Your article here doubles as a response to Sumner and Beckworth on why “Fed affected” historical data show very strong correlation between NGDP and aggregate profitability/employment.
I still maintain that we need to emphasize more than we do the importance of economic calculation via free market prices and its impossibility without them. We need to especially emphasize the inherent distortions IN PRICES caused by diluted funny money. Everything flows from that and it is clear that NO critic of the Austrian School seems to understand that.
Also, while interest rates are the probably the most important price, so are anticipated prices for the end products of capital and long term investments. Funny money is going to make people believe that there is more wealth out there to buy the end products than there really is.
I refuse to employ Keynesian terms such as “demand” and “aggregate demand”. When people find themselves much poorer than they previously understood thanks to the distortions caused by diluted funny money, such a situation can always be described as a problem of “demand”. When housing crashed, it was caused by a lack of “demand” for overpriced houses. So what? When I see alleged problems with “demand”, I say let’s stop and restart from the beginning. People are discovering that they are poorer due to prior Keynesian policies. If people want to have more “demand”, they need to stop spending and save more. Regarding “recalculation”, people won’t know what anything is worth until they start buying, selling and haggling.
The Keynesians try to solve problems that don’t exist with “solutions” that are the problem itself.
Finally, I cannot understand how any event triggered by the housing bubble and crash is in any way useful as an argument against basic Austrian School concepts.
Well said. For similar reasons, a big red flag goes up for me whenever someone talks about how we need to make sure that money gets to people “more likely to spend it”. No, if your understanding of the “economy” implies that you need people to spend more than they currently are, then you have truly lost sight of the purpose of economics. Spending is only good when people _want_ to spend money. It’s not good when that spending only exists because people have been manipulated to do it so as to pump up historically-useful metrics.
As I consisely put it, “Spending is not good. Good spending is good.” (And they say we can’t learn from tautologies!)
The whole point of the idea of effective demand is that people want to spend but don’t have the resources to do it. If nobody wants to spend, you’re right – artificially creating demand is going to be distortionary. But that’s not what the argument usually is (at least when the argument is made well).
@Daniel_Kuehn: Could you describe for me _any_ situation where this doesn’t hold: “people want to spend but don’t have the resources to do it”? I thought that was the problem of scarcity.
Yes, we all would love to have infinite money and acquire infinite things. But:
– That does not help to distinguish one situation from another,
– It is not a justification for satiating that desire for more money, and
– It does nothing to rediscover the purpose of an economic theory so lost that it has to care whether new money will be spent.
But by all means, point me to these top quality arguments for why the “economy”, in a sense we actually care about, crucially requires a steadily increasing aggregate total of money-unit transfers (NGDP). Because every time I see an argument to this effect, it’s referring to an economy I want nothing to do with.
If “effective demand” does not arise from one’s own work and savings, it must have arisen from someone else’s work and savings and it must have been seized from the second person by a SWAT team to give to the first. If that is done purely by taxation, the voters would revolt. It’s done via the dilution of funny money, it is done that way in order to make the process of wealth shifting obscure to the average voter. In any event, such “demand” is artificial. However, wealth shifting through taxation probably causes fewer problems of economic calculation.
The purpose of Keynesian jargon is to obscure the immoral wealth shifting that is the basis for all Keynesian policy and to make such immoral activity appear morally neutral and “scientific”. And too complicated for the average person to understand.
No offense but, in that picture of you that appears in all Mises articles, you look like the devil (or at least like an evil Peter Griffin). Please change it…
I appreciate you addressing the issue about “capital consumption”. Cowen, and to a lesser degree Krugman, did raise what I thought was a very valid point (that monetary policy increases capital investment). Please consider an elaborated explanation of this for a future article, i.e. how capital investment can be increasing and misallocating at the same time.
“This is very important, because it was Krugman who notoriously advocated (in 2002) the creation of a housing bubble ”
He was not advocating a bubble. He was agreeing with Paul McCulley’s prediction that Greenspan might see a bubble and let it grow like he did the tech bubble. It was not advocacy. Check the context and read the McCully article Krugman was talking about if you think it was bubble advocacy. He was being very critical of bubbles.
“There is room for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing (just like he denied belatedly attacking the NASDAQ bubble)”.
If you still don’t find the article convincing, take a look at what Krugman wrote only two weeks later long before any silly accusations of bubble advocacy. (guess why this didn’t make the list of supposedly damning Krugman quotes)
“Back when I first got professionally obsessed with Japan’s problems, around four years ago, I made myself a mental checklist of reasons that Japan’s decade of stagnation could not happen to the United States. It went like this:
1. The Fed has plenty of room to cut interest rates, which should be enough to deal with any eventuality.
2. The U.S. long-term budget position is very strong, so there’s plenty of room for fiscal stimulus in the unlikely event interest rate cuts aren’t enough.
3. We don’t have to worry about an Asian-style loss of confidence in our business sector, because we have excellent corporate governance.
4. We may have a stock bubble, but we don’t have a real estate bubble.
I’ve now had to strike the first three items off my list, and I’m getting worried about the fourth.
More and more people are using the B-word about the housing market. A recent analysis by Dean Baker, of the Center for Economic Policy Research, makes a particularly compelling case for a housing bubble. House prices have run well ahead of rents, suggesting that people are now buying houses for speculation rather than merely for shelter. And the explanations one hears for those high prices sound more and more like the rationalizations one heard for Nasdaq 5,000.”
DJ, I will try to come back to this, but explain to me the 2006 quote. Krugman explicitly says, in 2006 in response to a reader’s question, that Greenspan did the right thing “within limits” or something like that.
It seems to me that Krugman always engages in double-talk and plausible deniability. That’s the purpose of “As McCulley remarked….” (“Hey, he said it, not me! I never said it!”).
Krugman’s philosophy is clear enough:
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.
Even in 2006, Krugman was saying we needed low interest rates WITH WARNINGS.
Perhaps he did not mean precisely that he wanted a housing BUBBLE (one that would invariably collapse, even in Krugmanland), but he sure wanted low interest rates to pump up the housing market as did McCulley. I fail to see how splitting those hairs helps his cause.
Also, is there any evidence Krugman understands the Austrian concept of economic calculation? Or that any Austrian critic does?
“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.”
BREAKING NEWS: A KEYNESIAN WANTS MORE AGGREGATE SPENDING.
Interest rates will promote spending whether it be from housing OR OTHER DURABLE GOODS, bubble or no bubble. I see nothing wrong with what Krugman said.
“Yes, McCulley wanted a bubble.”
Wanting easier monetary policy does not mean you wanting a bubble. See his article here.
“The Fed should not use the macro tool of the Fed funds rate to deal with the micro problem of potential bubbles (“excessive risk taking”!) in selected asset markets. That’s why I was so troubled to see the FOMC – or at least “some” of its participants – talking openly in the December 14th minutes about a putative need to get the Fed funds rate up, so as to unwind whiffs of irrational exuberance, borne of a “prolonged period of policy accommodation.”
Accordingly, my quarrel with him was that hikes in the Fed funds rate until tech stocks cried uncle was equivalent to “rying to get the attention of gluttons by starving anorexics. It’s bad macroeconomic policy, and it’s also morally wrong.
What we do know is that Mr. Greenspan, unlike Mr. Bernanke, has no taste whatsoever for applying micro regulatory solutions to micro bubble problems.
Or to return to an analogy I used last summer, if Mr. Greenspan were a bartender with one rowdy drunk:
He would double the price of beer for all, in an effort to bankrupt the drunk more quickly, rather than simply cut off the drunk, letting the decent folk continue to act decently at an unchanged price.
I firmly believe that the welfare-maximizing policy for society would be to cut off the drunk. But I don’t run America’s monetary policy. Mr. Greenspan is the monopolist bartender, not me. “
Immediately following the “bubble” quote, McCulley stated:
Post Bubble Disorder in America is actually a case of the Paradox of Thrift. And it ain’t all that amenable to the cure of monetary reflation. Not that I’m against monetary reflation. Indeed, I frequently comment ‘round here, and only partly tongue in cheek, that if the central bank prints enough twenties, everything will go to par (and if it doesn’t, that’s prima facie evidence that the central bank ain’t printing enough twenties!).
“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?”
I’ve always favored the let-bygones-be-bygones view over the crime-and-punishment view. That is, I’ve always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. But I had to face the fact that speculative bubbles usually are followed by recessions. My excuse has been that this was because the policy makers moved too slowly — that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum. That was why I, like many others, was frustrated at the smallish cut at the last Federal Open Market Committee meeting: I was pretty sure that Alan Greenspan had the tools to prevent a disastrous recession, but worried that he might be getting behind the curve.
However, let’s give credit where credit is due: Mr. Greenspan has cut rates since then. And while some of us may have been urging him to move even faster, the Fed’s four interest-rate cuts since the slowdown became apparent represent an unusually aggressive response by historical standards. It’s still not clear that Mr. Greenspan has caught up with the curve — let’s have at least one more rate cut, please — but the interest-rate cuts do, cross your fingers, seem to be having an effect.
If we succeed in avoiding recession, this will mark a big win for let- bygones-be-bygones, and a big loss for crime-and-punishment. And that will be very good news not just for this business cycle, but for business cycles to come.
“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”
“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.”
“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.
“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”
“To be honest, a new bubble now would help us out a lot even if we paid for it later. This is a really good time for a bubble…”
“There was a headline in a satirical newspaper in the US last summer that said: “The nation demands a new bubble to invest in” And that’s pretty much right.”
Colonel Freedom,
Can you get a type-out of the English translation of the good part in the Spanish video? I just amended Krugman’s page in the Mises wiki with every housing bubble quote that I had saved in my own clipsheet. This video would be a great add.
Also Bob Roddis, if you read this, I seem to remember you posting some Krugman housing bubble quotes that I hadn’t seen before – Q&A with his readers. If you can post the link(s) here I would appreciate it.
I’ve been looking for an English transcript on that last one, but all I have is the video.
If you turn the volume up, and you really pay attention to Krugman’s voice and ignore everything else, you can eventually make it out.
I can also tell you that I had a conversation about this video some time ago with a blogger and he just so happened to have a Spanish speaking wife, and she was kind enough to translate it for us, and the translation ended up being almost identical to what it written above.
Sorry I couldn’t be of more help on that last one. It’s the juiciest quote!
Keep in mind that a he’s a popular writer that writes for a general audience with no econ background. He tends to oversimplify for the sake of his readers.
“DJ, I will try to come back to this, but explain to me the 2006 quote. Krugman explicitly says, in 2006 in response to a reader’s question, that Greenspan did the right thing “within limits” or something like that.”
DJ, but if you give me as much leeway in parsing Scott’s position as he had to take with Krugman’s, Scott is saying: “We need a housing bubble.”
I mean, Scott doesn’t even believe in bubbles, so of course he can’t get mad at Krugman for advocating one. If I said Greenspan needs to create a tooth fairy, nobody would blame me.
” leeway in parsing Scott’s position as he had to take with Krugman’s,”
I don’t think much leeyway is needed. When Krugman said, “So within limits he may have done the right thing,” Krugman was responding to this question.
“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?”
Krugman is basically agreeing with a simplified version of Scott’s post. It doesn’t seem far fetched to me.
If you think it’s okay to ignore subtleties and simplifications, I could just as easily compile a long list of Austrians quotes saying that a a recession is inevitable, necessary, and favorable. The essence of Austrians economics would be “Recessions are awesome” If you want to go through that route, Kruman’s “hangover theory” explanation of Austrian economics is perfectly correct then.
You are ignoring what Krugman is actually saying, and instead trying to rationalize and interpret it so as to avoid his statements being as incriminating as they clearly are.
There are countless interviews, quotes, and articles that show Krugman to be fully supportive of a housing bubble. Krugman just didn’t know how terrible it would turn out to be. He thought a housing boom would just smooth out the “slump in investment spending” that occurred 2000-2001. It was only after he thought the housing bubble got out of hand during 2005-2006 that he “warned” his readers about it.
If I advocated for the punch bowl to be spiked by the host of a party, because I think people should get somewhat drunk, in order to alleviate the party goers hangover from a party they went to the night before, but then I realize after some major partying that the host put in “too much” vodka, and so I “warn” him that the party goers “may be getting too drunk”, but I say nothing else, that is, I do not say to the host to cease spiking the punch bowl, and I have always said that “the drunks can pay for it later, but right now, they need to be drunk to alleviate the hangover”, and I have never EVER advocated for full sobriety, because I am dead set against people “hoarding” their pee, because the pee must flow if the party is going to operate smoothly, then would it make ANY SENSE to then listen to people try to defend me if the party gets out of hand and the house is destroyed?
That I am not AT ALL intellectually in favor of what happened in any way, that is, I am really celibate Muslim who thinks drinking is a sin, so don’t attack me because what happened is not at all what I advocated for?
Krugman did not intend to say he supported unsustainable bubbles. He did mean to say exactly what that questioner asked: “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”.
That’s the problem with Krugman and Keynesians of all stripes and parties. Booms engineered by diluted funny money are not sustainable and must lead to tragedy and despair. If you don’t see that, you are an economics-denier.
Let’s examine some words of wisdom from Mr. McCulley:
Fiscal deficits are not crowding out private sector borrowing because the private sector doesn’t want to borrow. Rather, fiscal deficits are facilitating the private sector’s desire to save more, delevering their balance sheets. Remember, the government sector’s liability is the private sector’s asset! [!!!!!!!!!!!!]
But, you retort, the private sector is ultimately on the hook for the government’s liabilities, so how can those liabilities be considered the private sector’s asset? Simple: They can be sold for hard cold cash. To be sure, someday the government’s debt must be rolled over, or retired. But in real time, government securities are assets of the private sector (or the foreign sector). And for a fiat currency country, there is no reason to think that the debt cannot be rolled over, as such countries have a technology called a money printing press.
Is the point about durable goods suffering especially during recessions that foreign to New Keynesians/Classicals? I thought the Austrian point was not about durability (a purely demand-side perspective) but how it fits in the structure of production.
Keynes became the most famous economist of the 20th century and the guru-crank whose work has inspired thousands of failed economic experiments and continues to inspire them today. He is the Svengali-like figure who implausibly convinced the world that saving is bad, inflation cures unemployment, investment can and should be socialized, consumers are fools whose interests should be dismissed, and capital can be made non-scarce by driving interest rates to zero – thereby turning the hard work of many hundreds of years by economists on its head.
Keynes had every privilege in life, and all the power and influence that an intellectual could have, and he used it all irresponsibly in service to the State.
Your article here doubles as a response to Sumner and Beckworth on why “Fed affected” historical data show very strong correlation between NGDP and aggregate profitability/employment.
Loose thoughts:
I still maintain that we need to emphasize more than we do the importance of economic calculation via free market prices and its impossibility without them. We need to especially emphasize the inherent distortions IN PRICES caused by diluted funny money. Everything flows from that and it is clear that NO critic of the Austrian School seems to understand that.
Also, while interest rates are the probably the most important price, so are anticipated prices for the end products of capital and long term investments. Funny money is going to make people believe that there is more wealth out there to buy the end products than there really is.
I refuse to employ Keynesian terms such as “demand” and “aggregate demand”. When people find themselves much poorer than they previously understood thanks to the distortions caused by diluted funny money, such a situation can always be described as a problem of “demand”. When housing crashed, it was caused by a lack of “demand” for overpriced houses. So what? When I see alleged problems with “demand”, I say let’s stop and restart from the beginning. People are discovering that they are poorer due to prior Keynesian policies. If people want to have more “demand”, they need to stop spending and save more. Regarding “recalculation”, people won’t know what anything is worth until they start buying, selling and haggling.
The Keynesians try to solve problems that don’t exist with “solutions” that are the problem itself.
Finally, I cannot understand how any event triggered by the housing bubble and crash is in any way useful as an argument against basic Austrian School concepts.
Well said. For similar reasons, a big red flag goes up for me whenever someone talks about how we need to make sure that money gets to people “more likely to spend it”. No, if your understanding of the “economy” implies that you need people to spend more than they currently are, then you have truly lost sight of the purpose of economics. Spending is only good when people _want_ to spend money. It’s not good when that spending only exists because people have been manipulated to do it so as to pump up historically-useful metrics.
As I consisely put it, “Spending is not good. Good spending is good.” (And they say we can’t learn from tautologies!)
The whole point of the idea of effective demand is that people want to spend but don’t have the resources to do it. If nobody wants to spend, you’re right – artificially creating demand is going to be distortionary. But that’s not what the argument usually is (at least when the argument is made well).
@Daniel_Kuehn: Could you describe for me _any_ situation where this doesn’t hold: “people want to spend but don’t have the resources to do it”? I thought that was the problem of scarcity.
Yes, we all would love to have infinite money and acquire infinite things. But:
– That does not help to distinguish one situation from another,
– It is not a justification for satiating that desire for more money, and
– It does nothing to rediscover the purpose of an economic theory so lost that it has to care whether new money will be spent.
But by all means, point me to these top quality arguments for why the “economy”, in a sense we actually care about, crucially requires a steadily increasing aggregate total of money-unit transfers (NGDP). Because every time I see an argument to this effect, it’s referring to an economy I want nothing to do with.
If “effective demand” does not arise from one’s own work and savings, it must have arisen from someone else’s work and savings and it must have been seized from the second person by a SWAT team to give to the first. If that is done purely by taxation, the voters would revolt. It’s done via the dilution of funny money, it is done that way in order to make the process of wealth shifting obscure to the average voter. In any event, such “demand” is artificial. However, wealth shifting through taxation probably causes fewer problems of economic calculation.
The purpose of Keynesian jargon is to obscure the immoral wealth shifting that is the basis for all Keynesian policy and to make such immoral activity appear morally neutral and “scientific”. And too complicated for the average person to understand.
Ah yes – how soon I forget. I advocate theft and immorality by SWAT team… thanks Bob.
No offense but, in that picture of you that appears in all Mises articles, you look like the devil (or at least like an evil Peter Griffin). Please change it…
I appreciate you addressing the issue about “capital consumption”. Cowen, and to a lesser degree Krugman, did raise what I thought was a very valid point (that monetary policy increases capital investment). Please consider an elaborated explanation of this for a future article, i.e. how capital investment can be increasing and misallocating at the same time.
Yeah I’ll try to think of a more complicated thought experiment with actual numbers. I.e. take the sushi model up a notch.
You should call Emeril Lagasse.
BAM!
“This is very important, because it was Krugman who notoriously advocated (in 2002) the creation of a housing bubble ”
He was not advocating a bubble. He was agreeing with Paul McCulley’s prediction that Greenspan might see a bubble and let it grow like he did the tech bubble. It was not advocacy. Check the context and read the McCully article Krugman was talking about if you think it was bubble advocacy. He was being very critical of bubbles.
“There is room for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing (just like he denied belatedly attacking the NASDAQ bubble)”.
http://www.pimco.com/Pages/FF_07_2001.aspx
If you still don’t find the article convincing, take a look at what Krugman wrote only two weeks later long before any silly accusations of bubble advocacy. (guess why this didn’t make the list of supposedly damning Krugman quotes)
“Back when I first got professionally obsessed with Japan’s problems, around four years ago, I made myself a mental checklist of reasons that Japan’s decade of stagnation could not happen to the United States. It went like this:
1. The Fed has plenty of room to cut interest rates, which should be enough to deal with any eventuality.
2. The U.S. long-term budget position is very strong, so there’s plenty of room for fiscal stimulus in the unlikely event interest rate cuts aren’t enough.
3. We don’t have to worry about an Asian-style loss of confidence in our business sector, because we have excellent corporate governance.
4. We may have a stock bubble, but we don’t have a real estate bubble.
I’ve now had to strike the first three items off my list, and I’m getting worried about the fourth.
More and more people are using the B-word about the housing market. A recent analysis by Dean Baker, of the Center for Economic Policy Research, makes a particularly compelling case for a housing bubble. House prices have run well ahead of rents, suggesting that people are now buying houses for speculation rather than merely for shelter. And the explanations one hears for those high prices sound more and more like the rationalizations one heard for Nasdaq 5,000.”
http://www.nytimes.com/2002/08/16/opinion/mind-the-gap.html?src=pm
Does it sound like he wanted a bubble? Sounds awfully prophetic more than anything.
DJ, I will try to come back to this, but explain to me the 2006 quote. Krugman explicitly says, in 2006 in response to a reader’s question, that Greenspan did the right thing “within limits” or something like that.
It seems to me that Krugman always engages in double-talk and plausible deniability. That’s the purpose of “As McCulley remarked….” (“Hey, he said it, not me! I never said it!”).
Krugman’s philosophy is clear enough:
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.
http://blog.mises.org/10153/krugman-did-cause-the-housing-bubble/
Even in 2006, Krugman was saying we needed low interest rates WITH WARNINGS.
Perhaps he did not mean precisely that he wanted a housing BUBBLE (one that would invariably collapse, even in Krugmanland), but he sure wanted low interest rates to pump up the housing market as did McCulley. I fail to see how splitting those hairs helps his cause.
Also, is there any evidence Krugman understands the Austrian concept of economic calculation? Or that any Austrian critic does?
“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.”
BREAKING NEWS: A KEYNESIAN WANTS MORE AGGREGATE SPENDING.
Interest rates will promote spending whether it be from housing OR OTHER DURABLE GOODS, bubble or no bubble. I see nothing wrong with what Krugman said.
“Yes, McCulley wanted a bubble.”
Wanting easier monetary policy does not mean you wanting a bubble. See his article here.
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2005/01/24/shades-of-irrational-exuberance.aspx
“The Fed should not use the macro tool of the Fed funds rate to deal with the micro problem of potential bubbles (“excessive risk taking”!) in selected asset markets. That’s why I was so troubled to see the FOMC – or at least “some” of its participants – talking openly in the December 14th minutes about a putative need to get the Fed funds rate up, so as to unwind whiffs of irrational exuberance, borne of a “prolonged period of policy accommodation.”
Accordingly, my quarrel with him was that hikes in the Fed funds rate until tech stocks cried uncle was equivalent to “rying to get the attention of gluttons by starving anorexics. It’s bad macroeconomic policy, and it’s also morally wrong.
What we do know is that Mr. Greenspan, unlike Mr. Bernanke, has no taste whatsoever for applying micro regulatory solutions to micro bubble problems.
Or to return to an analogy I used last summer, if Mr. Greenspan were a bartender with one rowdy drunk:
He would double the price of beer for all, in an effort to bankrupt the drunk more quickly, rather than simply cut off the drunk, letting the decent folk continue to act decently at an unchanged price.
I firmly believe that the welfare-maximizing policy for society would be to cut off the drunk. But I don’t run America’s monetary policy. Mr. Greenspan is the monopolist bartender, not me. “
Does it sound like he wanted a bubble?
Immediately following the “bubble” quote, McCulley stated:
Post Bubble Disorder in America is actually a case of the Paradox of Thrift. And it ain’t all that amenable to the cure of monetary reflation. Not that I’m against monetary reflation. Indeed, I frequently comment ‘round here, and only partly tongue in cheek, that if the central bank prints enough twenties, everything will go to par (and if it doesn’t, that’s prima facie evidence that the central bank ain’t printing enough twenties!).
http://www.pimco.com/Pages/FF_07_2001.aspx
Yes, McCulley wanted a bubble.
German Interview, undated
http://www.pkarchive.org/global/welt.html
“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?”
May 2, 2001
http://www.pkarchive.org/column/5201.html
I’ve always favored the let-bygones-be-bygones view over the crime-and-punishment view. That is, I’ve always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. But I had to face the fact that speculative bubbles usually are followed by recessions. My excuse has been that this was because the policy makers moved too slowly — that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum. That was why I, like many others, was frustrated at the smallish cut at the last Federal Open Market Committee meeting: I was pretty sure that Alan Greenspan had the tools to prevent a disastrous recession, but worried that he might be getting behind the curve.
However, let’s give credit where credit is due: Mr. Greenspan has cut rates since then. And while some of us may have been urging him to move even faster, the Fed’s four interest-rate cuts since the slowdown became apparent represent an unusually aggressive response by historical standards. It’s still not clear that Mr. Greenspan has caught up with the curve — let’s have at least one more rate cut, please — but the interest-rate cuts do, cross your fingers, seem to be having an effect.
If we succeed in avoiding recession, this will mark a big win for let- bygones-be-bygones, and a big loss for crime-and-punishment. And that will be very good news not just for this business cycle, but for business cycles to come.
July 18, 2001
http://www.pkarchive.org/economy/ML071801.html
“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 8^th 2001
http://www.pkarchive.org/economy/ML082201.html
“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
http://www.pkarchive.org/column/81401.html
“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
http://www.pkarchive.org/economy/ML071801.html
“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”
March 2009:
http://www.rtve.es/mediateca/videos/20090502/innovar-para-salir-crisis-informe-semanal/495712.shtml
“To be honest, a new bubble now would help us out a lot even if we paid for it later. This is a really good time for a bubble…”
“There was a headline in a satirical newspaper in the US last summer that said: “The nation demands a new bubble to invest in” And that’s pretty much right.”
Holy cow Freedom, you just got promoted to Colonel. Did you assemble this yourself?
Not from scratch, but from secondary research.
Colonel Freedom,
Can you get a type-out of the English translation of the good part in the Spanish video? I just amended Krugman’s page in the Mises wiki with every housing bubble quote that I had saved in my own clipsheet. This video would be a great add.
Also Bob Roddis, if you read this, I seem to remember you posting some Krugman housing bubble quotes that I hadn’t seen before – Q&A with his readers. If you can post the link(s) here I would appreciate it.
For the last one, is there an English transcript? How can we verify that?
I’ve been looking for an English transcript on that last one, but all I have is the video.
If you turn the volume up, and you really pay attention to Krugman’s voice and ignore everything else, you can eventually make it out.
I can also tell you that I had a conversation about this video some time ago with a blogger and he just so happened to have a Spanish speaking wife, and she was kind enough to translate it for us, and the translation ended up being almost identical to what it written above.
Sorry I couldn’t be of more help on that last one. It’s the juiciest quote!
The juicy bit is at the 35 second mark into the interview, right after the 2:50 mark in the video.
It sounds like he’s making an argument similar to the Scott Sumner defense.
http://www.themoneyillusion.com/?p=1620
Keep in mind that a he’s a popular writer that writes for a general audience with no econ background. He tends to oversimplify for the sake of his readers.
Meant to reply to
“DJ, I will try to come back to this, but explain to me the 2006 quote. Krugman explicitly says, in 2006 in response to a reader’s question, that Greenspan did the right thing “within limits” or something like that.”
DJ, but if you give me as much leeway in parsing Scott’s position as he had to take with Krugman’s, Scott is saying: “We need a housing bubble.”
I mean, Scott doesn’t even believe in bubbles, so of course he can’t get mad at Krugman for advocating one. If I said Greenspan needs to create a tooth fairy, nobody would blame me.
” leeway in parsing Scott’s position as he had to take with Krugman’s,”
I don’t think much leeyway is needed. When Krugman said, “So within limits he may have done the right thing,” Krugman was responding to this question.
“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?”
Krugman is basically agreeing with a simplified version of Scott’s post. It doesn’t seem far fetched to me.
If you think it’s okay to ignore subtleties and simplifications, I could just as easily compile a long list of Austrians quotes saying that a a recession is inevitable, necessary, and favorable. The essence of Austrians economics would be “Recessions are awesome” If you want to go through that route, Kruman’s “hangover theory” explanation of Austrian economics is perfectly correct then.
DJ, this is all very unconvincing.
You are ignoring what Krugman is actually saying, and instead trying to rationalize and interpret it so as to avoid his statements being as incriminating as they clearly are.
There are countless interviews, quotes, and articles that show Krugman to be fully supportive of a housing bubble. Krugman just didn’t know how terrible it would turn out to be. He thought a housing boom would just smooth out the “slump in investment spending” that occurred 2000-2001. It was only after he thought the housing bubble got out of hand during 2005-2006 that he “warned” his readers about it.
If I advocated for the punch bowl to be spiked by the host of a party, because I think people should get somewhat drunk, in order to alleviate the party goers hangover from a party they went to the night before, but then I realize after some major partying that the host put in “too much” vodka, and so I “warn” him that the party goers “may be getting too drunk”, but I say nothing else, that is, I do not say to the host to cease spiking the punch bowl, and I have always said that “the drunks can pay for it later, but right now, they need to be drunk to alleviate the hangover”, and I have never EVER advocated for full sobriety, because I am dead set against people “hoarding” their pee, because the pee must flow if the party is going to operate smoothly, then would it make ANY SENSE to then listen to people try to defend me if the party gets out of hand and the house is destroyed?
That I am not AT ALL intellectually in favor of what happened in any way, that is, I am really celibate Muslim who thinks drinking is a sin, so don’t attack me because what happened is not at all what I advocated for?
Krugman did not intend to say he supported unsustainable bubbles. He did mean to say exactly what that questioner asked: “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”.
That’s the problem with Krugman and Keynesians of all stripes and parties. Booms engineered by diluted funny money are not sustainable and must lead to tragedy and despair. If you don’t see that, you are an economics-denier.
Let’s examine some words of wisdom from Mr. McCulley:
Fiscal deficits are not crowding out private sector borrowing because the private sector doesn’t want to borrow. Rather, fiscal deficits are facilitating the private sector’s desire to save more, delevering their balance sheets. Remember, the government sector’s liability is the private sector’s asset! [!!!!!!!!!!!!]
But, you retort, the private sector is ultimately on the hook for the government’s liabilities, so how can those liabilities be considered the private sector’s asset? Simple: They can be sold for hard cold cash. To be sure, someday the government’s debt must be rolled over, or retired. But in real time, government securities are assets of the private sector (or the foreign sector). And for a fiat currency country, there is no reason to think that the debt cannot be rolled over, as such countries have a technology called a money printing press.
http://www.pimco.com/Pages/GCBFocusJuly2010FactsontheGround.aspx
Bob, you’re now on Zerohedge:
http://www.zerohedge.com/article/robert-murphys-retort-paul-krugman-austrian-business-cycle-theory
Is the point about durable goods suffering especially during recessions that foreign to New Keynesians/Classicals? I thought the Austrian point was not about durability (a purely demand-side perspective) but how it fits in the structure of production.
Speak of the devil.
Keynes became the most famous economist of the 20th century and the guru-crank whose work has inspired thousands of failed economic experiments and continues to inspire them today. He is the Svengali-like figure who implausibly convinced the world that saving is bad, inflation cures unemployment, investment can and should be socialized, consumers are fools whose interests should be dismissed, and capital can be made non-scarce by driving interest rates to zero – thereby turning the hard work of many hundreds of years by economists on its head.
Keynes had every privilege in life, and all the power and influence that an intellectual could have, and he used it all irresponsibly in service to the State.
http://www.lewrockwell.com/rockwell/hazlitt-and-keynes-167.html