An Example of Krugman Pooh-Poohing Current Bubble Concerns
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.
Bob, I don’t think that Krugman is saying that central bank action is going to cause a bunch of bubbles. He just says “bubbles will happen”, not that they wouldn’t have happened without central bank action.
Keshav,
Here is the Krugman quote Bob put up in his first post on this;
This kind of fits the H.L. Mencken definition of Puritanism: “The haunting fear that someone, somewhere, may be happy.” But here’s the thing: if we really are in the Summers/Krugman/Hansen world of secular stagnation, things like this are going to happen all the time. The underlying deficiency of demand will call for pedal-to-the-medal monetary policy as a norm. But bubbles will happen — and central bankers, always looking for reasons to snatch away punch bowls, will use them as excuses to tighten.
You don’t think his “pedal to the metal” comment wrt monetary policy had anything to do with “bubbles will happen”?
“Shit [will] happen[s].”
Look at the Mencken. PK’s conceit in the essay is the central bankers are like puritans seeking excuses to deprive others.
Note to valueprax: look up conceit before you conclude I mean ego. I’m being literate and subtle, devil that I am.
Hey Ken B., guess what? I got paid on a big project today that I thought might take weeks. So I’m in a giddy mood.
In fact, I’m feeling so saucy I will respond to your OLG posts, what do you think of that? But I want you to admit right now that, no matter what I possibly say, you will NOT respond, “Holy cow, you were right all along!!”
Can we both agree that such a statement is impossible, a priori?
I don’t believe any cows are holy, so I’d say it’s a posteriori. But i promise not to use that exact phrase no matter what.
Well unless you also prove Gene is polite. Then all bets are, of course, off.
Anyway I am sincerely interested in your response.
This is a good representation of what Ken B claims Krugman is saying in this latest post:
“War is horrible. War is most often unnecessary. War results in pain and suffering. War is something to be avoided at all costs. Innocent people die.”
According to Ken B, we’re supposed to take that last sentence about innocent people dying to be an isolated argument referring not to war, but to people who die through such things as getting hit by drunk drivers in New York.
And if anyone says Krugman is referring to war with that statement, then they’re “misreading” him.
Hahahaha
Keshav is clearly correct. That’s why the bubble would be an ‘excuse’ to tighten rather than *reason* to tighten. Keshav’s reading fits the actual wording of the sentence and the trhust of Krugman,s piece. Bob’s does not fit either.
Unless Krugman believes that bubbles are a a better option than doing nothing…
Not to mention that Krugman’s comment is inconsistent from those he has made earlier, where concerns over a bubble were unfounded given modest inflation (inflation being the object of a loose monetary policy).
Actually it’s the other way around Ken B.
http://mises.org/daily/6372/
Krugman KNOWS and HAS CLAIMED that the Fed causes “booms”. He isn’t just claiming bubbles happen. He is talking specifically about central bank caused booms.
Right, Keshav and I are refuted about Krugman’s wording this week by a post from 9 months ago talking about what he said 11 years ago.
No, Krugman’s arguments 11 years ago that was subsequently reposted 9 months ago tell you what he means when he talks about “bubbles” in relation to central bank stimulus.
But yeah, let’s do what you’re doing, and take every Krugman post as its own universe, where it doesn’t matter what he says before or after a given post, because then it would be easier for you to slice, dice and chop it up to mean anything you want it to mean.
Right, Keshav and I are refuted about Krugman’s wording this week by a post from 9 months ago talking about what he said 11 years ago.
It’s amazing how low a bar Ken B. sets for Krugman, when defending him from my scurrilous charges. Ken B., if I understand you correctly, this is what you’re saying:
“No no Bob, it’s not true that Krugman used to say that the Fed isn’t causing bubbles, but now he’s saying the Fed is causing bubbles. No gotcha at all. Rather, what happened is that Krugman used to say the Fed caused bubbles, but now he’s saying it doesn’t. No gotcha at all, I can’t believe you keep accusing Krugman of flip flopping.”
I am saying “bubbles will happen” means bubbles will happen. As in happen naturally, not caused by loose money in “a Krugman world” like he expects for the next few years. So I contend you are misreading Krugman in his recent post.
I misread a recent comment that read like a parody but was meant seriously. Misreadings will happen.
You’re misreading Krugman, not Murphy. Krugman is saying that bubbles will happen because of the “pedal to the metal” policy of the Fed.
Bob,
“Krugman is admitting that textbook central bank action to fight high unemployment will yield a string of bubbles”
I don’t think that’s what he was saying. In the article you quote above he says the following:
“What is a bubble, anyway? Surprisingly, there’s no standard definition. But I’d define it as a situation in which asset prices appear to be based on implausible or inconsistent views about the future. Dot-com prices in 1999 made sense only if you believed that many companies would all turn out to be a Microsoft; housing prices in 2006 only made sense if you believed that home prices could keep rising much faster than buyers’ incomes for years to come.”
http://www.nytimes.com/2013/05/10/opinion/krugman-bernanke-blower-of-bubbles.html?_r=0
By this definition, the Fed can only cause an asset bubble if it somehow manages to get everyone involved to have “implausible or inconsistent views about the future”.
Heh, this is funny Philipe. You’re right, in the May 2013 op ed, Krugman is definitely not saying Fed action will yield a string of bubbles. That’s why his post from last week is such a shocker. (I.e. you’re looking at the wrong Krugman post for my claim.)
So are you!
No, he’s looking at the one in question. You’re looking at a non-existent post.
Bob,
I think you might be misreading Krugman on this one.
He’s not arguing that current Fed policy will cause a series of asset bubbles.
His argument seems to be that the nominal Fed Funds rate is too high to bring about the level of real investment required to attain the “natural” rate of employment.
Nonetheless there is still lots of financial capital out there which might intermittently blow up asset bubbles as people get carried away in their search for quick returns.
My interpretation of this argument is: You’re not willing to invest in a factory because you don’t see enough profitable demand for your goods in the future, so instead you gamble on stock prices or things like bitcoin, to try and make some short-term capital gains.
btw, I don’t think “pedal to the metal” means “full steam ahead”. It means you can’t do anything to make the car go any faster – you’re out of ammo, essentially.
If the car is out of gas you could push “the pedal to the metal”, but it won’t do anything to make the car move.
Krugman is saying one of the consequences of “pedal to the metal” monetary policy is that “bubbles will happen.”
This echoes his earlier statement:
“To fight this recession the Fed 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.”
INB4 It wasn’t an advocacy!!!
“Krugman is saying one of the consequences of “pedal to the metal” monetary policy is that “bubbles will happen.”
Well he didn’t actually say that.
“To fight this recession the Fed needs”
Actually he says that the required “rescue force” is “resurgent business investment”. But he doesn’t think it’s going to happen so he argues that recession is likely, and that the Fed will fail to generate growth.
“Well he didn’t actually say that.”
In the context of the large collection of his posts where he connects bubbles to the Fed, yes, he did.
“To fight this recession the Fed needs”
“Actually he says that the required “rescue force” is “resurgent business investment”.”
Did you just correct Krugman about what Krugman said?
“pedal to the metal” means “zero lower bound” in Krugman terms. It essentially means “out of ammo”. Monetarists disagree with him on this point.
“Did you just correct Krugman about what Krugman said?”
No:
“If the story of the current U.S. economy were made into a movie, it would look something like ”55 Days at Peking.” A ragtag group of ordinary people — America’s consumers — is besieged by a rampaging horde, the forces of recession. To everyone’s surprise, they have held their ground.
But they can’t hold out forever. Will the rescue force — resurgent business investment — get there in time?
But predictions of an imminent recovery in business investment keep turning out to be premature…
Will the rescuers arrive in the nick of time? Not necessarily. This movie may not be ”55 Days at Peking” after all. It may be ”A Bridge Too Far.”
““pedal to the metal” means “zero lower bound” in Krugman terms. It essentially means “out of ammo”.
Out of ammo to reduce unemployment, not out of ammo to cause bubbles.
“Did you just correct Krugman about what Krugman said?”
“No:”
“If the story of the current U.S. economy were made into a movie, it would look something like ”55 Days at Peking.”
Then how do you explain Krugman agreeing with the technical point of Paul McCulley that the Fed can succeed in creating a housing bubble to replace the Nasdaq bubble?
“not out of ammo to cause bubbles”
would you buy stocks right now? If not, why not? Do you think it is a good idea? Do you think it is too risky? Do you think the stock market is in a bubble? if you think it’s in a bubble would you still invest in it if you thought you could profit?
The answer to those questions has to do with your personal choices as an investor.
Agreed!
Those are the sorts of questions investors ask and answer every day. They don’t stop asking them because the Fed lowers the overnight rate. But sometimes people get too excited and think that gold is going to $5000/oz. Then it doesn’t happen, they lose money, and people call it a bubble.
Philippe, telling a psychologically appealing story of events in your mind is something that doesn’t describe the real world.
Bubbles are not periods where growth in the price of X isn’t as high as investors thought it was going to be.
A bubble is actually a distortion to the capital structure caused by loose money and artificially low interest rates. Another consequence of loose money is rising prices, which is why folks who focus on nominal statistics tend to connect bubbles with price trends.
I know you like to think about goldbugs losing money. I know it makes you satisfied, because it reinforces in your mind that the government is in control, and that makes you feel safe and warm, just like a mommy and daddy should. Not really interested in that to be honest.
I’m not interested in your oedipal feelings towards the state either.
“A bubble is actually a distortion to the capital structure caused by loose money and artificially low interest rates”
what because you says so?
So the price of gold went up really high because of a distortion in the capital structure and low interest rates, and then fell down because of the same distortion in the capital structure and low interest rates?
“I’m not interested in your oedipal feelings towards the state either.”
Except I am not the one disparaging others from speculating on or using paper money, if they so choose.
“A bubble is actually a distortion to the capital structure caused by loose money and artificially low interest rates”
“what because you says so?”
Yes Philippe. That is exactly what I had in mind. Things are true solely because I say they are true. There is no painstaking reasoning that went into my thoughts at all. I am a person who thinks truth is MF claims.
Wow.
Do you think maybe you could be a little more intellectual in your posts? Or did you want it to devolve into he said she said?
“So the price of gold went up really high because of a distortion in the capital structure and low interest rates, and then fell down because of the same distortion in the capital structure and low interest rates?”
No. I am saying that the paper price of gold in a fiat system cannot be an accurate measurable base for the “proper” prices of things.
“I am saying that the paper price of gold in a fiat system cannot be an accurate measurable base for the “proper” prices of things”
so you’re saying that people who trade things don’t know who to value things in terms of other things, because “paper money”.
so you’re saying that people who trade things don’t know how to value things in terms of other things, because “paper money”.
“so you’re saying that people who trade things don’t know who to value things in terms of other things, because “paper money”.”
No, that’s also not what I am saying. Even in a pure laissez-faire world, where for example gold is money, then even the hamburger price of hotdogs would be “imputed” price, not an actual price (so long as hamburgers are not exchanged directly for hotdogs).
Similarly, the paper price of gold in a paper based system can only lead to imputed prices of goods in terms of gold.
Only if gold actually money, and traded against goods, can you KNOW what the gold prices of goods would be.
Furthermore, to add insult to injury, in a paper based system, there is coercion. This coercion prevents subjective values from being manifested fully in exchanges, and as a result, the subjective values of individuals, to the extent that they can take place physically but whose exchanges are influenced by non-market paper demand, are not represented accurately by prevailing prices.
“Only if gold actually money, and traded against goods, can you KNOW what the gold prices of goods would be.”
That’s like saying that only if Faberge eggs are actually money can you really KNOW what the value of Faberge eggs is relative to other goods.
In real-world land people are capable of working these things out and they do it all the time.
“in a paper based system, there is coercion”
In any society there are rules backed up by some form of coercion. Like for example if you owe taxes you’re required to pay.
“This coercion prevents subjective values from being manifested fully in exchanges”
Not really. The main thing that stops people fully manifesting their subjective values when it comes to money is simply not having enough money.
“and as a result, the subjective values of individuals, to the extent that they can take place physically but whose exchanges are influenced by non-market paper demand, are not represented accurately by prevailing prices”
No, because people pay prices that they are willing or able to pay, and sell for prices that they are willing or able to sell for. It’s called a market.
““Only if gold actually money, and traded against goods, can you KNOW what the gold prices of goods would be.”
“That’s like saying that only if Faberge eggs are actually money can you really KNOW what the value of Faberge eggs is relative to other goods.”
No, it would be like saying only if Faberge eggs are actually money, and traded against goods, can you KNOW what the Faberge price of other goods will be.
“In real-world land people are capable of working these things out and they do it all the time.”
No, they are working out imputed prices, not actual real world prices.
In real world land, not the fairy tale unicorns and leprechauns you obviously inhabit, prices are exchange ratios, they are not calculated on paper using historical price data. What you are talking about are imputed ratios, not exchange ratios.
“in a paper based system, there is coercion”
“In any society there are rules backed up by some form of coercion.”
No wonder slavery was justified. Every country/society was doing it!
Philippe, telling me that a form of coercion exists the world over, isn’t a justification for said coercion. You might as well say that if everyone except me were enslaved, by me, then because there is no other society to compare this to, it’s therefore justified.
“Like for example if you owe taxes you’re required to pay.”
The “owe” is coercive. It isn’t voluntary. People voluntarily enter into contracts whereby they “owe” other people, but with the state, “owing” is a default obligation. That’s coercion.
“This coercion prevents subjective values from being manifested fully in exchanges”
“Not really.”
Yes really. If I print a zillion dollars in my basement, and give it to crack addicts, then the massive rise in demand for crack would not be an accurate representation of the marginal utility of crack, relative to other goods that have to be produced.
“The main thing that stops people fully manifesting their subjective values when it comes to money is simply not having enough money.”
No, that is false. Even if everyone had 10 million times the amount of money they have now, subjective values would not be fully manifested in the way I describe, and certainly not in the way you describe. For having more money will just means prices rise. and with higher prices, people are still faced with having to choose some things over other things.
“and as a result, the subjective values of individuals, to the extent that they can take place physically but whose exchanges are influenced by non-market paper demand, are not represented accurately by prevailing prices”
“No, because people pay prices that they are willing or able to pay, and sell for prices that they are willing or able to sell for. It’s called a market.”
No, because money production itself isn’t a part of the market. You can’t call trades against money a fully “market” concept.
What about these comments from PK:
“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.”
or
“To fight this recession the Fed 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.”
Putting aside for the moment whether or not these statements are “advocacies” for bubbles, it is nevertheless clear that Krugman is connecting booms and bubbles with Fed stimulus.
Major Freedom,
in your second quote Krugman isn’t actually advocating a housing bubble, he’s calling into question the Fed’s ability to do anything that will generate growth. After that paragraph he goes on to say:
“Judging by Mr. Greenspan’s remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman’s crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging.” (etc.)
Which is exactly the point of Major_Freedom’s last sentence.
It’s incredible, isn’t it. I had in my mind that if I posted those quotes, then someone might just be ignorant enough to say “It wasn’t an advocacy!” despite the CLEAR purpose of posting those quotes, which was to explicate what Krugman is talking about when he talks about “bubbles”.
So, I went out of my way to make a disclaimer, and said “Putting aside for the moment whether or not these statements are “advocacies” for bubbles…”
And yet, astoundingly, Philippe actually proves my depraved assumption correct, and totally ignores that disclaimer and does exactly what I thought only the most ignorant of people would do.
I’m in the Twilight Zone…
well no, I was just pointing out that Krugman wasn’t actually advocating a housing bubble. You said ‘put that question to one side’, but I just pointed it out anyway. You might disagree, but I think it’s reasonably clear.
Anyway, your main point is that Krugman was saying that the Fed can create “booms and bubbles”. That may be so. But as I said in my original comment above, by Krugman’s definition of a bubble:
“…the Fed can only cause an asset bubble if it somehow manages to get everyone involved to have “implausible or inconsistent views about the future”.
You keep assuming Krugman is consistent. He contradicts himself all the time, depending on whether he’s defending left wing ideology or attacking right wing ideology.
IT DOESN’T MATTER whether it was or was not an advocacy.
The point is that Krugman was agreeing with Paul McCulley’s technical point about whether or not the Fed causes bubbles.
Krugman didn’t say “Paul McCulley is wrong about the Fed’s ability to create bubbles.”
Krugman didn’t say “Paul McCulley falsely believes that everyone can somehow manage to have implausible or inconsistent views about the future.”
No, he quoted McCulley in such a way so as to agree with the technical argument McCulley made.
Do you see how whether it was an “advocacy” is totally besides the point here?
At any rate, even your point that it wasn’t an advocacy is contradicted by Krugman’s other statements, which not even his most ardent defender can spin. As late as March 2009, when he was in Spain, far away from the ears and eyes of Republican rebel scum, he said this:
“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.”
The satirical newspaper Krugman was referring to was The Onion, article here:
http://www.theonion.com/articles/recessionplagued-nation-demands-new-bubble-to-inve,2486/
What am I saying. I too am assuming PK is consistent.
Like I said. Twilight Zone.
“He contradicts himself all the time”
I think his views have changed quite a lot since 2002, he’s said so himself.
“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”
Do you have a link to that article?
http://mises.org/daily/6372/
“I think his views have changed quite a lot since 2002, he’s said so himself.”
Not about this.
Why is it I get this sinking feeling that, over the next 5 to 10 years, the global economy and financial world is going to unfold very much in line with the forecasts of many prominent libertarian and Austrian economists yet they will somehow still be ostracized and castigated as lying, racist scum and dangerous RWNJs while statists like Krugman, DeLong, and their ilk manage to swoop in and tell everybody how they “had it right all along” and have the unthinking masses fawning over their every word again?
and dangerous RWNJs
That’s awesome! Add “a-holes” to the end, so we’re RWNJAs, which rhymes with “ninjas.”
Another Krugman Kontradition that turns out to be a Murphy Misreading.
How so? Your “explanation” above is ridiculously wrong.
Nowhere do I see him saying that pedal to the metal monetary policy will create bubbles…someone show me. I see him saying that “bubbles will happen,” which implies to me that he sees bubbles happening due to factors exogenous to the central bank, BUT since the fed is an easy scapegoat, inflation hawks will automatically blame it on the Fed.
Nothing to see here folks.
+1
Exactly Dan.
You have to read this post in the context of all of his posts Dan.
Stripping away words, sentences, and posts from the greater context will mislead you.
If your only point is that Krugman believes that loose monetary policy has the potential to create (or perhaps exacerbate) bubbles, I readily concede that. But I don’t think that Krugman believes that his preferred policies will necessarily lead to any bubbles at all. Now you presumably disagree with his position, that’s what his position is.
You mean if I advocate for loose money 99 days out of 100, and that what I want leads to bubbles, then because I don’t prefer those bubbles to occur, because of some mystical devotion to the a priori power of the state, that I am immune from the kind of criticism being levied against Krugman?
He can never mean what he says Dan.
Unless what he says is foolish, and then he definitely means it.
I hope we’re all clear on the rules now.
It would be boring if all we did was point out what Krugman said that wasn’t flawed. I mean, how much fun can we have with how to open a door, or counting on one’s hands?
The lengths to which Krugman’s supporters will go to defend his contradictions and fallacies is simply breathtaking.
Krugman uses the word but, this makes pedal to the medal connected to bubble. Then central bankers will tighten.
“The underlying deficiency of demand will call for pedal-to-the-medal monetary policy as a norm. BUT bubbles will happen — and central bankers, always looking for reasons to snatch away punch bowls, will use them as excuses to tighten.”
Now that I think about it more, Krugman may have just admitted to ABCT.
I think what Krugman is saying is that what’s called for is loose monetary policy, BUT what central bankers will do is something different than what’s called for, and they will use whatever bubbles there are as an excuse to do what Krugman considers to be the wrong thing.
No Krugman is suggesting much more than loose policy. He is suggesting pedal to the medal policy BUT bubbles will result, which in his mind are not a bad thing other than these bubbles will probably encourage central banksters to take away the punch bowl(drunk).
I doubt banskters will tighten anything as the hangover will be unbearable…
As I said, I think the but compares what ought to be done by central banks and what central banks will actually do.
“The underlying deficiency of demand will call for pedal-to-the-medal monetary policy as a norm. But bubbles will happen — and central bankers, always looking for reasons to snatch away punch bowls, will use them as excuses to tighten.”
Well we will have to agree to disagree however I just noticed a much larger, actually glaring problem with the above Krug quote.
“The underlying deficiency of demand”
Do these krugpeople not understand demand is low because prices are to high and or they produced the wrong goods and or consumers, simply have used all of their money(production/wealth?)
There is no such thing as an underlying demand deficiency. The people at the top of the pyramid hate this fact as it damages their wealth and political goals.
[…] it took me a bit to understand the point that Keshav (and then Ken B.) were making in response to my Summers/Krugman commentary on bubbles. They (and […]