Not a Fed-Generated Slump? Krugman’s Miserable Record on Recessions

by Aug 1, 2013Liberty & Economy0 comments

I’m not going to comment on this broken record. Let’s just let Krugman’s actual record on his fine prediction (and prescription) skills when it comes to understanding recessions speak for itself:

Paul Krugman writes that by January 2008, with the onset of the financial crisis precipitated by the collapse of the housing bubble,

it was already obvious to many people that we were looking at a “postmodern” recession like 1990-91 or 2001, which was likely to be followed by an extended jobless recovery. That is, this was not going to be a Fed-generated slump like 1981-82, which would be followed by a quick rebound once the Fed relented; it was a case of private-sector overreach, and was likely to go on for a long time.

I’m not going to comment on this broken record. Let’s just let Krugman’s actual record on his fine prediction (and prescription) skills when it comes to understanding recessions speak for itself:

“American consumerism … has allowed the United States economy … to sail through a global financial storm unscathed…. There is a strong element of rat race in America’s consumer-led boom, but those rats racing in their cages are what have kept the wheels of commerce turning.” – Paul Krugman, June 1, 1999

“[E]veryone—me included—is even more confused than usual about what stocks are really worth these days…. Current stock prices already have built in the expectation of economic performance that not long ago we would have considered incredible; performance that is merely terrific would be seen as a big letdown…. So which will it be—terrific or incredible?” – Paul Krugman, January 5, 2000

“I’m not sure that the current value of the NASDAQ is justified, but I’m not sure that it isn’t.” – Paul Krugman, February 27, 2000

“[T]he U.S. economy has cheerfully broken all the old limits…. [A]lmost every fresh economic statistic has been a cause for celebration.” – Paul Krugman, May 7, 2000

“But even if we do have a recession, so what? … So will we have a recession? Maybe. If so, will it be severe and prolonged? Not likely. And the best news of all is that the Fed will be able and ready to react….” – Paul Krugman, December 3, 2000

“You see, the general rule … is that recessions are not a serious problem for large, modern economies…. [R]ecessionary tendencies can usually be effectively treated with cheap, over-the-counter medication: cut interest rates a couple of percentage points, provide plenty of liquidity, and call me in the morning…. We don’t need to fear a recession; if it does happen, it’s something that the Fed can easily cure” – Paul Krugman, December 27, 2000

“[T]he Fed’s move has already made a noticeable difference…. Another few shots in the arm like that and talk of recession might well evaporate.” – Paul Krugman, January 17, 2001

“The Fed can easily and quickly cut interest rates as much as necessary, as long as zero is low enough.” – Paul Krugman, February 25, 2001

“It goes without saying that the Fed must cut interest rates next week. And too small a cut will be almost as bad as no cut at all.” – Paul Krugman, March 14, 2001

“Millions of Americans have decided that low interest rates offer a good opportunity to refinance their homes or buy new ones.” – Paul Krugman, May 2, 2001

“To reflate the economy, the Fed doesn’t have to restore business investment; any kind of increase in demand will do…. [H]ousing, which is highly sensitive to interest rates, could help lead a recovery.” – Paul Krugman, August 14, 2001

“I’m a little depressed. Housing, long-term rates haven’t fallen enough to produce a boom there.” – Paul Krugman, August 22, 2001

“[The Fed] keeps on cutting rates, hoping that it will finally accomplish something.” – Paul Krugman, August 31, 2001

“[T]he odds are still that rate cuts will eventually work.” – Paul Krugman, September 9, 2001

Low interest rates, which promote spending on housing and other durable goods, are the main answer.” – Paul Krugman, October 7, 2001

“The good news about the U.S. economy is that it fell into recession, but it didn’t fall off a cliff…. [T]he Fed’s dramatic interest rate cuts helped keep housing strong” – Paul Krugman, December 28, 2001

“[R]esidential investment kept rising through the recession, thanks to the Fed’s interest rate cuts…. It’s hard to see a dramatic further increase; if anything, housing may be in a mild bubble. So what will lead us into a full-fledged recovery? Beats me.” – Paul Krugman, May 28, 2002

“Given the definitely iffy economic outlook, shouldn’t Mr. Greenspan be thinking seriously about another interest rate cut?” – Paul Krugman, July 23, 2002

“To fight this recession the Fed … needs soaring household spending to offset moribund business investment. And to do that … Alan Greenspan needs to create a housing bubble to replace the NASDAQ bubble.” – Paul Krugman, August 2, 2002

“[T]hose 11 interest rate cuts in 2001 fueled a boom both in housing purchases and in mortgage refinancing, both of which helped keep the economy from experiencing a much more severe recession.” – Paul Krugman, October 1, 2002

“[C]lassic overinvestment … slumps have always been hard to fight simply by cutting interest rates.” – Paul Krugman, October 4, 2002

“Mortgage rates did indeed fall briefly to historic lows, extending the home-buying and refinancing boom that has helped keep the economy’s head above water.” – Paul Krugman, July 25, 2003

“U.S. interest rates low despite the enormous government borrowing required to cover the budget deficit. Low interest rates, in turn, have been crucial to America’s housing boom.” – Paul Krugman, May 20, 2005

“Now the question is what can replace the housing bubble…. But the Fed does seem to be running out of bubbles.” – Paul Krugman, May 27, 2005

“[T]he Federal Reserve successfully replaced the technology bubble with a housing bubble. But where will the Fed find another bubble?” – Paul Krugman, August 7, 2006

“Back in 2002 and 2003, low interest rates made buying a house look like a very good deal. As people piled into housing, however, prices rose—and people began assuming that they would keep on rising.” – Paul Krugman, July 27, 2007

“This looks to me like a clear case for government intervention: there’s a serious market failure….” – Paul Krugman, August 17, 2007

“There’s a huge overhang of excess housing inventory; it will probably take several years before housing prices fall to realistic levels; and it’s not at all clear what will fill the gap left by weak housing and consumer spending.” – Paul Krugman, January 28, 2008

“[I]t was already obvious to many people that we were looking at a “postmodern” recession like 1990-91 or 2001, which was likely to be followed by an extended jobless recovery. That is, this was not going to be a Fed-generated slump like 1981-82, which would be followed by a quick rebound once the Fed relented; it was a case of private-sector overreach, and was likely to go on for a long time” – Paul Krugman, July 23, 2013

Krugman is right about one thing: it was indeed predictable. Here is Ron Paul, for example:

“Business cycles are well understood. They are not a natural consequence of capitalism but instead from central bank manipulation of credit…. The next downturn, likewise, will be the fault of the Fed…. Artificially low interest rates prompt lower savings, over-capacity expansion, malinvestment, excessive borrowing, speculation, and price increases in various segments of the economy.” – Ron Paul, May 15, 2000

“The Federal Reserve credit created during the last eight months has not stimulated economic growth in technology or the industrial sector, but a lot of it ended up in the expanding real-estate bubble…. Instead of the newly inflated money being directed toward the stock market, it now finds its way into the rapidly expanding real-estate bubble. This, too, will burst as all bubbles do.” – Ron Paul, September 6, 2001

“Monetary inflation continues at a rate never seen before in a frantic effort to prop up stock prices and continue the housing bubble, while avoiding the consequences that inevitably come from easy credit….” – Ron Paul, July 9, 2002

“Like all artificially-created bubbles, the boom in housing prices cannot last forever…. [I]t is time for Congress to act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors misled by foolish government interference in the market” – Ron Paul, July 15, 2002

“The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial ‘boom’ followed by a recession or depression when the Fed-created bubble bursts.” – Ron Paul, September 10, 2002

“Congress should act to remove taxpayer support from the housing GSEs [i.e., Freddie Mac and Fannie Mae] before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market.” – Ron Paul, October 26, 2005

You can read more on both men’s records in my book Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis.

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About Jeremy R. Hammond

About Jeremy R. Hammond

I am an independent journalist, political analyst, publisher and editor of Foreign Policy Journal, book author, and writing coach.

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