yet more firms and sectors correct, and so on.
So because the Fed relowered interest rates, and reinflated the unsustainable boom, we only observed a large collapse in the tech industry, when in a counter-factual world of the Fed not relowering interest rates and not reinflating the boom, we would have seen more sectors correct even deeper, and we might have seen a car bubble, a housing bubble, and what have you.
The same thing occurred in 2006-7. Soon after the Fed raised the target rate, by inflating less, the housing bubble was the first to go. If the Fed didn’t do anything, the “contagion” so to speak would have spread out, and instead of a housing bubble, we would have seen many more bubbles exposed.
But because the Fed reinflated, those other sectors didn’t collapse by as much as they otherwise could have, and so we now have a history called the housing bubble.
This seems like more MF just being argumentative for the sake of being argumentative.
???
OK, now I know it’s just MF being argumentative for the sake of being argumentative.
???
I think I’m going to just skip the rest of this paragraph. A paragraph that starts off that dumb is unlikely to get any better.
But it’s not dumb. You do in fact think like a central planner. It’s not a personal attack, it’s an assessment that characterizes the way you view economic phenomena. Many people think like central planners. It’s the way they were taught economics.
The fact that you are so sensitive about this can only tell me that you know you do think like one, and consider it an embarrassment, and thus you believe those who tell you the truth are somehow attacking you for attacking sake.
Oh, and I don’t believe your first “you’re being argumentative for the sake of being argumentative” was written and thought of before you thought of writing it after my central planner comment. This is because the first time you said it makes absolutely no sense whatsoever, and so you had to create for yourself and others a seeming argumentative for the sake of argumentative so as to appear as a sort of correct overall characterization of what I am saying, so that you can deny and hand wave what I am saying. It’s obvious.
“The fact that you are so sensitive about this can only tell me that you know you do think like one, and consider it an embarrassment, and thus you believe those who tell you the truth are somehow attacking you for attacking sake.”
Ding!!! We have a winner!
DK wrote: Well I’m trying to understand why you seem to be identifying a “boom” with a “bubble”. There are a lot of people making the case after looking at the data that we have lower housing stock than we need.
Believe it or not, Daniel, that was my first thought too. I was going to do a blog post on “hey look, Krugman has learned from his past ambiguities and is now covering himself by calling for a boom, not a bubble, which by definition could be construed as a sustainable expansions.”
But there are two problems with that, which is why I didn’t bother making the distinction:
(A) The reader in 2006 kept calling it a “boom” and Krugman didn’t correct him. Now it’s true, Krugman himself used the term “bubble” in his answer, so that by itself isn’t a smoking gun; maybe he didn’t want to seem pedantic. But the point is, somebody used the two terms interchangeably, and Krugman didn’t seem to object.
(B) The analysis he gave to Ezra Klein is identical to what he said in 2002, just substituting “boom” for “bubble.” In light of MF’s quotation above (which, believe it or not MF, I think makes Krugman’s overall position more defensible–he seems to be saying “in the absence of government policy to shore up business investment, we are condemned to jump from bubble to bubble”), I really think his position is that until “we” get serious about Depression Economics and the global imbalances etc. etc., this is going to just keep happening over and over.
So the only issue is, if we stipulate that Congress won’t do what Krugman wants, what is his second-best preference? That we stay like we are, or that the Fed gives us another boom/bubble (maybe in housing, if it’s ready for that)? I think all the evidence comes down on the latter.
Daniel, here’s what I don’t get: Krugman and his fans should just come out and say, “Yeah, I called for a housing bubble in 2002. And guess what? The years 2002-2004 really were good for the economy. We created some jobs and real growth. That wasn’t ‘fake’ output the way conservatives like to say now (though they weren’t saying it when Bush was actually in the White House). But then Greenspan and other regulators should have done more to prevent it from getting out of control. So my call for low interest rates to fuel a housing bubble was right. They just didn’t execute it properly.”
But instead of saying that, he is (I realize this is a strong word Daniel) simply lying about what his position was. I mean, if you go read that 2002 article in full, it is crystal clear that the Fed would be rescuing the economy if it could engineer a housing bubble. That’s why he opens the article with movie references about heroic rescues. Or are we to conclude that Krugman was rooting for the rampaging hordes of invaders in “55 Days in Peking”?
I don’t even really see the problem with “bubble” in 2002, except to note that it’s a little brash and since he obviously didn’t want it continually inflated it probably would have been more accurate to say “boom”.
If you say “let’s lower interest rates in 2002” and then say “Greenspan should have started pulling back in 2004, but he didn’t” I have a hard time laying a bubble at Krugman’s feet. That sounds to me like he just supports responsible counter-cyclical policy.
re: “Yeah, I called for a housing bubble in 2002. And guess what? The years 2002-2004 really were good for the economy. We created some jobs and real growth. That wasn’t ‘fake’ output the way conservatives like to say now (though they weren’t saying it when Bush was actually in the White House). But then Greenspan and other regulators should have done more to prevent it from getting out of control. So my call for low interest rates to fuel a housing bubble was right. They just didn’t execute it properly.”
Right… isn’t that basically the argument?
It was Krugman who said this: “But by late 2004 he should have seen the danger signs and warned against what was happening; such a warning could have taken the place of rising interest rates. He didn’t, and he left a terrible mess for Ben Bernanke.”, was it not???
DK wrote:
Right… isn’t that basically the argument?
No, it absolutely was *not* what Krugman and his fans said, once the 2002 piece came to light. In fact, we may even get some of them to show up here, especially once a lot of comments have accumulated and they won’t bother reading the way you’ve been trying to defend Krugman.
So to be clear, here is what I’m saying:
(1) Yes, Daniel, you are 100% right that that is “basically the argument,” if you mean in terms of looking at Krugman’s past writings and trying to summarize his position. I.e. I think I fairly gave Krugman a reasonable way he should have responded, when people threw the 2002 quote at him and accused him of calling for a housing bubble. I think he could have honestly said what I offered above, and that would have been a decent response. Austrians wouldn’t have liked it, because we think he is fooling himself if he thinks you can responsibly and safely ignite a bubble/boom if you do it juuust right, but mainstream economists wouldn’t have much room to criticize him. And anyway, he is saying the exact same thing right now in response to Ezra Klein, so he obviously still believes in that basic stance.
(2) Unfortunately, in practice when people accused Krugman of calling for a housing bubble in 2002, he totally denied it. Look at the title of that blog post; it was “And I was on the grassy knoll, too.” So unless Krugman thinks there were other shooters who responsibly took shots at Kennedy but then stopped before a fatal one struck, that blog post in no way ties up with what you are asking me, “Isn’t that basically the agument?” Also, Krugman’s fans and I think he himself, have made a big deal about “Those weren’t Krugman’s words! He was quoting someone else! Man what a bunch of liars these conservatives are!” As if Krugman had been quoting him to say, “What a nutjob this PIMCO guy is!”
If you need documentation for any of the above, Daniel, I’m sure MF could provide it.
Well shouldn’t he deny responsibility for what happened?!? I guess I’m getting really confused now.
He never denies he wrote that in 2002 right?
What he denies is that that implies he was in favor of what subsequently went on in the middle of the decade. And as far as I know he’s right to deny that.
You seem to be saying that if he takes responsibility for an accommodating Fed in 2002 he has to take responsibility for the entire decade, and that if he denies responsibility for the entire decade it means he’s also denying responsibility for advocating an accommodating Fed in 2002. That seems wrong to me.
Starting around 19:40 or so of this video from his Bloomberg appearance the other day:
http://www.bloomberg.com/video/91694137/
Krugman claims that it is the “great lie” that the Fed created the Housing Bubble. However, he wrote this in his blog in 09:
“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.”
http://krugman.blogs.nytimes.com/2009/06/17/and-i-was-on-the-grassy-knoll-too/
Rereading the grassy knoll post, he seems to reject even more (ie – his analysis vs. advocacy point). That’s fine too. But even if he was doing advocacy in 2002 I don’t think that makes him responsible for the rest of the decade, or the securities regulation.
Daniel Kuehn wrote:
Rereading the grassy knoll post, he seems to reject even more (ie – his analysis vs. advocacy point). That’s fine too.
Yeah, it’s “fine too” if Krugman is allowed to fib about what he was doing.
Daniel, there is no way on Earth that you can read the 2002 post and conclude that Krugman was *against* Greenspan creating a housing bubble, if only he could.
Look, let’s try an analogy. Suppose they abolish the TSA, and then there’s a terrorist attack that kills 10,000 people. I imagine a lot of neo-conservatives could pull up Ron Paul quotes where he was in favor of abolishing the TSA.
Now in that light, what should Ron Paul do? I would recommend he say, “Yes, I was in favor of abolishing the TSA, and that doesn’t make me responsible for what happened. They should have stopped meddling in those foreign lands too.”
But if Ron Paul came out and said, “Huh?! Read my speeches again, folks. I was merely engaging in analysis, not advocacy. I was merely talking about what flying would be like if you weren’t getting groped. I never in a million years was saying we should abolish the TSA.”
If Ron Paul had said that, he (a) still wouldn’t necessarily be culpable for the terrorist attack but (b) would be lying about his previous stance, in order to deal with critics in a lazy fashion.
So that’s what I think Krugman is doing here. You keep defending him, by saying he’s not responsible for the full ravages of the housing bubble. That’s not really the point.
I think that’s harder to parse than you let on. 95% of the article was essentially a double-dip forecast. There was one funny line from the PIMCO guy.
The tone, of course, was that we should take the double-dip prediction seriously, which does mean responding. If you were to ask “how does Krugman think we should respond” I think “with easier monetary policy” is the right answer, not “creating a housing bubble”. The PIMCO line isn’t really his point, is it?
Most of the article is analysis, not advocacy, like he said. But I do agree that there’s an undertone of advocacy.
If I had to choose between who is being the most distortionary here: Krugman or people who say he “called for a housing bubble”, it seems obvious that the biggest culprit is the latter.
I do like his 2006 response (2006!!!!! Well before most people were worrying about this!) better than his “grassy knoll” response. The grassy knoll response probably claimed too much.
But come on Bob – the grass knoll response was in the context of actual liars who think Krugman is Satan. Let’s have a little perspective here.
If you want to say that you’d prefer the Mises Institute crowd, the Ron Paul crowd, and the Tea Party crowd didn’t demonize, giving him no reason to respond with the “grass knoll” post and leaving us with only the much better record on the matter of the 2006 post, then I’d agree with you on that whole-heartedly.
I think that’s harder to parse than you let on. 95% of the article was essentially a double-dip forecast. There was one funny line from the PIMCO guy.
It’s not hard to parse at all. It’s only hard to spin, which you then conflate with hard to parse.
How about this October 2001 call:
“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.”
http://articles.businessinsider.com/2009-06-17/wall_street/30063851_1_interest-rates-housing-bubble-policy-makers
Not enough grassy knoll for you?
DK wrote: I don’t even really see the problem with “bubble” in 2002, except to note that it’s a little brash and since he obviously didn’t want it continually inflated it probably would have been more accurate to say “boom”.
OK good, so now you are agreeing with me that trying to defend Krugman’s statements to Ezra Klein on the boom/bubble distinction isn’t really relevant here, right? You are now agreeing with me that what Krugman said in 2002 is basically what he is saying in 2012.
That’s good; it shows your guy is consistent. So I just wish, when right-wingers accuse Krugman of “supporting a housing bubble in 2002!!!”, Krugman and his fans would say, “Yeah, it was the right thing to do at the time. Some of us have to wear the Daddy Pants and make the hard choices. You guys weren’t complaining about housing growth back then, either, as I recall.”
But instead he goes into total denial mode, and (I’m pretty sure he did this himself, for sure his fans did) hiding behind McCulley as if Krugman didn’t agree with the quote.
I’ll start worrying about the modest overstatement of the “grassy knoll” post when the entirely immodest demonization stops. Krugman can lash out, but the Krugman hate fest is so one-sided it’s hard to worry about a post that was basically right, but probably a little bit of a dodge.
My God – if we made such an issue of the “little bit of a dodge” moments among libertarians we’d have nothing else to blog about!!!
DK wrote: I’ll start worrying about the modest overstatement of the “grassy knoll” post when the entirely immodest demonization stops. Krugman can lash out, but the Krugman hate fest is so one-sided it’s hard to worry about a post that was basically right, but probably a little bit of a dodge.
My God – if we made such an issue of the “little bit of a dodge” moments among libertarians we’d have nothing else to blog about!!!
I think this is the closest we will ever get to, “Yes Krugman was lying, but your guys lie too Bob.” And yes, some of them do, unfortunately.
They really are different. Booms ‘bust’, but bubbles ‘pop’.
The other real problem with the housing was not the housing per se (although that was a legitimate bubble) but rather the securitization. And presumably any new housing sector growth is going to be much more conservative when it comes to the securitization of the financing.
Securitization is not inherently destructive.
Nobody said it was MF. Modern American home financing would be impossible without securitization.
The point is, things would have been bad if it were just a housing bubble. Things were atrocious because of the sort of securitization that supported it this time.
Yes, and why was that?
Wasn’t Wall Street already conditioned by the Greenspan Put, and the official assurance by the master himself that housing is not in a bubble? Not to forget Wall Streets first rate connections to policy makers. Etc…
And now after all this TBTF bail outs, I really doubt that it got better.
I never understood how Greenspan could have argued he didn’t agree with lancing asset bubbles in light of the Greenspan Put.
I imagine his defense would have been “it wasn’t the assets that lead to the policy action, it was the behavior of the real economy”. I don’t know the data well enough to evaluate that hypothetical defense, though.
Greenspan didn’t believe the Fed was behind the housing bubble (at least, this is his claim); he blamed a rise in East Asian savings.
Which Reisman demolished, by the way.
http://mises.org/daily/3556
Shostak has a criticism on Mises.org too, and I repeat it in my own Mises.org article on Greenspan.
Ah, now I better understand why you said below that securitization CAN BE a problem.
You just repeated a second time that securitization is inherently destructive.
A housing bubble cannot get worse from securitization unless the securitization is itself destructive.
Securitization qua securitzation isn’t destructive. It can be, though, if there exist perverse incentives due to regulations. Take the housing bubble: securitization of mortgage backed securities allowed banks to reduce capital reserves, since securitized MBS’ were in a different risk basket than unsecuritized MBS’. Together with the original incentive to invest in MBS, instead of business loans, as a result of the recourse rule, this allowed a greater than otherwise investment in MBS’.
If you say regulations can make securitization destructive, you’re really just saying the regulations are destructive.
It’s like me saying to DK that water is not inherently destructive, and then you say “It can be, if the water is laced with arsenic.”
I will say no, it’s not the water that is poisonous, it’s the arsenic.
Or, a more relevant example: Money and interest rates are not a problem. Central banks manipulating money and changing interest rates, to the extent this is destructive, is due to the central bank, not money or interest rates, even though the money and interest rates proximately brought about the problems.
Securitization with bad regulations, if there is destructiveness associated with it, isn’t coming from the securitization, it’s coming from the bad regulations.
DK didn’t say the problem was the regulations associated with securization, he said the problem was securitization. Taken at face value, that’s blaming securitization itself.
I see your point though, I am just weary of blaming something that is not inherently destructive, as if the process of collecting loans and separating them into tranches for purchase, is somehow destructive in any way.
I haven’t gone through all the comments yet, but could it not be the case that Krugman believes we can temporarily create a bubble to restore aggregate demand, and then cease inflating it once the private sector is recuperated and can reallocate resources on its own? What Krugman seems to be critiquing is recklessness in controlling the bubble and the Fed’s inability to use it only as a temporary tool.
I read Bob’s response to Daniel above, but I’m still confused as to why a lack of clarity (on when to restrain a new bubble) implies that Krugman somehow supported an unrestrained bubble.
JMFC wrote:
I haven’t gone through all the comments yet, but could it not be the case that Krugman believes we can temporarily create a bubble to restore aggregate demand, and then cease inflating it once the private sector is recuperated and can reallocate resources on its own?
Yes, that could be the case, and I think it actually is the case. Unfortunately, Krugman didn’t have the cajones to just say that was his position all along. Instead, he’s trying to say he wasn’t calling for a housing bubble in 2002.
Note JMFC, on your own attempt at reconciliation, Krugman was still calling for a housing bubble.
That’s what I’ve been saying here: He should just come out and say, “Did I call for a housing bubble?! You’re ***damn right I did!! You need that housing bubble, you want that housing bubble. I would appreciate just a ‘thank you’ for my vigilance on that wall.”
Fair enough. Do you think this could imply that he actually recognizes that creating bubbles to restore demand is bad theory and is trying to cover his tracks, instead of correcting himself?
To be honest JMFC–by the way, is anyone else worried that JMFC is the same guy as MF?–I think what Krugman is doing is a combo of (a) being careless and (b) not wanting to be fully honest because he know his critics are merciless and won’t be cool if he gives a nuanced answer. Look, guys (especially Daniel Kuehn if you see this comment), in my work for IER I understand that things get tricky when you are on a “team” that is engaged in political controversies. It’s why I have a lot of sympathy for Christina Romer or Steven Chu, when they clearly couldn’t say what they actually believed since they decided to work for the Obama Administration. (To be clear: I have not lied in any of my work. But I can understand the pressures people face a lot more, now that I am closer to that world.) If you know that there are people out there who hate you with a passion, and will sift through your writings/speeches to find something to pull out of context, then you have to be really careful in what you say.
So Krugman knows he’s hot stuff, and that if he said, “OK yes, I technically called for a housing bubble in 2002, but I didn’t mean that the regulators should fall asleep at the wheel and…” then people will pounce on that. George Will et al. (and probably Bob Murphy, though with less venom) would be quoting that forever.
So better to just deny deny deny.
by the way, is anyone else worried that JMFC is the same guy as MF?
I know this probably won’t mean much, but I can say that I am not JMFC. But I will take it as a compliment.
I think what Krugman is doing is a combo of (a) being careless and (b) not wanting to be fully honest because he know his critics are merciless and won’t be cool if he gives a nuanced answer.
I say definitely (b). Krugman is very jealous and protective of his ideology, and he probably knows it will take a brutal beating by his ideological enemies if he were fully honest.
I don’t mean this as an attack, but what Krugman is doing is a very watered down version of what totalitarian communists did. They had to cover up their own destructive actions by stretching the truth so as to prevent an uprising from a very itchy trigger finger populace.
It’s why I have a lot of sympathy for Christina Romer or Steven Chu, when they clearly couldn’t say what they actually believed since they decided to work for the Obama Administration. If you know that there are people out there who hate you with a passion, and will sift through your writings/speeches to find something to pull out of context, then you have to be really careful in what you say.
This is exactly why I remain purposefully anonymous. It is the only way I can say everything that is on my mind, for better or for worse. Those who don’t have this luxury may want to consider that cowardly, but if my intention is to promote better ideas that replace worse ideas, and to do so to the best of my ability, this is the best approach I can think of.
So Krugman knows he’s hot stuff, and that if he said, “OK yes, I technically called for a housing bubble in 2002, but I didn’t mean that the regulators should fall asleep at the wheel and…” then people will pounce on that. George Will et al. (and probably Bob Murphy, though with less venom) would be quoting that forever.
So better to just deny deny deny.
I think we have a winner! That’s a bingo!
I will add that Krugman still believes central planning works, as long as the “right” central planners are in charge of course, and this probably contributed to his apologia for the failed central planning that took place, which he can then say would have worked, as bad as it was, if it hadn’t been for the evil bankers, lenders, etc, who are the “real” culprits for failed central planning.
Every economist who thinks like a central planner does this. They really do believe the blame is on the market for not behaving in accordance with the expectations and intentions of the central planners’ actions and plans. Stupid market! Why won’t you behave like you’re told! This stuff SHOULD work! Our models are sound!
You know, if I didn’t know any better, I’d say that what’s been said over the last few years by all parties, I think the Austrian theory of the business cycle is now accepted as valid even by Krugman.
Think about it. If he truly didn’t think it was valid, then he would have no problems at all with going on Bloomberg TV, and saying something like the following hypothetical:
“OK, fine, yes, I did call for the Fed to lower interest rates to engineer a housing boom. I admit it. That’s what I thought the economy needed at the time. But this is not what collapsed the economy! The economy collapsed because the Fed and the Treasury failed to maintain sufficient AD afterwords.”
But he doesn’t say that, because he knows his “ideological enemies” would have devastating counterarguments.
Then there is the fact that he responded not once, but 4 times, on his blog regarding the Ron Paul interview.
Maybe this is why Krugman tends to stay away from the Austrians. It’s not because he’s above them like his silly acolytes want to pride themselves in believing. It’s because he’s scared. His entire ideology is at stake, and my guess is that a part of him deep down knows we’re right.
If I’m the same person as MF, it must mean that Bob thinks MF has people write his stuff for him.
(I’m being facetious.)
Wrt Krugman, you are probably right. It’s just that I usually see Krugman as a straight-enough-shooter. Maybe I don’t read Krugman closely enough.
“is anyone else worried that JMFC is the same guy as MF?”
I’m more worried there might be two of them. 🙂
I actually thought they were the same guy when I first started visiting this blog (because of the MF in JMFC) and then I saw both of them post in the same blog post.
Then again, that doesn’t mean they can’t still be the same person.
JMFC is far too couth and intellectually charitable to be me.
“Unfortunately, Krugman didn’t have the cajones to just say that was his position all along.”
I’m not PK apologist, but isn’t that what he said in his grassy knoll post?
“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.”-PK
It’s different. In the grassy knoll post, he wanted to portray it as a descriptive assessment, not an advocacy. I think Murphy is talking about Krugman having the cajones to say his position was an advocacy all along.
This doesn’t suffice?
“So within limits he may have done the right thing.” -PK
Maybe I’m unclear on the distinction between advocacy and analysis. What differentiates the two?
This is 2012 Krugman trying to prove 2005 Krugman true, by claiming that 2002 Krugman MAY have wanted a “within limits” Fed boom.
Bob, couldn’t Krugman’s position have been the following? “Greenspan should do whatever’s necessary to get us out of the slump. Unfortunately, doing what’s necessary will probably have undesirable side effects, in particular a housing bubble that we’re going to have to deal with later..”
Keshav wrote:
“Bob, couldn’t Krugman’s position have been the following?…”
Yes, reading his 2002 piece and especially his 2006 piece, that seems to have been his position. Too bad Krugman later on denied that it was his position. So I don’t know what you mean by “couldn’t Krugman’s position have been…” Not according to him, it couldn’t have been. He said it was analysis, not advocacy, and that’s why I’m criticizing him in this post.
In his 2006 piece there really rings a “Too bad that always people who mess things up are in charge, if only I was in charge…”
Who else thought like this?
“If I had the power today I should surely set out to endow our capital cities with all the appurtenances of art and civilisation on the highest standards of which the citizens of each were individually capable, convinced that what I could create, I could afford – and believing that money thus spent would not only be better than any dole, but would make unnecessary any dole. For with what we have spent on the dole in England since the War we could have made our cities the greatest works of man in the world.”
And in his answer to Hayeks Road to Serfdom:
“Dangerous acts can be done safely in a community which thinks and feels rightly, which would be the way to hell if they were executed by those who think and feel wrongly.”
Both Keynes. I guess the obvious solution would to put Krugman in charge, then everything would be fine, at least as fine as possible…
I think the advocacy part was telling Greenspan to do whatever is necessary to get us out of the slump. But saying that it would lead to a housing bubble is economic analysis.
Krugman here was not advocating a housing bubble (if he had, don’t you think he would have called it something other than a housing BUBBLE). People are hung up on the word “need,” but sportscasters talk about all the time what one team “needs” to do in order to win the game without wanting that team to win, necessarily.
More to the point, later in the article Krugman writes:
“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.”
Does this quote means Krugman advocated for the Bush tax cuts, the very ones he vehemently opposes even now? No, it means the same as the previous quote, he is describing what people hope to achieve and why.
Booms become bubbles only after they burst. Nobody who wants a bubble says bubble, because that implies they also want a bust.
Krugman did advocate for a housing boom on the basis of the Fed lowering interest rates. That the boom didn’t last forever, which was inevitable, doesn’t mean he didn’t want a housing boom.
You’re getting hung up on the word “bubble.”
I came into this against Krugman but after reading this I agree that his position is that Alan Greenspan, within the confines of his targets/situation/powers, needed to create a housing bubble.
Still, he really should have added a comment about how absurd and unpalatable the situation was for it to have come to that.
But Krugman himself denies that this is his position.
Suppose I said to you the following hypothetical sentence:
“Government policy should encourage other spending to offset the temporary drop in investment. Low interest rates, which increased spending on housing and other durable goods, are the primary solution.”
Would you interpret me to be advocating or merely describing?
We have always been at peace with housing bubbles.
Yeah, maybe I’m wrong. It’s a stupid thing to say by any metric.
http://www.economicpolicyjournal.com/2012/05/krugmans-caught-in-lie-on-housing.html
I think this helps explain part of why Krugman refuses to admit he called for a housing bubble, now denies that he ever did this, and pretends none of us can research his previous columns on his blog where he stated as much:
http://www.nytimes.com/2005/05/22/weekinreview/22okrent.html
“Op-Ed columnist Paul Krugman has the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults.”
I read Krugman 2002, and thought that he’d again revealed Greenspan as dangerously deluded. Thanks more to reading Krugman than anything else, I persuaded my parents to sell their house early in 2007.
Other economists still denied that the cliff existed, let alone that we’d gone over it.
I think I found your problem: you didn’t read the second page of his column: http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html?pagewanted=2&src=pm
“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….”
Reading comprehension: yet another code for liberal bias. 🙂
Janus, thanks for responding, but your reply astounds me even further. The point under dispute is whether Krugman endorsed the PIMCO guy’s call for a housing bubble in 2002. You are now quoting Krugman saying that Greenspan thinks he can pull it off (i.e. save the economy by generating a housing bubble), yet Krugman isn’t sure.
So how does this exonerate Krugman? I said in my post that the only way Krugman could be excused is that he said he didn’t think Greenspan would be able to generate a housing bubble back in 2002; Krugman never said it would be a bad idea for Greenspan to do it.
So since you are saying we lack reading comprehension, please do explain why.
Maybe this article would help with this discussion on what Krugman did and did not say/mean regarding the Housing Bubble. http://theypu.com/paul-krugman-and-the-housing-bubble