Is a new housing bubble being created?

[Sam_Stone]

@jshore

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.

Actually, the Fed hasn’t run out of monetary tools, and if you read Krugman’s articles from 2001, he was making the same point with respect to Japan. In fact, the U.S. has already done some of this. You can print money (“Quantitative Easing”). Milton Friedman once said that a ‘helicopter drop’ of money would be more effective than a spending stimulus, because it could be timed better and would keep the government out of the mix. You can inflate prices and devalue your currency.

But you’re setting up a false choice anyway. If fiscal stimulus doesn’t work, it really doesn’t matter whether or not monetary stimulus has run out of bullets, it’s a bad idea either way.

[Dick_Dastardly]

@Sam_Stone

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.

Using 2001 quotes is ridiculous. In 2001 Krugman was advocating rate cuts to get the economy going, he wasn’t advocating inflating a $14 trillion housing bubble. If you go and cherry pick his quotes through 2002/3/4 etc. you can see him start to worry about the size of the housing bubble too, pointing out it would get out of hand and cause a crash.
Krugman isn’t cheerleading deficits, he’s pointing it’s necessary to get us out of the current mess. He isn’t against monetary policy either, he’s advocating QE.

It was really easy to use monetary policy in 2001, we could cut interest rates to goose the economy! With the Fed funds rate effectively zero now, how do you cut interest rates to goose the economy considering banks are swimming in zero percent Fed dollars and aren’t lending, and consumers aren’t borrowing? There’s a big hole in demand that can’t be filled by tappedout consumers and the only actor capable of doing so is government.