18 Jun 2009

What Did Krugman Know About the Housing Bubble, and When Did He Know It?

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The plot thickens. If you need to get up to speed regarding Krugman’s alleged advocacy of a housing bubble in 2002, see here.

Now then, Bob Roddis (drawing from the Mises.org blog I believe) sent me a Krugman blog post from Oct. 2006. In the post, Krugman is responding to reader questions regarding his NYT column. Check out this exchange:

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.

OK, so (as Roddis pointed out in his email to me) the very best Krugman can now say is that YES he thought Greenspan should engineer a housing bubble, but he shouldn’t have let it go on as long as he did.

Already, Krugman is dead in the water. In his most recent denial, he said the Pimco quote wasn’t a recommendation, but merely positive analysis. Well, that’s not what he said in 2006.

But then the larger question is, did Krugman issue warnings about the housing bubble in, say, 2004? He very well might have, since Krugman has never been a fan of people getting rich from market activities. (I.e. rising asset values would be a prima facie red flag for Krugman, so it wouldn’t surprise me if he wrote that “there oughta be a law against this” between 2002 and 2006.)

At the very very least, Krugman should point out where he told Greenspan to pop the housing bubble that he (Krugman) had recommended Greenspan create. (And no cheating–he had to write that advice before everyone else realized it too.)

17 Jun 2009

Krugman Digging Himself Deeper

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Wow this is getting hilarious. A Krugman quote from 2002 has been flying around the Internet, in which he seemed to advocate that Greenspan replace the Nasdaq bubble with a housing bubble.

Now Krugman outdoes himself and posts this (HT2 von Pepe):

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

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

Look closely at the parts I’ve put in bold. In the first one, he is acting like the claim is so absurd, that he has difficulty even understanding how his nutjob critics could come up with it. The very idea, that Krugman would be recommending a housing bubble?! Ha!

Then the second part in bold shows that I know how Krugman thinks. When I blogged about this yesterday, I said that Krugman seems to be predicting a housing bubble, but not really. Some of you doubted my interpretation, but look, that’s exactly how he tried to spin it. (And right, Krugman didn’t actually predict the housing bubble, but that’s why I ended with “but not really.”)

If all we had to work with were the 2002 article in question, we wouldn’t have enough evidence to convict Krugman. After the money quote about Greenspan needing to cause a housing bubble, Krugman wonders whether Greenspan “can do this.” (Actually, this is the worst of all worlds: It seems that Krugman really was saying, ‘Yes Greenspan ought to cause a housing bubble to fix the economy, but I don’t think he can.’ !!)

Fortunately, we have a lot more evidence. Assuming the below quotes and links are legit, Krugman really ought to have a short blog post saying, “OK I screwed up.” (I may have to show him the way in a few days when my summer gold call doesn’t pan out.)

Von Pepe originally alerted me to this follow up material, and as best as I can trace it back, it first appeared on Reason, posted by “Ben.” Here it is in all its glory:

If you think what he wrote in 2002 was offensive, then you’ll really get annoyed reading what he wrote in 2001.

German Interview, undated


“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


“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


“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


“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


“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


“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.”

17 Jun 2009

Same Old, Same Old: BLS Adjusts Away Two-Thirds of May’s Inflation

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The trend continues. The actual CPI rose 0.3% in May–an annualized price inflation rate of 3.7%–but the BLS “seasonally adjusted” it down to 0.1%, which is a much more reasonable annualized inflation rate of 1.2%.

For those of you who are newcomers, let me bring you up to speed: The BLS has “seasonally adjusted” the CPI downward every month this year. And it’s not little tinkerings on the edges, these are significant differences. All told, from Dec 2008 through May 2009, the raw CPI rose at an annualized rate of about 4.2%.

In contrast, the seasonally adjusted CPI–the figure that the media reports, before they throw out energy and food prices and talk about “core [seasonally adjusted] CPI”–rose at an annualized rate of only 1.5%.

I should point out that this is not a smoking gun proof of conspiracy; I checked earlier years, and in both 2007 and 2006, from January through June the seasonal adjustments always dampened the official inflation, while the adjustments went the other way from July to December. For a different point, if you do the seasonally adjusted vs. non-seasonally adjusted CPI changes from Dec 05 through May 06, you get annualized inflation rates of 3.7% vs. 7.1%.

So, maybe what the BLS has been doing the last few months isn’t as shady as I originally thought. We won’t really know until January 2010, when we can finally compare the yearly increase in S.A. vs. N.S.A. prices over the whole year of 2009.

If nothing else, though, it is interesting that while everyone is still warning of us falling off a deflationary cliff, actual prices have risen at an annualized rate of 4.2% since December.

16 Jun 2009

Another Testimonial

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George Smith adds his voice to the growing chorus:

There are several excellent books on the Great Depression, but Robert P. Murphy’s guide is the most accessible and rebuts all the politically correct falsehoods about that era — the Fed, Hoover, Roosevelt, and World War II. With Obama on track to repeat FDR on a grand scale, Murphy’s book becomes a must-read intellectual survival manual.

16 Jun 2009

Scott Sumner Reluctantly Agrees With Krugman on Inflation

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This is a long but “neat” post by Scott Sumner. I still think he is basically wrong, but it’s always refreshing to see someone who admits when his “enemies” are right (in his mind). He also points out an odd inconsistency in Krugman’s writings:

In my view Krugman is mixing science and advocacy in a very misleading and inappropriate way. When he evaluates central banks, he seems to take a deterministic, scientific, and clinical attitude, as if studying a colony of ants….Central banks are assumed to be impervious to public pressure. On the other hand his stance toward fiscal policy is much more normative. Now he is an advocate, he’s part of the game, passionately calling for more stimulus. But I don’t see how this makes any sense. If we are going to take a deterministic view of things, it seems likely that Congress is also far too conservative to implement the sort of spending that Krugman advocates. Indeed, hasn’t that already been shown? Couldn’t one just as reasonably say: “Since Congress clearly won’t do what it takes, we must fall back on the Fed as our only hope for the sort of stimulus that the economy needs.”

Krugman is 100 times more influential than I am. With his NYT column, and his ideological allies in the White House, he is arguably the most influential economic pundit in the world. And he is also known (for better or worse) for his moral outrage over perceived injustices. In many cases I think he goes a bit over the top. But here it is just the opposite. I am outraged over Krugman’s lack of outrage over current monetary policy.

16 Jun 2009


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* Von Pepe sends me this 2002 Krugman piece (via Arnold Kling). The money quote:

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.

I realize there’s a danger of playing “gotcha!” with the Nobel (Memorial) laureate. Fortunately only Silas Barta combs through my past writings with the same effort and cynicism, and I’m not sure I like it.

But come ON. A bunch of us have been saying for more than a year that Krugman’s prescription for fixing the current mess, is exactly what caused the housing bubble and would only cause another crisis down the road. Doesn’t the quotation above seal the deal? What more do we need? Oh wait, here’s more evidence that, despite all the formal models with their bells and whistles, Krugman has the crudest of business cycle theories. At the end of his 2002 article he says: “But wishful thinking aside, I just don’t understand the grounds for optimism. Who, exactly, is about to start spending a lot more?”

Incidentally, this is pretty weird, now that we have Krugman in 2002 predicting the housing bubble, but not really. The only thing like it is Tyler Cowen in early 2005 predicting the housing crash from an Austrian point of view, but not really.

* Here’s an odd article from Charles Hugh Smith (HT2 Tim Swanson) that says: “The idea that the super-wealthy and super-influential folks who own the politicos will benefit from inflation does not hold water.” Right, they don’t benefit from the price inflation per se, but they do benefit from the trillions in bailouts financed by the Fed and Treasury. Be careful: I think Smith just “proved” that Caesar would never have debased the coinage.

* Tyler Cowen responds to my charge the he flipped on carbon taxes. If you go read the post, maybe you can help me out: Is Tyler saying I need to lose weight?

16 Jun 2009

Black Swan Hyperinflation Fund

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Von Pepe passes along this story:

36 South Investment Managers Ltd., whose Black Swan Fund gained 234 percent in 2008, is raising money for a new hedge fund, betting that government efforts to pump money into economies could result in hyperinflation.

The Excelsior Fund targets returns that will be five times the average annual rate of inflation of the Group of Five economies — France, Germany, Japan, the U.K. and the U.S. — should the rate exceed 5 percent, Jerry Haworth, co-founder of the firm, said yesterday. Raising $100 million for the fund would be a “good” amount, he said.

Most investors are underestimating the risk of inflation, Haworth said. Consumer prices in the U.S., the world’s largest economy, are set to rise 1.7 percent next year, following a 0.6 percent decline this year, according to the median of 70 economists surveyed by Bloomberg.

“There is certainly talk about inflation but people might think of inflation at 5 percent or 6 percent,” Zimbabwean-born Haworth said. “We’re talking 5, 10, 15, 20 percent or more.”

36 South’s Excelsior Fund will buy long-dated options it considers cheap and that “stand a good chance of outperforming in an inflationary environment,” Haworth said. Options are contracts to buy or sell a security by a certain date at a specific price.

The fund will wager on an increase in commodity and equity prices, bond yields and increased currency volatility.

16 Jun 2009

Krugman’s Record on Inflation Forecasts

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Bob Roddis sent me this 2004 National Review piece in which Donald Luskin tears Krugman a new one, assuming the items are authentic. I don’t have the time right now, but at some point I may discuss the differing inflation forecasts of monetarists and supply-siders in the 1980s. Specifically, the ratio of M1/real GDP rose after the Reagan tax cuts, leading people like Milton Friedman to warn of impending price inflation. That didn’t happen, though, because (in the explanation of Arthur Laffer) the Reagan tax cuts and deregulations increased the demand for dollar-denominated assets.

Anyway, it’s not such a big deal if Krugman put his name on a document that misfired in predicting big inflation. (I better not be too harsh, since I could very well be in the same boat three years from now!) After all, I think Summers was his superior, and maybe Krugman just went along with it.

But then he certainly had no business later on, patting himself on the back:

These days [in 2004], however, Krugman flat out lies about his inflation-forecasting record. Instead of admitting he got it wrong, in his New York Times column last Friday, he bragged that the collapse of inflation in the 1980s “played out just as ‘left-wing Keynesian economics’ predicted.”