The great debt bubble of 2011

Larry Motuz

The article cites Krugman as urging Greenspan to create a new bubble. Please correct.

“This, probably accidental­ly, misquotes Krugman, who was citing someone else.

Go to the original NYT article: "Dubya's Double Dip?" at http://www­.nytimes.c­om/2002/08­/02/opinio­n/dubya-s-­double-dip­.html?page­wanted=2”

Johan Norberg

Dear Larry,

Yes, Krugman was referring to (not exactly quoting) McCulley's view, but he did it to say that McCulley is right. It is obvious from the context (and from his recommendations to Fed) that this is Krugman's own view as well:

"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."

Steve Tierney

Very much what I've been saying for a few years now. Nobody listens.

Larry Motuz

Dear Johan,

My reading is different from yours--but then I'm a multihanded economist. I believe Mr. Krugman began his article by stating that the equity market bubble had been caused by the Fed's low interest rate policy, and that more of the same was about to happen from the Fed.

Of course, I could be wrong. If so, sorry.

Thanks.

Laurent

Dear Mr Norberg,

I think you are intentionally misreading the Krugman piece from 2002. Clearly Krugman agrees with Mcculley that a Greenspan housing bubble would head off a double dip. But you cannot possibly argue he is *advocating* a housing bubble. He is in fact predicting a double dip recession (incorrectly, as it happened). In general this is an analytical piece by him, not one of advocacy. This failed cheap shot at Krugman undermines the rest of your article (I am sure I am not the only person who did not read another word of it . . .)

A. MacAulay

"But to whom will the EU send the bills when its credit card is maxed out?" Why, Germany of course! Which is why the Kanzlerin has the German people behind her when she attempts to stall this nonsense before it happens.

maddy1

Will the UK and the USA ever be able to pay off their debts? Lets start afresh by defaulting on the Chinese like they did to the world in 1921.

Wm Peden

An excellent article. Thank you for writing it so well. I really appreciate your common sense analysis.

JohnAnt

I've read Krugman's article. It is clear (to me at least) that he does not call for the housing bubble whose advocacy he ascribes to Greenspan - on the contrary, he goes on to be rather scathing about Greenspan's 'crystal ball'. But Krugman is partly to blame for any misinterpretation of his stance, by writing in a misleading 'as if' semi-ironic style without proper attention to the subjunctive mood of reported or alleged speech.
The context of what Krugman said was [I quote]:
"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.
Judging by Mr. Greenspan's remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman's crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging...The administration needs a recovery because, with deficits exploding, the only way it can justify that tax cut is by pretending that it was just what the economy needed. Mr. Greenspan needs one to avoid awkward questions about his own role in creating the stock market bubble.
But wishful thinking aside, I just don't understand the grounds for optimism. Who, exactly, is about to start spending a lot more?"
Even those of us whose first language is English have some difficulty in understanding American polit-economese. Suggesting that any misunderstanding by Mr Norberg might be 'intentional' is extremely inflammatory. We need cool and co-operative heads and above all, cool and clear prose.

Johan Norberg

Dear Larry and JohnAnt,

Above we have the exact words, Krugman hopes that Greenspan can engineer a housing bubble - but he is not certain that Greenspan can pull it off. And if you think he is being ironic, I urge you to consider that this is precisely the policy Krugman advocated at the time - lower interest rates to get people to spend more on housing and everything else.

And if you demand more proof that this is what Krugman really thought, here it is, from four different interviews/articles with and by Krugman in 2001:

"economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer."

"Business investment is not going to be the driving force in this recovery. It has to come from things like housing"

“...there are always those who say that lower interest rates will not help. They overlook that low interest rates act in several ways. For instance, more housing is built, which expands the building sector."

"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”

http://blog.mises.org/10153/krugman-did-cause-the-housing-bubble/

As you can see, Krugman's only reservation is that he does not think Fed was bold enough in inflating the housing bubble.

Hmmm

As Baron Rothschild would say: "Buy when there's blood in the streets" and he, who didn't seem to be a "left-wing monger" knew it very well.

alaoui .morocco

your article is a real lesson of the world economic crisis and the chairs of the universities must teachs to the students .none can give whene he have nothing to give.thanks mister.

revolution

Yes but Gordon the clown Brown stopped all this boom and bust didn;t he?