Paul Krugman comments at his blog on the failure of so-called “austerity” and on the “sheer human unwillingness” of proponents of “austerian economics” (Krugman’s meaningless amalgamation of “austerity” and “Austrian economics”) “to admit gross error; ‘we may have been a bit overenthusiastic’ is an easier thing to say than ‘whoops — we did exactly the wrong thing, and killed the economy’.”
Hey, Mr. Krugman, do you mean like when you advocated that the Fed inflate to lower interest rates in order to replace the dot-com bubble with a housing bubble, which is exactly what it did, which precipitated the financial crisis and its consequences, which you are now attributing to the obstinacy of others?
I reviewed Krugman’s record on the housing bubble briefly here, but let’s recap and take it a bit further:
- In June 1999, Krugman noted that Americans were consuming so much that personal savings had “disappeared almost completely”. He questioned whether this might not be “imprudent” while at the same time hailing the excessive spending as being good for the economy: “those rates racing in their cages”, he wrote, “are what have kept the wheels of commerce turning” during “America’s consumer-led boom”.
- In January 2000, Krugman puzzled over the cause of the sudden dive in stock prices, but he assured his readers that the economy was fundamentally sound and that this dip was merely a signal of a “merely terrific” rather than “incredible” economy and that it had no place to go but up.
- In February 2000, he was “not entirely convinced” that the NASDAQ was in a bubble, once again suggesting that the economy had nowhere to go but up. Even as the dot-com bubble burst and the NASDAQ began to plummet, Krugman could still write that “the U.S. economy has cheerfully broken all the old limits” with “almost every fresh economic statistic” being “a cause for celebration.” He said that “growth will have to slow” but would continue.
- In December 2000, Krugman dismissed concerns that the U.S. was heading into a recession. “But even if we do have a recession,” he remarked, “so what?” A “brief recession” would be no big deal, he reassured, because it would not “reflect any fundamental problems in the economy.”
- In January 2001, Krugman described the soaring NASDAQ as “a classic bubble” — which raises the question of why he had failed to recognize it at the time. He was by this time no longer reassuring his readers that the economy would continue to grow, albeit at a slower pace. Rather, with the NASDAQ plummeting, he acknowledged the increasing possibility of a recession, although he continued to express uncertainty that it would occur. He praised the Fed for cutting interest rates, saying that “the Fed’s move has already made a noticeable difference, stemming the rout in the NASDAQ and producing a striking recovery in the corporate bond market. Another few shots in the arm like that and talk of recession might well evaporate.”
- In February 2001, Krugman continued to downplay fears of a recession with the argument that “The Fed can easily and quickly cut interest rates as much as necessary, as long as zero is low enough.”
- In March 2001, he criticized it for not cutting rates enough.
- In July 2001, he said that the problem was “too little spending” and argued that “recovery depends on persuading the public to start spending again.” He criticized the Fed again for not cutting interest rates enough to spur investment in “things like housing”.
- In August 2001, Krugman noted how the Fed had “cut again and again”, but there were nevertheless “few signs that a turnaround is imminent”, so his proposal was to cut interest rates even more. He wrote that consumers were already lacking savings and laden with debt, but that “housing” was “highly sensitive to interest rates”, and so the Fed should cut long-term as well as short-term interest rates. He complained that he was “a little depressed” because “long-term rates haven’t fallen enough to produce a boom” in the housing sector. He commented that the Fed “keeps on cutting rates, hoping that it will finally accomplish something”.
- In September 2001, he repeated that “the odds are still that rate cuts will eventually work.” This would encourage borrowing and spending, he argued. “Housing was doing better,” he said, “thanks to low interest rates”. But the Fed should be “willing to abandon conventional notions of prudence” and buy long-term government debt in addition to short-term Treasury securities.
- In October 2001, he repeated that “Low interest rates, which promote spending on housing and other durable goods, are the main answer.”
- In December 2001, Krugman bemoaned that “the Fed has now cut interest rates 11 times this year, and has yet to see any results” and once again suggested that the Fed should cut long-term rates as well to “conjure up another dramatic boom”. While criticizing the Fed for not cutting rates enough, he praised it for its “dramatic interest rate cuts” that had “helped keep housing strong”.
- In July 2002, Krugman described the economic outlook as “definitely iffy” and asked, “shouldn’t Mr. Greenspan be thinking seriously about another interest rate cut?”
- In August 2002, Krugman wrote that what the Fed needed to do was “to create a housing bubble to replace the NASDAQ bubble”. He responded to concerns that there might already be a housing bubble by suggesting that the Fed cut interest rates even further and “throw money at the economy”, and again criticized the Fed for not cutting rates enough.
- In October 2002, Krugman wrote that the U.S. was now in a “classic overinvestment slump” and that “such slumps have always been hard to fight simply by cutting interest rates.” The problem was that “the Fed hasn’t done enough” and “should cut rates further”.
- In December 2002, he noted that the Fed had cut so much that it “has almost run out of room to cut interest rates.” It could still cut long-term rates, but “will be reluctant to try exotic, untested policies unless the economy is clearly facing deflation.”
- In May 2003, he again observed that the Fed had “cut rates early and often” and “had almost run out of room to cut”, but still “the economy remains weak.”
- In July 2003, he complained that “the boost from low interest rates seems to be evaporating.” He noted that mortgage rates had fallen “to historic lows, extending the home-buying and refinancing boom” that he considered good for the economy, but the Fed wasn’t doing enough to fuel the housing boom.
- In August 2003, Krugman wrote that “rising interest rates seem to have ended the [mortgage] refinancing boom that put cash in consumers’ pockets; that’s bad”, the corollary being that the Fed should lower rates more to further inflate the housing bubble.
- In October 2003, Krugman acknowledged that the “boost from housing” to the economy “can’t go on” forever because “in the long run, consumer spending can’t outpace the growth in consumer income”, and that consumers had taken “advantage of low-interest financing, cash from home refinancing and tax rebate checks to accelerate purchases they would otherwise have made later”, but there was still no hint that he might reconsider his argument in favor of keeping rates artificially low in order to encourage borrowing and spending in the housing sector.
- By May 2005, Krugman acknowledged the existence of the housing bubble, but deflected attention from the role of the Fed policy he had long advocated by blaming low interest rates on China’s, rather than the Fed’s, purchases of U.S. government debt. In another article, he asked “what can replace the housing bubble”? His answer was to replace the housing bubble with still another bubble. In another article later that month, he referred to the Fed’s role again, this time praising its policy on the grounds that “the job losses would have been much worse if the stock bubble hadn’t been quickly replaced with a housing bubble” and expressed his hope that the opposing view, that “the Fed’s apparent success after 2001 was an illusion, that it simply piled up trouble for the future” was “wrong”. The problem, in Krugman’s view, was that “the Fed does seem to be running out of bubbles”.
- In August 2005, Krugman acknowledged that the “housing boom has created jobs”, that the economy was being “driven by real estate”, and that “When that bubble begins to deflate, so will housing-related employment”. But he offered criticism of the Fed for creating a housing bubble that would lead to massive unemployment when it inevitably burst or any other hint that he might reconsider the wisdom of having advocated that very same Fed policy.
- In January 2006, Krugman was back to thanking the Fed for the low interest rates that had kept housing “surprisingly affordable” in most of the country, despite “record home prices” in some areas. He again acknowledged that housing was in a bubble, but rather than recognizing the Fed’s artificially low interest rates as part of the problem, his complaint was that they couldn’t get much lower in order to inflate the housing bubble even further.
- In August 2006, he acknowledged that the bursting of the housing bubble risked throwing the economy into recession. He acknowledged the role of the Fed in creating the bubble, saying, “A snarky but accurate description of monetary policy over the past five years is that the Federal Reserve successfully replaced the technology bubble with a housing bubble.” But rather than reconsidering the policy he had advocated, he instead continued to advocate more of the same, that the Fed just inflate to create another bubble. “But where will the Fed find another bubble?” he wondered.
- In September 2010, Krugman continued to defend the Fed policy that, by his own account, had created the housing bubble, writing that “It’s hard to see, even in retrospect, how the Fed could have justified not keeping rates low for an extended period.” He added that “it would be wrong wrong to attribute the real estate bubble wholly, or even in large part, to misguided monetary policy”, meaning not that Fed policy hadn’t created the housing bubble, but rather that creating the housing bubble was the right thing for it to do.
Now, what was that, Mr. Krugman, about the “sheer human unwillingness to admit gross error”? What was that bit about people in positions of responsibility admitting not only that “we may have been a bit overenthusiastic”, but fessing up that, “whoops — we did exactly the wrong thing, and killed the economy”?
Read more about Krugman’s record, in contrast to the prescient warnings from Dr. Ron Paul about the consequences that would result from the very policy Krugman was advocating, in my book Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis.