Actually, Krugman Was A Huge Advocate Of The Housing Boom
All day Paul Krugman has been involved in a brouhaha over a 2002 column which seemed to be advocating a housing bubble to get us out of the recession. He says he wasn't calling for a bubble, just that he was just explaining Alan Greenspan was trying to do.
Mark Thornton has gone through Krugman's entire archives and undermined this defense. Many of Krugman's own quotes from that era suggest that he was an aggressive advocate of low-low interest in order to bring the housing market to a broil, thus bringing us out of the recession.
In Krugman's defense, this was 2001, when the economy was in the midst of cratering. As yet, no one has dug up quotes suggesting that Krugman was still pounding the table for low rates and a housing boom in, say, 2004, which is when most observers agree the housing "bubble" really started.
Here's the full compendium compiled by Mark:
German Interview, undated
pkarchive.org
"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
pkarchive.org
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
pkarchive.org
"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
pkarchive.org
"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
pkarchive.org
"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
pkarchive.org
"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"
Dec 28, 2001
pkarchive.org
"The good news about the U.S. economy is that it fell into recession, but it didn't fall off a cliff. Most of the credit probably goes to the dogged optimism of American consumers, but the Fed's dramatic interest rate cuts helped keep housing strong even as business investment plunged."
businessinsider.com
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Sorry, It's No Defense That Krugman Said Those Things In 2001
Joe Weisenthal
The evidence is indisputable that in 2001, Paul Krugman advocated aggressive rate cuts in the hope that the Fed would spur the housing market and help get us out of the recession.
His defenders say: Yes, but that was in 2001, right in the midst of a recession. The Fed's real mistake was leaving rates low for so long into 2004.
Sorry, but these defenses just don't cut it.
First, regardless of the timing, Krugman was of the mindset that to get out of the recession, the Fed needed to inflate asset values and create a wealth effect. But more expensive homes aren't real wealth, savings or productivity. All they did was give people the illusion that they didn't have to actually save money.
Second, to say that the Fed was right to slash rates to near-zero, but that it wasn't right to wait so long to raise them up again is to say that proper policy is to mount a highwire on a unicycle and then to go from one tower to another.
His defenders are arguing that Krugman was just advocating that Greenspan mount the highwire. But he wasn't advocating that Greenspan actually fall off.
And if we're going to continue this approach of having massive interventions either through Fed or fiscal policy every time there's a recession, what does Krugman or anyone else propose be done so that future Fed chiefs all know how to ride unicycles on highwires? If these policies have such a high risk of making the problem worse, unless they're executed absolutely perfectly, that means they're bad policies.
Now, another defense of Krugman is that the housing boom wasn't the problem, but rather the problem was all the subprime, NINJA loans that came along with it.
Please.
All those loans were a natural outgrowth of the belief that the government would make the housing market go up indefinitely, and that there was zero-risk to loaning money out for housing if asset values couldn't go down. Seriously, if you believe housing could and should always go up, you can lend $1 million to a bum off the street and know that if they can't make their payments, they'll just flip the house and everyone can be fine.
And even if you can (in your mind) separate the two things, you're still standing by the idea that creating an asset bubble is a legitimate way of spurring the economy, rather than taking our lumps and undergoing the fundamental fixes we should've done way back when.
businessinsider.com |
