Fun Stuff from the Ludwig Von Mises Institute, who did a bit of digging and found Paul Krugman's 2002 urgings to create a housing bubble.
Yeah, you read that right. Why anyone continues to take this guy seriously is beyond me.
Fun Stuff from the Ludwig Von Mises Institute, who did a bit of digging and found Paul Krugman's 2002 urgings to create a housing bubble.
Yeah, you read that right. Why anyone continues to take this guy seriously is beyond me.
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How about checking Arnold Kling, who first brought this to light?
http://econlog.econlib.org/archives/2009/06/defending_what.html
"Krugman was mainly expressing pessimism. He was not cheerfully advocating a housing bubble, but instead he was glumly saying that the only way he could see to get out of the recession would be for such a bubble to occur."
Thanks for clarifying, bc - Krugman wasn't cheerful about his economic prescriptions.
Kling goes on to say "To me, this raises the question of whether a distorted recovery is better than an undistorted recession." Whether Krugman really really no backsies meant that we needed a housing bubble, there is no question that he believes firmly in distorting the economy to suit his own preferences.
Finally, bc, read the whole article at von mises. There's more than enough crow for Krugman and his apologists to eat, and have plenty left over. The housing bubble was an oft-repeated theme for Krugman, in multiple venues.
You have to hand it to Krugman, he's predicted 10 out of the last 3 recessions.
We "needed" a housing bubble because Bush's coarse and ill-timed tax cuts left us without traditional anti-recessionary measures. (At least without increasing the deficit to what looked like an impossible level, at least for Republicans.) It isn't Krugman who wanted a housing bubble; it is Krugman observing that Greenspan needed a housing bubble to compensate for his mistaken disparagement of the Clinton surplus.
That's the plain reading of Krugman's work, and the fact the libertarian cult can't figure that out is curious. Perhaps they are a little demented by the failure of yet another attempt to drown the entire government in the bathtub.
"It isn't Krugman who wanted a housing bubble; it is Krugman observing that Greenspan needed a housing bubble..."
That's pretty nicely debunked by the LVM folks, Andrew. Nice try, though.
Actually, I'm with Andrew on this one. Really.
The key quote from the 2002 column is this:
Clearly, "Greenspan induced bubbles" are negative things.
What the LVM folks have done is show conclusively that in 2001, Krugman advocated a housing led recovery and low interest rates to create a boom.
This, as the LVM folks claim, is entirely in keeping with expectations - Krugman is a good Keynesian, this is the prescription - he was hardly alone here!
But Krugman never actually advocated a "housing bubble" in the 2002 op ed, just alleged that that is what the Bush and Greenspan needed.
Now, a good Austrian would say, "boom == bubble" and consider his case proved. No wonder the LVM article reads so smug.
The key here is to comprehend the subtlety, the nuance, that makes all the difference:
- When they do it (lower interest rates and incur deficits, and inflate asset prices), it's a reckless, unsustainable bubble.
- When we do it, it's engineering a prosperous boom.
All ist klar?
Krugman was in the awkward position in 2002 of endorsing the policy of the Fed, which he identified with the Republicans; he had to be back handed and disparaging about it. I'd say he succeeded, personally.
And FWIW, I agreed with both Krugman and Greenspan right through 2002, I thought and still believe that deflation was a real risk then, and that the primary mistake was not raising rates sooner once things got going (should have followed the Taylor rule), which might have ruptured the disequilibrium without the current level of dislocation of pretty much all assets, everywhere, all at once.
And also FWIW I'd caution Joe against the siren song of the Austrians, where there are plenty of grounds for criticism of current policies from within the Keynesian consensus - there are plenty of mainstream and even left/liberal economists who question the wisdom of risking sovereign insolvency in the pursuit of "stimulus".
Krugman is much further out on a limb now than seven years ago. (Because we are much, much broker now).
Wow. That makes absolutely no sense to me.
Firstly, there are plenty of traditional anti-recessionary measures, but none of them were really tried.
Secondly. it seems to me the problem here wasn't that there was a recession and nothing was done about it, but rather that anti-recessionary tactics were used when in fact there was no recession, driving the economy upwards thus creating pro-cyclical rather than anti-cyclical pressure. The overheated economy "bubble" then inevitably popped going from a peak into a trough. Had there been less pro-cyclical policies, e.g. interest rates kept higher and less encouragement of banks to give out marginal loans then likely the bubble would not have been anywhere near as severe.
I also don't think all the cries of "recession" when the bubble had not popped yet helped much,
To claim that a small tax cut (in the grand scheme of things) caused this crisis seems to me like you just want to find a way to blame your political opponents when it was at the very least a bi-partisan screwup.
Hmm I just realised my comment isn't quite saying what I meant it to say.
Yes, tax cuts during a time of no recession could be argued to be pro-cyclical but the thing is you can't look at the economy like it's one monolithic entity and it's all doing the same thing at the same time.
Before this crisis hit, aside from the housing sector, I'd say the US economy was pretty much flat. No spectacular growth, but hardly a recession either. The housing sector, on the other hand, was going insane.
Now I don't see how you can claim with a straight face that in this environment a small tax cut is going to exacerbate the housing bubble. Nobody's going to get a $600 cheque (or whatever it was) and run out and buy a house. What's going to make them buy a house is low interest rates, easy loans, skyrocketing prices and the impression that it's easy to buy low and sell high in the market. Those things were caused by (a) poor Federal Reserve decisions (possibly because they were looking at the economy as too monolithic an entity) and (b) severe market distortions caused by the incentives for banks to make loans to people who couldn't pay them back.
We can argue about the reasons behind the forces which caused the bubble but I'm sorry I just don't see how you can connect the tax cut to it.
"Bush's coarse and ill-timed tax cuts"?
'Coarse' in the sense that it's terribly vulgar to let people keep money they earn, or in the sense that the cuts weren't targeted enough to make sure they benefited just the right sort of people?
Alles ist klar, indeed.
Few weeks after recieving the Nobel Prize, Mr. Krugman blamed Aznar government for lying on the Madrid train bombings.
The timing, five years after the massacre, and dishonesty of that statement points out to a relation, at least ideological, to the oligarchic structures present in Western Europe.
Knowing those oligarchies, I am inclined to think Mr. Krugman really meant to create a housing bubble, leaning on the instruments already inoculated into the real estate market by previous keynesians (Freddy Mack, Fannie Mae) and the new deregulation which made banks able to pour cash from everywhere with little control and backing from the Fed.
That is, in a free one, small bubbles may occur as supply meets demand, but if the market is manipulated it cannot be ever considered a boom, but a bubble.
Our society has moved past the discussion of how these "toxic assets" moved from the primary market (lending institutions) into the secondary market (financial institutions). That transition only occurs through Government Subsidized Entities, Fannie Mae, Freddie Mac, Ginnie Mae, etc... Furthermore, once those mortgages were off the books of the primary market lenders they no longer posed a risk to them. However, the GSE's allowed so many into the financial market that it poisoned countries around the globe, all because our politicians felt every American deserved a home. This notion was promoted to politicians by various Community Organizers and Activists, while Clinton and Bush (43) both spoke of record home ownership. This was largely created by government and we are allowing government to fix it. When will we learn?
Look back at the quotes of who was saying the GSE's needed further oversight and regulation, as opposed to those who tried to demagogue them for saying such a thing.
Much as I'd like to lay the blame solely at the feet of the GSE's, but I have seen contrary data.
As of Q4 '08, the "private label" mortgages were responsible for a vastly disproportionate number of delinquencies compared to those of the GSEs. See this report, page 30.
Specifically, your assertion:
The GSEs certainly played a role - their entire raison d'etre was to distort the mortgage market, after all - but Wall St (securitization) and Main St (mortgage fraud) managed to grope their way through more than a few assignations unchaperoned by the likes of Aunt Fannie and Uncle Freddie...
lewy (#6)... those accompanying 2001 quotes, from multiple instances, don't sound like your characterization - they sound very much like advocacy.
As for #12, I think we're in general agreement. Fannie and Freddie helped create the problem, shielded by their political favourmeisters. Wall Street also helped do a fair bit of damage, too. The relationship of all of the above to monetary policy is the missing link in your response - the Fed was very much at the heart of this situation. Even as it's placing itself squarely at the heart of the next one.
Joe, it's true that the Fed may be looking at insolvency as a consequence of the actions it's taken so far.
But what were they going to do?
I don't recall many people complaining when the Fed shielded the US from the worst consequences of the Russian bond crisis, the Asian currency crisis, and the LTCM crisis in the late '90s.
I don't recall many complaints when the Fed lowered rates in the wake of 9/11.
Greenspan is often criticized in hindsight for the tech bubble - but was that really his business to shut down? Yahoo, Google, Amazon - each had Underpants Gnome - level valuations at some point.
Greenspan did make mistakes.
His assumption that the self interest of Wall St was in any way enlightened was a principle/agent fail of epic proportions.
And Greenspan should have raised rates quicker after the 2001/2002 recession ended, as I indicated in #6. Many people are in general agreement about this.
The housing bubble was fundamentally different from the tech bubble because it was a debt bubble, not an equity bubble, and the consequences for the latter are much more severe. Equity, when it dies, goes peacefully to money heaven. Debt likes to take as many as it can along with it.
But lowering rates in the first place was not a mistake. The Fed has a dual mandate by statute: price stability and employment. Both were at risk in the 2001/2002 timeframe. That the Fed oes not take the same hard line with inflation as (e.g.) the ECB is by design. I don't see either party proposing a bill to change that mandate.
And the current low rates and level of quantitative easing etc are not necessarily a mistake either on the part of the Fed. If the economy had completely tanked, we face a solvency crisis and dollar collapse anyway - one catalyzed by crashing tax revenues as opposed to debt issuance, but a "Minsky moment" nonetheless.
Recall the rate of free fall the economy suffered in the wake of Lehman - how much more of that do you think we could have taken? Standing aside and allowing "creative destruction" to run its course would have been the "pure" thing to do but the real risk was of not one stone being left upon another. The alphabet soup of interventions is no cure and it raises its own problems - and the end of contraction is by no means assured. But they did stop the free-fall.
Perhaps it's just kicking the can down the road, but section 13.3 of the Federal Reserve Act is there for a reason.
The Fed is not some rogue entity, they are doing what they are supposed to - standing aside and doing nothing while prices spiral down into debt deflation and unemployment ramps up would not be consistent with their governing statute.
But that's just the monetary side. My problem with the stewards of the fiscal side of the house is not their Keynesian theory, but the adequacy of their skill as practitioners.
Do take a look though at the Ritholtz article I linked, you'll like it.
Lowering rates was like entering into a refinery with a match lit, and keeping them down was like running with a torch through it: all the conditions were met for once the fire began, it won't end until all the fuel be depleted.
Any other middle result foreseen belongs only to the realm of imagination, not the real world.
Moreover, it is not the task of the BCE nor the Fed to provide happiness to the regular citizens, neither to the bank's executives, nor to cover up one thing under the other.
Why did the Fed act when it did? Because in fact they stood aside and did nothing for a while. What was the turning point? AIG? Why does the Fed allow some banks to collapse and not others? Do ut des?
Mr. Krugman has already portrayed himself pretty well.
Lewy 14, I know of no other entities that buy mortgages from banks and pool them into Mortgage Backed Securities (MBS, then sell them into the financial markets. Of course I am open to hearing of any you know about.
Heh:
That's a definite keeper. And I am reading that article. Many thanks for including it.
Scooter, the relevant search would be "private label MBS".
Some examples of what you find:
Here's something from the FDIC, from 2006:
Here's something from the site of a financial consultant - this might help clarify some terminology:
The references to non-GSE MBS issuers are abundant. And again, it is the private label MBS which are defaulting at vastly disproportionate rates compared to the GSE backed MBS.
Now, I believe it is the case - read this in the NYT a while back but don't have the reference offhand - that the GSEs themselves did purchase private label MBS. But they were far from the only purchasers.
Scooter, I had a longer response which apparently got eaten by the blog or something... in any case, the relevant Google search is "private label MBS", and you will find several references which will back my assertion that the GSEs were not solely responsible for securitizing mortgages.
And I'd even go further and say securitization is not in and of itself a bad thing.
Just to toss out my two old posts on this:
Long Post On Fannie And Freddie With Graphs
and
GSE's Redux
Marc
I like this:
Nine months on - how's that working out?
Half the folks arguing Goldman Sachs works for the government, the other half arguing the government works for Goldman Sachs. Nobody noticing it doesn't much matter.
Brilliant, innit?
Lewy 14, I was unaware of the Private Label MBS Market, thanks for informing me. It seems to be approaching, or has past 30 percent of the total MBS Market. In regards to sole responsibility, no one has that. However, It seems that the GSE's involvement in front end risk reduction and the specific political manipulations of such has been near totally ignored by our media informants. This cannot be healthy.
I do agree securitization is not totally bad because it frees up capital for more lending. But, I do think it allows the front end lenders to be more risky in their terms and if that risk is not accurately assessed by the rating agencies the risky assets pour out into the global financial market. Therefore, when many local "blisters" pop, the world suffers from the bubbles deleveraging.
Also, I'm curious; it seems that mortgages that pass through the GSE's are implicitly insured by the federal government. Would the Private Label MBS's have that same artificially reduced default risk?
Would the Private Label MBS's have that same artificially reduced default risk?
Why yes! Who was doing the guarantees? Well... AIG was providing guarantees ("credit enhancement") for the sub-prime mortgage securities, except for the tail end of the bubble, when according to Michael Lewis, the big banks were simply swallowing the risk without guarantees.
Oh, and who was guaranteeing AIG? Heh, you and me, d00d.
Is this all making more sense now? ;)
Lewy 14, thanks and sorry it took me so long to get back - three kids, with the oldest being a toddler. Actually I am perfectly aware of AIG's "Credit Default Swaps", which should've been capitalized like Insurance but skirted regulation with the title of a "swap". However, that risk reduction only comes through an outside source. My curiosity is more in line of the GSE's implied backing by the federal government. I can't imagine Private Label MBS's having any such implied guarantee.