The Paul Krugman column from 2002 that everyone’s talking about:
A few months ago the vast majority of business economists mocked concerns about a ”double dip,” a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I’ve repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.
The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. 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.
Mark Hemingway at NRO
Michael C. Moynihan in Reason
Paul Mirengoff in Powerline:
Last September, in an entry called “Bubble Memories,” Paul Krugman took pleasure in recalling that in 2005, when he predicted that the housing bubble was going to burst, John Hinderaker saw “little reason to fear a catastrophic collapse in housing prices.” Krugman concluded his piece as follows: “Memories, memories.”
[...] Whatever the quality of Krugman’s predictions, I’d certainly beware of his prescriptions.
For the defense, Matt Y.:
If you read the read the entire column, Krugman was actually expressing skepticism that the Fed’s policies would have this result. He was saying that people were understating the odds of a “double dip” recession. But he didn’t say a double dip recession was inevitable. He said that if a double dip recession were to be avoided, the most likely mechanism would be the inflation of a housing bubble. As it happens, we didn’t get a double dip recession. Instead, we got soaring household spending driven by a housing bubble that replaced the NASDAQ bubble. The column, in other words, was completely correct.
And I was on the grassy knoll, too
One of the funny aspects of being a somewhat, um, forceful writer is that I’m regularly accused of all sorts of villainy. I was personally responsible for the demise of Enron; my nonexistent son worked for Hillary; etc.. The latest seems to be that I called for the creation of a housing bubble — in fact, the bubble is my fault! The claim seems to be based on this piece.
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.
Forget the grassy knoll. Can Krugman account for his whereabouts in February 1637?
UPDATE: Arnold Kling, defending Krugman.
UPDATE #2: Megan McArdle again