It seems that since the subprime market went south, loans backed by the Federal Housing Administration are being doled by banks eager to cash in on a risk-free enterprise:
For discussion: Isn’t a moral hazard being created by offering loans with so little risk to banks? Is such a bubble looming? And, if so, how much of an effect would it have on the U.S. economy?
Why don’t we wait until real estate prices start rising before we start talking about bubbles.
Keeping the housing bubble inflated is a major part of the government’s economic strategy. In fact, pumping up bubbles is the only thing that has kept the economy from totally flatlining for about the last 15 years. First the dot-com bubble, then the housing bubble, then a commodities bubble, next a “green energy” bubble. Get your cap-and-trade credits now or be priced out forever!
They are still selling Reverse Mortgages, which are a con, so that bubble will burst, leaving many elderly homeless and penniless.
Well, it must make Paul Krugman happy. In 2002, he was pushing hard for Greenspan to keep interest rates low specifically to create a housing bubble, which he thought would be the savior of the economy. That’s right - Paul Krugman specifically advocated for the creation of a housing bubble as a means of improving the economy. Didn’t that work out swell?
What technocrats like Krugman and some in the current administration need to learn is that bubbles, stimuluses, and other means of yanking the strings of the economy do great harm in the long run by distorting prices and moving capital away from productive uses and into non-productive uses. They may give you a short-term boost, but in the long run they’re poison.
Sam, a quick search on google showed that this claim seems to be all the recent rage in places like Reason.com, but could you provide us with evidence to support it? What I seem to recall is at about the time that you were telling how wonderful and honky-dorry the Bush economy was (July 29, 2005), Krugman was warning us that the housing bubble might soon burst (May 27, 2005).
Glad to oblige.
From the New York Times, Aug 2, 2002
And, just for the fun of it, here is a 2005 piece written by Noel Sheppard in conservative Business & Media Institute; he is a conservative darling who is also a contributing editor for Newsbusters.org. In it, he makes fun of Paul Krugman and the others who claim that the housing market is a bubble. Here are the last 3 paragraphs of that piece:
So, apparently the problem is that the media was overblowing the possibility of a bubble and what they ought to have been doing is ignoring the doomsayers like Krugman and be more evenhanded by cheering the housing market on! As we can see in retrospect, he had that exactly right! :rolleyes:
I think there is some pretty severe re-writing of history going on now! Fortunately, in the days of the internet, that ain’t so easy to do anymore!
Sam,
Using that quote against Krugman, particularly in the full context of the article, seems to be like blaming the weatherman if some people get hit by lightning because he is the one who said there was going to be a thunderstorm!
The overarching fact is that Krugman, more than anyone else, warned early and often of the dangers of a housing bubble (and basing an economic recovery almost solely on housing) at a time when most people on the Right were all ga-ga about how strong the fundamentals of the economy were and were even mocking the media (including Krugman in particular) for being too negative about the housing market!
The more I read of Krugman, the more I realize why the Right is so intent on attacking him…because he was so freakin’ prescient. Here is Krugman on Sept 30, 2001:
Now, this isn’t exactly how it played out. The economy showed a bit more of a recovery and then more of a nosedive than Krugman imagined, the unemployment rate has now topped 9.5%, and I’m sure the 2010 budget deficit is projected at way over $800 billion. But geez, when you compare to what other people were telling us…
I think the philosophy of attacking Krugman on the housing bubble thing is sort of similar to the Rovian philosophy of going after Kerry on the swiftboat stuff: If you can turn your opponent’s strength into a weakness…
The housing bubble was created by Clinton then perpetuated by Bush when they decided that the American Dream was for every family to own a home. Clinton changed the rating systems for banks, and created a system where banks were rewarded for providing risky loans to minorities and low income earners so that they could buy a home. Of course that also meant that the middle class were able to obtain mortgages they couldn’t afford either.
Government artificially created demand for homes (from those who shouldn’t have qualified and couldn’t afford them), which artificially increased home values to unsustainable levels. The market, as it always does, is self correcting.
The thing about Krugman is that his positions shift with the political winds, so you can always find something you like.
For instance, here’s Krugman in 2001, when he sounds like a supply-sider:
But the fact is, one of the acknowledged villians of the current deep recession was the Federal Reserve’s low interest policy. And Paul Krugman was the leading cheerleader for it. In article after article, he was pushing hard for Greenspan to lower interest rates. For example, here he is in the same article:
And this one is amazing, in which he disses European ‘Third Way’ social democracy:
Get that? Job creation in the U.S. is because of a weaker social safety net, and because of expansionist monetary policy. He didn’t like fiscal stimulus then, because he felt that the debt increase required to pay for it was too dangerous. But then, a fiscal stimulus then would have been spent by a Republican president on Republican types of jobs, and Bush was running big deficits, so those were now an overriding concern for Krugman.
Paul Krugman is a good economist in his area of specialty. But he’s also a strong partisan, and it colors his opinions.
A housing bubble with dropping prices, many ,many foreclosures, few mortgages being revamped, unemployment climbing …not possible.
I agree with this completely.
It’s never a good idea to divorce risk from reward. It’s amazing we haven’t learned this yet.
But the Obama administration doesn’t give a shit. His goal is to redistribute wealth. Let things get really bad, and then the government will step in and dole out our money in some grand emergency plan. Maybe even a plan that no one will even read.
Sam, do you have more than one NYTimes column? You have posited that Paul Krugman was advocating for a housing bubble. I think you need more than one or two cherry picked quotes out of context from a column that he writes several times per week.
Well, in the other quote I gave above, given from another interview, Krugman re-iterates his call for lower interest rates, specifically mentioning how it will help the construction industry.
He wrote dozens of articles back then calling for lower interest rates.
Here’s another: New York Times, May 2001.
In this article he calls for more rate cuts. His argument seems to be that one speculative bubble popped, and recessions usually follow bubble bursts, but he thinks this can be avoided by being extremely aggressive with interest rate cuts:
He seems to be arguing that speculative bubbles can be ‘managed’ with aggressive interest rate cuts when they pop, so that the party can continue on ad-infinitem.
From an interview with Lou Dobbs in July 2001:
The more I read of Krugman back then, the more he sounds like a monetarist, not a Keynesian. For example, there’s this article in 2001, in which he talks about Japan’s approach to their recession. Today, Krugman’s spin is that fiscal policy didn’t work for Japan because it wasn’t aggressive enough - if they had just done more spending, they could have pulled themselves out. But this is what he said in 2001:
So… The problem with fiscal policy is that it creates big distortions and potential for corruption, racks up your debt, and is temporary - as soon as the stimulus is gone, the hangover starts. There are no free lunches. In the meantime, huge construction problems cause environmental issues.
These are exactly the arguments opponents of a fiscal stimulus use today. In 2001, Krugman was calling for more interest rate cuts, because he didn’t think fiscal stimulus was a good idea. Today, he thinks Japan needed more fiscal stimulus. In 2001, he thought their fiscal stimulus was ‘awesome’ in scope, and that Japan wasn’t doing enough - with monetary policy.
Even JShore’s quote above, posted to point out how prescient Krugman was, is essentially the same argument his opponents are using against him today.
So the ‘nightmare scenario’ is that the government will try to use fiscal stimulus to stave off recession, resulting in a huge debt and a deficit of 800 billion dollars, which ‘no one knows how to manage’ what with the baby boomers retiring and all.
And so now here we are in 2009 - with a deficit more than twice that size, and Paul Krugman cheerleading for even bigger deficits and more fiscal stimulus. The Paul Krugman of 2001 would not have approved. Back then, he warned against fiscal stimulus, because his big ideas of the time were all monetary. In that article, he suggests allowing banks to buy riskier, long-term government debt instead of short term, and he proposes that the Japanese simply print yen and use the money to buy American dollars. This would drive down the yen, make exports more competitive, and pump more money into the system.
He thought Japan did too much fiscal stimulus and not enough monetary policy. Today, he ignores the call for similar monetary policy ‘fixes’ in the U.S., and calls for more fiscal stimulus. In 2001, his ‘nightmare scenario’ was a decade of constant Keynesian pumping by the government to stave off the inevitable, leading to a huge deficit and a moribund economy, with the big crunches of Social Security and Medicare just around the corner. So to him then, the answer was monetary policy, which would keep the bubbles going without requiring the government to spend money.
Krugman was pretty consistent about this back then. In this article from 1999, he talks about then-current economic problems and solutions. Fiscal policy isn’t mentioned once. He talks about rapidly expanding the money supply, maintaining low interest rates, and ‘learning to love inflation’.
Finally, when Krugman isn’t being a partisan editorialist, he can be very good. Here’s his chapter on Fiscal Policy from his macro textbook. In it, he talks about how fiscal policy can work, what the multiplier is, etc. But he sounds a lot more cautious about it than he does as a pundit. He discusses the problems of debt and lag and other issues of practical implementation of fiscal policy, and admits that many economists don’t think it’s a good idea for these reasons.
To be fair to Krugman, he occasionally said nice things about Keynes even back then, such as in this article from 1998.
The thing about Krugman that conservatives don’t understand is he actually modifies his views of what to do on the basis of actually circumstances rather than being slave to ideology (which is exactly the opposite of what you claim, by the way, although your own examples back up this fact). Krugman understands that the Fed can’t cut the interest rates below zero! I.e., we have basically exhausted the monetary options, had a huge implosion of demand, and need to stimulate the demand side of the economy.
Many conservatives on the other hand can’t modify their ideology to suit actual circumstance and thus you have RNC head Steele and many others running around talking about supply side solutions…how you need tax cuts to stimulate investment and so forth, which is pretty amusing when you think about it. What sort of idiot is going to invest in expanding his factory when there aren’t any buyers for what he is already producing!?!
I’ll give you everything you like to say about Steele, but your first paragraph is complete blather. What exactly is different between the US situation of today and Japan’s situation of ten years ago? If anything they were sitting on a much better debt situation as a starting point than we are. Or is it in the alternative universe of Obama economics, the more debt you have to start with, the bigger deficits you can run up without worrying about the consequences?
GWB running up a trillion dollar deficit was bad, BHO running up one twice that size is worse. Somewhere there must be a balance between what Hoover is accused of (not entirely fairly) and the monetary policy of Rober Mugabe.
I was one of those kooks who was complaining about the dot-com bubble in 1997 and that the projected budget surpluses were illusory because a lot of the income being taxed was illusory in the first place. No one wanted to hear it back then, nor in 2003-5 when I was screaming that easy credit was a dangerous way to inflate the housing market and thus the economy.
The public sector borrowing and spending like a drunken sailor for a decade is not really the hangover cure from the private sector borrowing and spending like a drunken sailor or a decade.
The point is simply what I said – that you can’t cut interest rates to less than zero so the Fed has run out of monetary tools to stimulate the economy. The only way to stop the implosion of demand is for the government to step in and create some demand.
I agree with you that this leads to higher deficits in a situation where we already had large deficits, but the alternative is to have the economy continue spiraling down. That is not the time to worry about fiscal responsibility. If the economy continues to implode, you would still get the high deficits anyway because revenues would continue to sink, only then you would have high deficits and an economy that is even a lot crappier that it would be with the stimulus.