Yes, Paul Krugman Actually Did Call for a Housing Bubble In 2002

by Nov 22, 2013Liberty & Economy2 comments

Paul Krugman on his blog today denies that he advocated that the Fed create a housing bubble in 2002.

Paul Krugman on his blog today denies that he advocated that the Fed create a housing bubble in 2002:

(Nor, by the way, was I actually calling for a housing bubble in 2002. I was, instead, trying to highlight the problems of getting monetary traction in an economy that “wants” a negative interest rate — which is exactly what everyone is talking about now.)

Krugman has repeatedly issued shifting denials about what he said. So let’s just look at what he actually said in context. Here’s an excerpt from my book Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis:

On August 2, 2002, Krugman wrote an article in which he said that what the Fed needed to do in order to prevent a recession was to create a housing bubble. His statement, quoted in its full context, was as follows:

A few months ago the vast majority of business economists mocked concerns about a “double dip,” a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I’ve repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.

The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises 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.

Curiously, he commented that Alan Greenspan needed a recovery “to avoid awkward questions about his own role in creating the stock market bubble”, but didn’t elaborate on what that role was. He closed by saying, “But wishful thinking aside, I just don’t understand the grounds for optimism. Who, exactly, is about to start spending a lot more?”

It is important to be clear on what Krugman was saying here. His earlier record on the housing bubble is unambiguous. He had repeatedly advocated that the Fed should lower interest rates for the explicit purpose of creating a boom in housing as a route to economic recovery. Here, he was implicitly acknowledging that the numerous interest rate cuts that had already been made had not solved the problem. The reason he offered was that people were still not spending enough, and his argument had been that the Fed should cut interest rates even further. He attributed the view that the Fed “needs to create a housing bubble” to Paul McCulley, but there can be no mistake, reading his remark in context, that Krugman was in agreement. This is evident in his prefacing the remark by saying that people warning of a double-dip recession “made a lot of sense”, by his own (not McCulley’s) comment that to “fight the recession” the Fed “needs” to do so, and by his expressed pessimism that the Fed could “pull that off”.

So, did Krugman actually call for a housing bubble in 2002? Yes, he actually did. For more on his record on the housing bubble, see here (and read my book!).

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About Jeremy R. Hammond

About Jeremy R. Hammond

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2 Comments

  1. Michael English

    On August 16th, 2002, exactly two weeks after the article Mr. Hammond quoted, Paul Krugman published another article, “Mind the Gap”, in which he both predicted that the US was entering a housing bubble and explained why that would be an unambiguously bad thing- namely that it would lead to a prolonged Japan-style recession, Here is a link to it: http://www.nytimes.com/2002/08/16/opinion/mind-the-gap.html

    It is legitimate to say that Krugman was insufficiently clear that he was being sarcastic when he wrote the article of August 2nd (although close reading should make it clear that he was explaining that the only way Greenspan’s optimistic statements could seem to be true would be if a housing bubble made it look like it they were true). However it is not at all true that Krugman wanted a housing bubble. People who want housing bubbles do not publish articles stating that they are unambiguously bad and to be avoided.

    I would urge Mr. Hammond and his readers to beware of “gotcha” journalism, in which bloggers consider their jobs done when they find a quote that seems at first glance to support their words.It is too easy misconstrue a man’s thoughts and opinions and make false claims about them as a result.

    Reply
    • Jeremy R. Hammond

      Michael, Krugman’s article “Mind the Gap” hardly helps your case. Here’s a relevant excerpt from my book, in which I cite that article as well:

      On August 2, 2002, Krugman wrote an article in which he said that what the Fed needed to do in order to prevent a recession was to create a housing bubble. His statement, quoted in its full context, was as follows:

      A few months ago the vast majority of business economists
      mocked concerns about a “double dip,” a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I’ve repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.

      The basic point is that the recession of 2001 wasn’t a typical postwar slump,
      brought on when an inflation-fighting Fed raises 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.

      Curiously, he commented that Alan Greenspan needed a recovery “to avoid awkward questions about his own role in creating the stock market bubble”, but didn’t elaborate on what that role was. He closed by saying, “But wishful
      thinking aside, I just don’t understand the grounds for optimism. Who, exactly,
      is about to start spending a lot more?”[i]

      It is important to be clear on what Krugman was saying here. His earlier record on the housing bubble is unambiguous. He had repeatedly advocated that the Fed should lower interest rates for the explicit purpose of creating a boom in housing as a route to economic recovery. Here, he was implicitly acknowledging that the numerous interest rate cuts that had already been made had not solved the problem. The reason he offered was that people were
      still not spending enough, and his argument had been that the Fed should cut
      interest rates even further. He attributed the view that the Fed “needs to
      create a housing bubble” to Paul McCulley, but there can be no mistake, reading his remark in context, that Krugman was in agreement. This is evident in his prefacing the remark by saying that people warning of a double-dip recession “made a lot of sense”, by his own (not McCulley’s) comment that to “fight the recession” the Fed “needs” to do so, and by his expressed pessimism that the Fed could “pull that off”.

      Later that month, Krugman said that the “economic funk” was “not over”. He
      wrote that there was “no mystery about the cause of our funk”. The problem in
      his view was that “the bubble years left us with too much capacity, too much
      debt and a backlog of business scandal.” The question remained: why had such malinvestment occurred? What Krugman identified as the disease, Ron Paul had identified as the symptoms. Furthermore, if “too much debt” was admittedly part of the problem, how, then, could Krugman possibly rationalize advocating a Fed policy of encouraging even more spending and more
      debt as the solution?

      Krugman further wrote that he was “getting worried” that the U.S. might “have a real estate bubble”. “More and more people are using the B-word about the housing market”, and there were suggestions that “people are now buying houses for speculation rather than merely for shelter.” So what was Krugman’s answer to the possibility of a housing bubble? To cut interest rates further and “throw money at the economy”, of course!

      If we do have a housing bubble, and it bursts, we’ll be looking a lot too [sic] Japanese for comfort. A recent Federal Reserve analysis of Japan’s experience declares that the key mistake Japan made in the early 1990’s was ‘‘not that policy makers did not predict the oncoming deflationary slump—after all, neither did most forecasters—but that they did not take out sufficient insurance against downside risks through a precautionary further loosening of monetary policy.’’ That’s Fedspeak for ‘‘if you think deflation is even a possibility, throw money at the economy now and don’t worry about overdoing it.’’ And yet the Fed chose not to cut rates on Tuesday. Why?[ii]

      [i] Paul Krugman, “Dubya’s Double
      Dip?” New York Times, August 2, 2002,
      http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html.

      [ii] Paul Krugman, “Mind the
      Gap,” New York Times, August 16,
      2002, http://www.nytimes.com/2002/08/16/opinion/mind-the-gap.html

      I advise you to read the book:

      https://www.jeremyrhammond.com/ron-paul-vs-paul-krugman/

      Reply

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