If you have been following the news lately, you’ve likely heard a resurgence of the claim that Paul Krugman predicted the housing bubble and the ensuing economic catastrophe. Bill Anderson sets us straight about the facts:
“Paul Krugman loves to remind people that he predicted the housing bubble collapse before others did. (Actually, I think he is confusing himself with Peter Schiff, but I digress.) Well, maybe there is another reason why The Great One did such a good self-described job in “predicting” the bubble: He called for the government to create one.
Now, in Krugman’s defense, he did not demand that the Fed create a new housing bubble; he just suggested it as a good idea to jumpstart more consumption. He wrote back in 2002:
‘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.’
This, my friends, is better known in my home state of Tennessee as the “hair of the dog,” which is what some of the Good Ole Boys take after a night of guzzling down lots of “Lynchburg Lemonade.” Since the stock market was in the toilet, what better way of trying to “stimulate” consumption without the economy producing anything than to do it in the housing market!
The problem here is not with Krugman’s recommendations, as awful and stupid as they were (and still are). The problem is more basic; Krugman’s Keynesian “economics” is stupid, wrong-headed, and as crude a “theory” as the economics profession could create.
To his “credit,” Krugman actually admits that he wrote that Really Stupid Comment. Furthermore, he does not exactly disown it:
‘Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.’
Uh, sorry. It was advocacy. Bubbles exist because of easy credit and easy money, and Krugman already is on the record as claiming that inflation will give an economy “traction,” which is Keynesian-speak for “stimulating” spending.”
I can’t wait for Anderson’s comprehensive review of this topic, because I’m sure he has more to say.
But for now, it gets even better on the Mises blog, where Mark Thornton demolishes any pretentious nonsense that Krugman did not advocate a housing bubble with a torrent of quotes:
August 14, 2001
“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.”
Krugman, please stop talking, you are a shill and you know it. You advocated inflation and a bubble economy, period.