26 Dec 2009

Sometimes You Have to Salute Krugman’s Audacity (or Maybe Just Sloppiness)

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This guy is really something else. In this post, Krugman matter of factly said that he had predicted the housing bubble, in contrast to Bernanke. Apparently some people demanded that Krugman give examples of where exactly he warned that housing prices were too high, because in a subsequent post Krugman wrote:

3. Some commenters ask for proof that I warned early about the housing bubble. As it happens, I ran across this interesting piece from 2005, denouncing the lying liberal media — mainly me — for asserting that there was a bubble in housing.

Now right away my Spidey sense was tingling; Krugman didn’t actually link to his article, but to someone else talking about his articles. Why not cut out the middle man, if there were a smoking gun article?

If we go to the “piece from 2005,” we see that yes indeed, it is from a right-winger who thinks wacko liberals are complaining unfairly about home prices. Yet here’s what they say about Krugman:

Journalists have been talking about a housing bubble since 2001. On September 3 of that year, Forbes magazine warned its readers about the consequences of home equity values starting “to wobble,” while stating, “There are ominous signs that this is about to happen.” On the same day, a BusinessWeek editorial cautioned about a “double bubble” and told its readers, “A housing bubble may be developing – right behind the Nasdaq bubble.” Both indicated that such an event would be devastating to the economy.

What those reports failed to explain was that an investment bubble occurs when an asset appreciates by extraordinary percentages for a short period of time, culminating in a rapid decline that wipes away most of the gains. A perfect example is the NASDAQ stock index, which went from roughly 1,400 in October 1998 to more than 5,000 in March 2000 (a 250-percent gain in less than 18 months), only to fall back to about 1,400 by October 2001 (a 70-percent decline in about 18 months). The housing market is less liquid and prices don’t usually change quickly like stocks do.

Four of 16 media reports in 2001 that referenced a housing bubble were either written by or cited New York Times economic columnist Paul Krugman. Of particular note was a September 30 Times article by Krugman entitled “Fear Itself” where he wrote: “Housing was doing better, thanks to low interest rates, but some analysts were warning about a housing bubble – and even if they were wrong, how solid a recovery could we have from housing alone?”

Unfortunately I can’t find the particular article they are talking about; maybe someone can help me out. (I’ve check the NYT archives both by title and by searching for “Fear Itself,” and I don’t see anything close to what these people are talking about.)

However let’s look at a Krugman NYT piece from August 14, 2001 where he said:

The driving force behind the current slowdown is a plunge in business investment. It now seems clear that over the last few years businesses spent too much on equipment and software, and that they will be cautious about further spending until their excess capacity has been worked off. And the Fed cannot do much to change their minds, since equipment spending is not particularly sensitive to interest rates.

Still, as former Treasury Secretary Larry Summers says, you don’t have to refill a flat tire through the puncture. To reflate the economy, the Fed doesn’t have to restore business investment; any kind of increase in demand will do.

How might demand increase? 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. Even more important would be a turnaround in the U.S. trade balance. America’s deficit has lately been running at 4.5 percent of G.D.P., three percentage points higher than it was as recently as 1997. Reversing that trend — which would mean both exporting more and buying domestic instead of imported goods — could deliver a big boost to the economy.

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. But for the time being delusions of an instant return to prosperity stand in the way of a real economic turnaround.

Hmm that doesn’t sound exactly like he’s warning everyone of the dangers of artificially high home prices. And let’s not forget his now-notorious 2002 NYT column which even the NYT archive summarizes this way:

Paul Krugman Op-Ed column on role of American consumers who have rushed into fray, fending off recession’s worst effects time and again; suggests that recession of 2001 was not typical postwar slump but prewar-style recession, ‘morning after’ brought on by irrational exuberance; says Fed needs to fight back with soaring household spending to offset moribund business investment, for which Alan Greenspan needs to create housing bubble to replace Nasdaq bubble.

OK let’s pause in our victory lap, I’m pretty sure there are some 2005 columns where Krugman is talking about there being an ominous housing bubble. It’s late and I have to crash; I just saw these titles now as I was looking for the notorious 2002 one. If any readers find a smoking gun where Krugman clearly calls it, let me know and I’ll do a new post.

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