In the comments of my recent post, in which I said Krugman was significantly retreating from his earlier stance about Fed policy causing bubbles, naturally some of Krugman’s defenders claimed I was inventing things, and that Krugman has been worried about bubbles all along.
Here’s Krugman from May, 2013:
So do we have a major bond and/or stock bubble? On bonds, I’d say definitely not. On stocks, probably not, although I’m not as certain.
The Fed normally cuts rates when unemployment is high and inflation is low — which is the situation today….[I]t’s hard to see why the Fed should raise rates until unemployment falls a lot and/or inflation surges, and there’s no hint in the data that anything like that is going to happen for years to come.
Why, then, all the talk of a bond bubble? Partly it reflects the correct observation that interest rates are very low by historical standards….
There’s also, one has to say, an element of wishful thinking here. For whatever reason, many people in the financial industry have developed a deep hatred for Ben Bernanke, the Fed chairman, and everything he does; they want his easy-money policies ended, and they also want to see those policies fail in some spectacular fashion. As it turns out, however, dislike for bearded Princeton professors is not a good basis for investment strategy.
All in all, the case for significant bubbles in stocks or, especially, bonds is weak. And that conclusion matters for policy as well as investment.
For one important subtext of all the recent bubble rhetoric is the demand that Mr. Bernanke and his colleagues stop trying to fight mass unemployment, that they must cease and desist their efforts to boost the economy or dire consequences will follow. In fact, however, there isn’t any case for believing that we face any broad bubble problem, let alone that worrying about hypothetical bubbles should take precedence over the task of getting Americans back to work. Mr. Bernanke should brush aside the babbling barons of bubbleism, and get on with doing his job. [Bold added.]
Now it’s true, in that same op ed he acknowledges that the dot-com and housing bubbles were, in fact, bad things. I didn’t say otherwise. My point is that during our current crisis, Krugman has been pooh-poohing people complaining about Bernanke, by pointing out that we have modest price inflation.
But now, in his latest elaboration of the Summers/Krugman “secular stagnation” thesis, Krugman is admitting that textbook central bank action to fight high unemployment will yield a string of bubbles. He and Summers are now babbling barons of bubbleism.