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.)

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