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Things to Read on the Morning of January 25, 2014

Lunchtime Must-Read: When Someone Says Paul Krugman Called for Greenspan to Create a Housing Bubble Back in 2002, They are Trying to Say That They are Either a Fool or a Liar

Mark Thoma sends us to: Dean Baker: When Someone Says Paul Krugman Called for Greenspan to Create a Housing Bubble Back in 2002, They are Trying to Say That They are Either a Fool or a Liar: "Paul Krugman is a very smart person who does a fine job of defending himself. But he has enough detractors who repeat the same nonsense enough times that some reasonable people may actually be deceived.

For this reason, I will briefly intervene to point out that the people claiming Krugman called on Greenspan to create a housing bubble in 2002, like Bret Stephens in the Wall Street Journal today, are just making stuff up.

The basis for this absurd claim was a 2002 column on the weak recovery following the 2001 recession... and attributes it to the fact that the 2001 recession was... brought about by the collapse of the stock bubble. Krugman then wrote:

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.

It should have been pretty evident that this was sarcastic.... The last paragraph expresses Krugman's pessimism about the recovery's prospects:

But wishful thinking aside, I just don't understand the grounds for optimism. Who, exactly, is about to start spending a lot more? At this point it's a lot easier to tell a story about how the recovery will stall than about how it will speed up. And while I like movies with happy endings as much as the next guy, a movie isn't realistic unless the story line makes sense.

Note: there is no moaning about how difficult it is to get a housing bubble going. The point was that we needed some additional source of demand, and Krugman did not see where it would come from.... It is worth noting that two weeks later, partly at my prodding, Krugman wrote a column explicitly warning about the dangers of a housing bubble.

So let's cut the crap. There are plenty of places that right-wingers should be able to take issue with what Krugman says, but the story about him urging Greenspan to create a housing bubble in 2002 is complete nonsense. The people who repeat this line are either dishonest or too clueless to take seriously.

And here is the subsequent column from August 2002:

Paul Krugman: Mind the Gap: "When I first got professionally obsessed with Japan's problems, around four years ago, I made myself a mental checklist of reasons that Japan's decade of stagnation could not happen to the United States.

It went like this:

  1. The Fed has plenty of room to cut interest rates, which should be enough to deal with any eventuality.
  2. The U.S. long-term budget position is very strong, so there's plenty of room for fiscal stimulus in the unlikely event interest rate cuts aren't enough.
  3. We don't have to worry about an Asian-style loss of confidence in our business sector, because we have excellent corporate governance.
  4. We may have a stock bubble, but we don't have a real estate bubble.

I've now had to strike the first three items off my list, and I'm getting worried about the fourth.

More and more people are using the B-word about the housing market. A recent analysis by Dean Baker, of the Center for Economic Policy Research, makes a particularly compelling case for a housing bubble. House prices have run well ahead of rents, suggesting that people are now buying houses for speculation rather than merely for shelter. And the explanations one hears for those high prices sound more and more like the rationalizations one heard for Nasdaq 5,000.

If we do have a housing bubble, and it bursts, we'll be looking a lot too Japanese for comfort.

A recent Federal Reserve analysis of Japan's experience declares that the key mistake Japan made in the early 1990's was "not that policy makers did not predict the oncoming deflationary slump--after all, neither did most forecasters--but that they did not take out sufficient insurance against downside risks through a precautionary further loosening of monetary policy." That's Fedspeak for: "if you think deflation is even a possibility, throw money at the economy now and don't worry about overdoing it."

And yet the Fed chose not to cut rates on Tuesday. Why?

Last year some economists began privately referring to the Fed chairman as ''Greenspan-san.'' The joke faded out as optimism about recovery became conventional wisdom. But maybe it's not a bad nickname after all.