# Is a new housing bubble being created? **URL:** \ **Category:** Great Debates\ **Created:** [July 6, 2009, 12:36am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030 "2009-07-06T00:36:50Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![sleeping](https://avatars.discourse-cdn.com/v4/letter/s/839c29/32.png) [@sleeping](https://boards.straightdope.com/u/sleeping)\ **Post date:** [July 6, 2009, 12:36am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/1 "2009-07-06T00:36:50Z")
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: > [@](#): > > Last year banks issued $180 billion of new mortgages insured by the FHA, which means they carry a 100% taxpayer guarantee. Many of these have the same characteristics as subprime loans: low downpayment requirements, high-risk borrowers, and in many cases shady mortgage originators. FHA now insures nearly one of every three new mortgages, up from 2% in 2006. > > The financial results so far are not as dire as those created by the subprime frenzy of 2004-2007, but taxpayer losses are mounting on its $562 billion portfolio. According to Mortgage Bankers Association data, more than one in eight FHA loans is now delinquent – nearly triple the rate on conventional, nonsubprime loan portfolios. Another 7.5% of recent FHA loans are in “serious delinquency,” which means at least three months overdue. > > The FHA is almost certainly going to need a taxpayer bailout in the months ahead. The only debate is how much it will cost. By law FHA must carry a 2% reserve (or a 50 to 1 leverage rate), and it is now 3% and falling. > > … > > How did this happen? The FHA was created during the Depression to help moderate-income and first time homebuyers obtain a mortgage. However, as subprime lending took off, banks fled from the FHA and its business fell by almost 80%. Under the Bush Administration, the FHA then began a bizarre initiative to “regain its market share.” And beginning in 2007, the Bush FHA, Congress, the homebuilders and Realtors teamed up to expand the agency’s role. > > The bill that passed last summer more than doubled the maximum loan amount that FHA can insure – to $719,000 from $362,500 in high-priced markets. Congress evidently believes that a moderate-income buyer can afford a $700,000 house. This increase in the loan amount was supposed to boost the housing market as subprime crashed and demand for homes plummeted. But FHA’s expansion has hardly arrested the housing market decline. The higher FHA loan ceiling was also supposed to be temporary, but this year Congress made it permanent. > > … > > Because FHA also allows borrowers to finance closing costs and other fees as part of the mortgage, the purchaser’s equity can be very close to zero. With even a small drop in prices, many homeowners soon have mortgages larger than their home’s value – which is one reason FHA’s defaults are rising. Every study shows that by far the best way to reduce defaults and foreclosures is to increase downpayments. Banks know this and have returned to a 10% minimum downpayment on their non-FHA loans. > > [http://online.wsj.com/article/SB124139474675481713.html#mod=todays\_us\_opinion](http://online.wsj.com/article/SB124139474675481713.html#mod=todays_us_opinion) 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? ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [July 6, 2009, 8:02am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/2 "2009-07-06T08:02:39Z")
Why don’t we wait until real estate prices start rising before we start talking about bubbles. ---
**Author:** ![Hyperelastic](https://avatars.discourse-cdn.com/v4/letter/h/a3d4f5/32.png) [@Hyperelastic](https://boards.straightdope.com/u/Hyperelastic)\ **Post date:** [July 8, 2009, 2:15am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/3 "2009-07-08T02:15:36Z")
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! ---
**Author:** ![Never\_Say\_Dice](https://avatars.discourse-cdn.com/v4/letter/n/ee59a6/32.png) [@Never\_Say\_Dice](https://boards.straightdope.com/u/Never_Say_Dice)\ **Post date:** [July 14, 2009, 9:30pm UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/4 "2009-07-14T21:30:56Z")
They are still selling Reverse Mortgages, which are a con, so that bubble will burst, leaving many elderly homeless and penniless. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [July 14, 2009, 10:29pm UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/5 "2009-07-14T22:29:41Z")
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. ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [July 15, 2009, 1:33am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/6 "2009-07-15T01:33:49Z")
> [@Sam\_Stone](#): > > 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. Sam, a quick search on google showed that this claim seems to be all the recent rage in places like [Reason.com](http://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)](http://boards.straightdope.com/sdmb/showthread.php?t=327921), [Krugman was warning us that the housing bubble might soon burst (May 27, 2005)](http://www.nytimes.com/2005/05/27/opinion/27krugman.html?_r=1&incamp=article_popular). ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [July 15, 2009, 2:06am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/7 "2009-07-15T02:06:23Z")
Glad to oblige. From the [New York Times, Aug 2, 2002](http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html) > [@](#): > > 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. ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [July 15, 2009, 2:15am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/8 "2009-07-15T02:15:20Z")
And, just for the fun of it, [here](http://www.businessandmedia.org/specialreports/2005/mediamyths/mediamyths.asp) 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](http://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: > [@](#): > > It’s been more than four years since the media began reporting bearish housing predictions in earnest. Yet real estate values have forged ahead. As a result, the net worth of the average citizen is now at an all-time high, well exceeding what Americans enjoyed during the stock bubble years of the late ’90s and early 2000s. In addition, and maybe most importantly, close to 70 percent of residential dwellings are now owned by one or more of the inhabitants, also an all-time high. > > ``` > So who’s right about real estate – the media that have been predicting a crash for more than four years, or past and future Federal Reserve chairmen along with millions of Americans who have bought a piece of the American dream during this run-up? > > So far, the answer is clear. However, given the seriousness of this issue, and just how much impact the housing market has on the rest of the economy, the media should learn from this and present even-keeled reports that deal with how people should invest their money. > > ``` 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! ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [July 15, 2009, 2:29am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/9 "2009-07-15T02:29:42Z")
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! ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [July 15, 2009, 2:46am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/10 "2009-07-15T02:46:03Z")
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](http://www.pkarchive.org/economy/FearEconomy.html) is Krugman on Sept 30, 2001: > [@](#): > > Here’s my nightmare: America’s recovery from its current slump, whenever it comes, is tentative and short-lived, because the business investment that drove our boom in the 1990’s remains stagnant. Eventually the housing bubble bursts and we have another slump; then we have another weak recovery, this time driven by deficit spending, but that, too, fades out. Eventually we look around and realize that it’s 2009, and the economy still hasn’t fully recovered from the slowdown that began at the end of the previous decade. > > And we also realize that while the government’s subsequent attempts to sustain the economy, mainly through tax cuts and subsidies to energy companies, have arguably staved off depression – the unemployment rate has risen, but only to 8 percent – they have also devastated the environment and left a huge government debt. The fiscal 2010 budget deficit is projected at $800 billion, and nobody has any idea how we will manage in a couple of years, when millions of baby boomers start collecting their Social Security checks. > > Is this outlined situation an actual forecast? No, it’s only a possibility. And the terrorist attack doesn’t make it any more likely – if anything, the fiscal response to terror should help give the economy a boost now, when there is a good chance of heading off the chance that we will slip into a Japanese-style trap. 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… ---
**Author:** ![PunkyPoo](https://avatars.discourse-cdn.com/v4/letter/p/6bbea6/32.png) [@PunkyPoo](https://boards.straightdope.com/u/PunkyPoo)\ **Post date:** [July 15, 2009, 2:53am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/11 "2009-07-15T02:53:55Z")
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. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [July 15, 2009, 4:39am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/12 "2009-07-15T04:39:40Z")
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](http://www.pkarchive.org/global/welt.html): > [@](#): > > what’s the way out? Higher government spending or tax cuts? > > That can only be, always, the second line of defense. At first monetary policy must help. That is cleaner, because then no budget deficit is created. Government spending programs and tax cuts, in contrast, increase the debt. Besides, they cause argument between interest groups regarding who becomes the money. That is why my suggestions involve monetary policy: the European Central Bank should get expansionary. 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: > [@](#): > > During phases of weak growth there are always those who say that lower interest rates will not help. They overlook the fact that low interest rates act through several channels. For instance, more housing is built, which expands the building sector. You must ask the opposite question: why in the world shouldn’t you lower interest rates? And this one is amazing, in which he disses European ‘Third Way’ social democracy: > [@](#): > > **You don’t seem to be a enthusiastic follower of the “Third Way”.** > > I have never understood what that’s supposed to mean. If you mean job creation, there are two reasons why many jobs are created in the US. The social safety net is very limited, people are forced into the job market. At the same time monetary policy is expansionary. In continental Europe it’s the opposite, the safety net is very generous and monetary policy is rigid. In both respects Europe should move a little towards the US, without your social policies having to become as hard as ours. But you cannot avoid structural reforms. 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. ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [July 15, 2009, 4:48am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/13 "2009-07-15T04:48:21Z")
A housing bubble with dropping prices, many ,many foreclosures, few mortgages being revamped, unemployment climbing …not possible. ---
**Author:** ![PunkyPoo](https://avatars.discourse-cdn.com/v4/letter/p/6bbea6/32.png) [@PunkyPoo](https://boards.straightdope.com/u/PunkyPoo)\ **Post date:** [July 15, 2009, 10:49am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/14 "2009-07-15T10:49:29Z")
> [@Sam\_Stone](#): > > Paul Krugman is a good economist in his area of specialty. But he’s also a strong partisan, and it colors his opinions. I agree with this completely. ---
**Author:** ![magellan01](https://avatars.discourse-cdn.com/v4/letter/m/45deac/32.png) [@magellan01](https://boards.straightdope.com/u/magellan01)\ **Post date:** [July 15, 2009, 11:23am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/15 "2009-07-15T11:23:02Z")
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. ---
**Author:** ![China\_Guy](https://avatars.discourse-cdn.com/v4/letter/c/779978/32.png) [@China\_Guy](https://boards.straightdope.com/u/China_Guy)\ **Post date:** [July 15, 2009, 12:59pm UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/16 "2009-07-15T12:59:29Z")
> [@Sam\_Stone](#): > > 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? 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. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [July 15, 2009, 3:58pm UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/17 "2009-07-15T15:58:54Z")
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](http://www.pkarchive.org/column/5201.html). 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: > [@](#): > > Put it this way: Many economic commentators seem to subscribe to a sort of crime-and-punishment theory of recessions. They believe that after the economy goes through a period of speculative excess, it must then pay for that excess with a slump. > > But must irrational exuberance be followed by recession? The alternative to crime-and-punishment is let-bygones-be-bygones. Of course capital is wasted in a speculative boom, and much of that capital must be written off. Moreover, the sectors of the economy in which the speculative excess was greatest may not see much new investment for a while; it might be years before the demand for servers or business software resumes rapid growth. > > But why should this stop the economy in its tracks? There are always good investments to be made, if the price is right. Millions of Americans have decided that low interest rates offer a good opportunity to refinance their homes or buy new ones, even as the headlines warn of a slumping economy; and there are plenty of profitable opportunities in those old- economy sectors that got a bit neglected during the technology bubble. > > I’ve always favored the let-bygones-be-bygones view over the crime-and-punishment view. That is, I’ve always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. But I had to face the fact that speculative bubbles usually are followed by recessions. My excuse has been that this was because the policy makers moved too slowly — that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum. That was why I, like many others, was frustrated at the smallish cut at the last Federal Open Market Committee meeting: I was pretty sure that Alan Greenspan had the tools to prevent a disastrous recession, but worried that he might be getting behind the curve. > > However, let’s give credit where credit is due: Mr. Greenspan has cut rates since then. And while some of us may have been urging him to move even faster, the Fed’s four interest-rate cuts since the slowdown became apparent represent an unusually aggressive response by historical standards. It’s still not clear that Mr. Greenspan has caught up with the curve — let’s have at least one more rate cut, please — but the interest-rate cuts do, cross your fingers, seem to be having an effect. > > If we succeed in avoiding recession, this will mark a big win for let- bygones-be-bygones, and a big loss for crime-and-punishment. And that will be very good news not just for this business cycle, but for business cycles to come. 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](http://www.pkarchive.org/economy/ML071801.html): > [@](#): > > DOBBS: And the fact that the door is now open to another interest rate decline, that obviously is a hopeful sign to most investors. But the fact is we haven’t seen much impact from 6 interest rate cuts in six months. > > KRUGMAN: Right, the impact is in what hasn’t happened, instead of what has, which is that this has not turned into a freefall in the economy unless you happen to be a tech firm. But the Fed is certainly having harder time turning this around than we have become accustomed to have happen. > > DOBBS: Greenspan pointed out that he is very hopeful because of three major factors. One, lower energy prices, second, lower interest rates, and thirdly the tax rebates coming from the Bush tax cut that will start hitting mailboxes next week. Does that also salve your concerns? > > KRUGMAN: I’m nervous as I think he is. You know, all of the major recessions we’ve had for the last 40 years have been basically caused by the Fed. It was the Fed raising interest rates to bring inflation down. And this one, although the Fed did a little of that, is basically the first one we’ve seen in generations that was caused by a bubble in the private sector. It was caused by overinvestment. And it’s somewhat an uncharted territory here. We don’t know how much Fed cutting it takes. > > DOBBS: To restimulate business investment, capital investment and corporate buying? > > KRUGMAN: I think frankly it’s got to be – business investment is not going to be the driving force in this recovery. It has to come from things like housing, things that have not been (UNINTELLIGIBLE). > > DOBBS: We see, Paul, housing at near record levels, we see automobile purchases near record levels. The consumer is still very much in this economy. Can he or she – or I should say he and she, can they bring back this economy? > > KRUGMAN: Well, as far as the arithmetic goes, yes, it is possible. Will the Fed cut interest rates enough? Will long-term rates fall enough to get the consumer, get the housing sector there in time? We don’t know. The more I read of Krugman back then, the more he sounds like a monetarist, not a Keynesian. For example, there’s [this article](http://www.pkarchive.org/economy/FearEconomy.html) 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 why hasn’t Japan tried to get its sluggish economy moving again? The worrying answer is that it has tried, over and over – and failed. > > Remember that the first line of defense against recession is monetary policy, the ability of the central bank to cut interest rates. Well, in Japan monetary policy has hit the wall. Interest rates came down and down, falling below 1 percent in 1996. In early 1999 the Bank of Japan, the counterpart of the Federal Reserve, reduced the overnight rate to zero. Yet, there has been no sign of inflation – or of recovery. And you can’t push interest rates below zero. > … > The other reason that Japan does not look like a country in the midst of a depression is that the government has found a concrete solution to the problem of mass unemployment. By ‘‘concrete,’’ I don’t mean serious, hardheaded, substantial. I mean concrete, as in roads, dams and bridges. > > Think of it as the W.P.A. on steroids. Over the past decade Japan has used enormous public works projects as a way to create jobs and pump money into the economy. The statistics are awesome. In 1996 Japan’s public works spending, as a share of G.D.P., was more than four times that of the United States. Japan poured as much concrete as we did, though it has a little less than half our population and 4 percent of our land area. One Japanese worker in 10 was employed in the construction industry, far more than in other advanced countries. > > Without those public works programs, things might have been much worse. For there is no question that enormous public spending has helped keep the economy from sliding into a true, unambiguous depression. As one Japan expert, Adam Posen of the Institute for International Economics, points out, the record of the 1990’s is unmistakable. Every time the government tries to scale back its spending, as it did under Prime Minster Ryutaro Hashimoto back in 1997, the economy goes into a recession. Every time the government goes back to its free-spending ways, as it did after Hashimoto resigned in disgrace, the economy perks up a bit. > > Now for the bad news: deficit spending has slowed the Japanese economy’s slide, but it has not reversed it. That is, the public works programs provide only temporary, symptomatic economic relief. The favorable effects last only as long as the spending itself. They don’t seem to lay the basis for a permanent turnaround. > > And meanwhile, though Japan has thus far avoided mass unemployment, its policy of massive public works spending has produced many nasty side effects. One is the vast environmental damage that has been inflicted in the name of job creation. Another is pervasive corruption, as rakeoffs and kickbacks have become a way of life, distorting the whole economic and political system. > > Furthermore, a decade of huge deficit spending has left Japan with an enormous public debt. Japan last ran a budget surplus in 1992. In that year, the nation’s public debt was about 60 percent of G.D.P., about the average for advanced countries and slightly less than the figure for the United States. The years of deficit spending since then have pushed Japan’s debt above 130 percent of G.D.P. That’s the highest ratio among advanced nations, considerably worse than either Belgium or Italy, the traditional champions. It’s almost twice the advanced-country average and 2.5 times the figure for the United States. 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. > [@](#): > > Let me be clear: I don’t think that the United States is at any imminent risk of following Japan into deep slump. What I do fear is that a combination of factors – the legacy of our bubble economy, the trouble in Japan and maybe the psychological impact of the terrorist action – will drag us into a prolonged period of stagnation. > > Here’s my nightmare: America’s recovery from its current slump, whenever it comes, is tentative and short-lived, because the business investment that drove our boom in the 1990’s remains stagnant. Eventually the housing bubble bursts and we have another slump; then we have another weak recovery, this time driven by deficit spending, but that, too, fades out. Eventually we look around and realize that it’s 2009, and the economy still hasn’t fully recovered from the slowdown that began at the end of the previous decade. > > And we also realize that while the government’s subsequent attempts to sustain the economy, mainly through tax cuts and subsidies to energy companies, have arguably staved off depression – the unemployment rate has risen, but only to 8 percent – they have also devastated the environment and left a huge government debt. The fiscal 2010 budget deficit is projected at $800 billion, and nobody has any idea how we will manage in a couple of years, when millions of baby boomers start collecting their Social Security checks. 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](http://www.pkarchive.org/theory/LoveInflation.html) 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](http://www.worthpublishers.com/krugmanwellsnew/pdf/KRUGMAN_WELLS_MACRO_CHAPTER12.pdf) 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](http://www.pkarchive.org/theory/keynes.html) from 1998. ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [July 15, 2009, 4:27pm UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/18 "2009-07-15T16:27:32Z")
> [@Sam\_Stone](#): > > 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. 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!?! ---
**Author:** ![Mighty\_Mouse](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/mighty_mouse/32/7776_2.png) [@Mighty\_Mouse](https://boards.straightdope.com/u/Mighty_Mouse)\ **Post date:** [July 15, 2009, 5:12pm UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/19 "2009-07-15T17:12:19Z")
> [@jshore](#): > > 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. ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [July 18, 2009, 3:24am UTC](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030/20 "2009-07-18T03:24:38Z")
> [@Mighty\_Mouse](#): > > 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? 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. [Next page](https://boards.straightdope.com/t/is-a-new-housing-bubble-being-created/502030.md?page=2)