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.