Krugman DID Identify the Housing Bubble in 2005
OK after browsing through his archives circa 2005, I must retract my earlier criticism of Paul Krugman. For sure, Krugman did identify the housing bubble before many other analysts (including me), and so he’s not bluffing when he says nowadays that he called it. Also, people who comment at his site should be a little more nuanced instead of saying things like, “None of you Keynesian wizards saw this coming, so why should we listen to you now? Only Peter Schiff and the Austrians predicted the crash.”
Last apology: I also was suspicious in the previous post that Krugman didn’t point to any of his own articles (for proof that he had called the bubble), but instead linked to a 2005 article which in turn referred to Krugman’s 2001 articles–when those articles came 95% close to recommending that Greenspan create a housing bubble!! In retrospect, I think Krugman probably did that to show, “Hey, I know I was calling this back in 2005, and here are people attacking me for saying so–therefore I clearly was making loud noises about the bubble!” (Also, it’s possible there is a typo in that article critical of Krugman; I could never find his article that they were talking about.)
OK now that the apologies are out of the way, let’s go through and see the difference between Krugman’s identification of the bubble, versus a Peter Schiff or a Mark Thornton (from 2004). Here’s Krugman from May 2005:
Remember the stock market bubble? With everything that’s happened since 2000, it feels like ancient history. But a few pessimists, notably Stephen Roach of Morgan Stanley, argue that we have not yet paid the price for our past excesses.
I’ve never fully accepted that view. But looking at the housing market, I’m starting to reconsider.
In July 2001, Paul McCulley, an economist at Pimco, the giant bond fund, predicted that the Federal Reserve would simply replace one bubble with another. “There is room,” he wrote, “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.”
As Mr. McCulley predicted, interest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst.
Now the question is what can replace the housing bubble.
Nobody thought the economy could rely forever on home buying and refinancing. But the hope was that by the time the housing boom petered out, it would no longer be needed.
But although the housing boom has lasted longer than anyone could have imagined, the economy would still be in big trouble if it came to an end. That is, if the hectic pace of home construction were to cool, and consumers were to stop borrowing against their houses, the economy would slow down sharply. If housing prices actually started falling, we’d be looking at a very nasty scene, in which both construction and consumer spending would plunge, pushing the economy right back into recession.
That’s why it’s so ominous to see signs that America’s housing market, like the stock market at the end of the last decade, is approaching the final, feverish stages of a speculative bubble.
…
Even Alan Greenspan now admits that we have “characteristics of bubbles” in the housing market, but only “in certain areas.” And it’s true that the craziest scenes are concentrated in a few regions, like coastal Florida and California.
…
The important point to remember is that the bursting of the stock market bubble hurt lots of people – not just those who bought stocks near their peak. By the summer of 2003, private-sector employment was three million below its 2001 peak. And the job losses would have been much worse if the stock bubble hadn’t been quickly replaced with a housing bubble.So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it’s hard to imagine what that might be. After all, the Fed’s ability to manage the economy mainly comes from its ability to create booms and busts in the housing market. If housing enters a post-bubble slump, what’s left?
Mr. Roach believes that the Fed’s apparent success after 2001 was an illusion, that it simply piled up trouble for the future. I hope he’s wrong. But the Fed does seem to be running out of bubbles.
Not to beat a dead horse, but let’s go back to August 2002 closer to when the guy from Pimco first made the comment about Greenspan replacing the Nasdaq bubble with a housing bubble. Here’s what Krugman said at the time:
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.
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.
So yes, Krugman did identify that there was a housing bubble in progress in 2005, but it was akin to a doctor thinking a cancer patient was reacting very severely to aggressive chemotherapy. The Fed-induced housing bubble wasn’t poison, as far as Krugman was concerned, just medicine that was having unfortunate negative consequences. His recommendation wasn’t for the government to stop tinkering and fueling new booms, but rather to search for something else to inflate.
Sometimes You Have to Salute Krugman’s Audacity (or Maybe Just Sloppiness)
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.
The New Republic: If Something Is Taken for Granted, It Must Be a Good Thing
Arnold Kling links to this TNR article showing allegedly absurd warnings from the past, which are supposed to make current Obama-haters rethink their rhetoric. Funny thing is, a bunch of those warnings strike me as confirmed, or at the very least still open for debate. The TNR writers don’t actually give a “The Claim…The Reality” type analysis, but instead list these quotes as self-evidently dumb. Here is what the TNR writers say about it in the intro:
Conservatives have lined up in near-unanimous opposition to any progressive legislation introduced during President Obama’s first year in office. Whether they’ve been railing against health care reform, a climate bill, or financial regulation, their ire has stemmed less from legislative specifics than from a generalized prophecy of doom: Obama’s proposals will move the country toward socialism, bankrupt entire industries and small businesses, and deny Americans their basic freedoms. These arguments, however, aren’t new. Conservatives—not just Republicans, but various politicians and groups who’ve resisted major social changes—recycled them throughout the twentieth century. They used them to oppose numerous progressive measures that Americans now take for granted, from women’s suffrage to child-labor laws to Medicare.
Really, with that intro, you’re expecting to see all manner of crazy, bigoted things. Don’t get me wrong, some of the quotes ARE just that, but several of them are not only understandable, I think they are confirmed.
I Have Been Following The Rock’s Career With Great Interest
I’m not sure if I blogged about this before, but it’s been very interesting to watch “The Rock’s” transition from wrestling to film stardom. Today I took my son to see Alvin and the Chipmunks (the only non-scary kid movie available, though it featured wedgies) and here was one of the trailers (just move the pointer to the 2:10 mark if you want):
Now when this particular guy first started in films, he was billed in the Previews as “The Rock.” Then in subsequent films he was referred to as “Dwayne ‘the Rock’ Johnson,” and there might have also been a period where they used both names separately.
Now, in this film (and I believe his previous one) they don’t even use “The Rock” at all. He is trying to put that behind him so he can become a real movie star, a la Marky Mark and the Fresh Prince.
Mr. Johnson’s transition will not be complete until he can star in a movie without taking his shirt off.
Last point, I actually like him a lot. I love the self-deprecating comedic roles he takes, in particular in Be Cool (sequel to Get Shorty). This is one of his best parts, where he’s auditioning by re-enacting a scene from Bring It On. (Sorry I couldn’t find a better video.)
I Told You Guys That Krugman Was Misleading the Children
Jeff Tucker passed along a very critical comment from reddit on my recent article accusing Krugman of making a basic mistake on trade theory. Here’s the opening salvo:
Has this author ever even taken macroeconomics in college? This crap was on my freakin midterm; Krugman is 100% right. Increasing or decreasing the amount of trade we do via protectionism or trade liberalization only changes the volume of trade, but not the balance of trade, ergo it doesn’t affect short run GDP. That’s what Krugman is saying, and it’s extremely obvious to anyone who knows that NX = Savings – Investment. Maybe if the author actually went over NX = S – I, he’d realize why what he’s saying is wrong.
OK, criticizing Krugman on general economics is one thing, but you’d have to be a damned fool to criticize him on trade theory. That’s all Krugman does, academically speaking. The author of this piece is WAY out of his own league. To say that “Krugman is wrong even within the Keynesian framework” is completely laughable; take it from someone who just studied most of this junk.
If you are interested in using Keynesian macro variables to express sound economics, I think you will enjoy clicking the link and watching this guy (?) and me debate. For example here is part of his follow-up:
You’re 100% right; trade barriers adversely affect C and I. But it’s more of a long run effect than a short run effect.
Trade in itself does not contribute to output, it just turns your output into something else that you want. If I’m making 40 bushels of corn and trading them with China for 40 teddy bears (backwards, I know), and all of a sudden a barrier is put up so I can’t trade for teddy bears anymore, if I’m still producing 40 bushels then my output hasn’t changed; it is and always has been 40 bushels. So GDP remains the same.
This is–I believe–totally totally wrong, but it’s a very interesting mistake that I’ve never encountered before. So if you want to see me pick it apart, follow the link.
Last point: I’m almost glad that this guy (?) made this confident comment about my article. Kevin Donoghue and some others had me doubting myself, and thinking that Krugman wasn’t misleading his readers. Well, he certainly fooled this person.
Potpourri
* It’s the clash of the titans over at Crash Landing, concerning a popular and allegedly circular argument against the State.
* TokyoTom takes a break from discussing my income stream to pointing out the ominous WSJ series on financial “reform.” (I think it’s like health care “reform.”)
* A naive economist allows his anti-Fed arguments to be used by above-mentioned WSJ.
* M4liberty passes along this interesting board game trivia. I’m glad to see I’m doing my share to save the planet.
* Mankiw sees the wisdom in economists adopting the medical analogy for the failures of Keynesianism.
* Gary North writes favorably of Oral Roberts (no surprise) and Frank Zappa (huge surprise). (HT2 Lew Rockwell)
* Tyler Cowen linked (with bemusement I think) to this Italian song about what Americans sound like to foreigners, but I thought the song was awesome. USA! USA! In any event, I’m not sure when this was released, but if it came after Austin Powers, then this guy’s got nothing on Mike Meyers. Seriously, isn’t this video just the opening of Austin Powers II?
When Life Gives You Taxes, Make the Savior of the World
Merry Christmas! And as part of our ongoing series, “Why does God let bad things happen?” here we explain that if King Herod and Caesar had become Rothbardians, the Scriptures wouldn’t have been fulfilled.
The Jews in Jesus’ day were waiting for their Messiah, but the prophecies said he would come from Bethlehem. So you can understand Nathanael’s confusion when Philip tells him the good news:
Jesus Calls Philip and Nathanael
43The next day Jesus decided to leave for Galilee. Finding Philip, he said to him, “Follow me.”
44Philip, like Andrew and Peter, was from the town of Bethsaida. 45Philip found Nathanael and told him, “We have found the one Moses wrote about in the Law, and about whom the prophets also wrote—Jesus of Nazareth, the son of Joseph.”
46″Nazareth! Can anything good come from there?” Nathanael asked.
“Come and see,” said Philip.
So the confusion here is that this guy Jesus is the son of a carpenter who grew up in Nazareth. Hence, he couldn’t possibly be the promised Messiah, since all educated Jews knew the Messiah was supposed to come from Bethlehem (from the line of King David).
Of course, the wrinkle is that Jesus really was born in a manger in Bethlehem–his earthly parents Mary and Joseph had to make the trek there for a census being conducted for tax purposes:
The Birth of Jesus
1In those days Caesar Augustus issued a decree that a census should be taken of the entire Roman world. 2(This was the first census that took place while Quirinius was governor of Syria.) 3And everyone went to his own town to register.
4So Joseph also went up from the town of Nazareth in Galilee to Judea, to Bethlehem the town of David, because he belonged to the house and line of David. 5He went there to register with Mary, who was pledged to be married to him and was expecting a child. 6While they were there, the time came for the baby to be born, 7and she gave birth to her firstborn, a son. She wrapped him in cloths and placed him in a manger, because there was no room for them in the inn.
So when earthly rulers seek to rip off poor people, they unwittingly fulfill the Scriptures and allow the rise of the true King whose majesty renders them paupers. And later on, when earthly rulers have Him killed, they unwittingly fulfill the Scriptures yet again and allow Him to save the world.
You and I are dirty sinners, but the reason we should feel down is that we’re not doing what God wants. We don’t need to worry that we’re going to screw up His plans. He knew you were going to do that before you were even born. He’s disappointed, but don’t worry–He was ready for it. Good will still triumph, sometimes in spite of us.
It’s All About Me Potpourri
* I am on vacation and am not getting out my Rosetta Stone, but I frankly don’t know what Mish is even talking about in this response. It seems he is using a variation of the legal defense, “My client wasn’t at the murder scene, and if he were he doesn’t own a gun, and if he did he is legally blind and so couldn’t possibly have been the shooter.” Naturally Mish doesn’t explain why we will have about 2.9% CPI inflation in 2009 if his analysis is the correct one.
* I walk through Krugman’s (apparent) goof on international trade and the Keynesian accounting identity.
* I quintuple-down on my inflation bet, this time with David Henderson. If Arnold Kling wants a piece of it, I will have to buy a credit default swap on EconLog.
* I have been waiting since the summer for this: The YouTube of my appearance on a TV show in the Bahamas. Like Obi-Won, I easily fend off anticapitalist attacks from two assailants.
If you want to see the rest go here and scroll down in the “Related Videos” to see Parts 2 etc. of “Dr. Robert Murphy on Platform TV.” Note that I am at my parents’ house and I can’t figure out how to turn on the volume on their computer, so I hope it sounds OK.
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