CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press 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

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

Wednesday, 22 January 2014 13:25

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. The column notes the weakness of the economy at the time (we were still losing jobs 8 months after the official end of the recession) and attributes it to the fact that the 2001 recession was not a standard post-war recession. It 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. Later in the piece, Krugman derides Greenspan for failing to have taken steps to head off the stock bubble, explaining that Greenspan badly needed a recovery:

"to avoid awkward questions about his own role in creating the stock market bubble."

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. In this respect, 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.

Comments (42)Add Comment
written by crosspalms, January 22, 2014 1:38
Didn't I read in the Daily Caller that Bret Stephens was arrested for posing nude in his college newspaper?
written by Ron Alley, January 22, 2014 1:40
As Krugman often notes, when it comes to right wing nuts, there are your zombies and you cockroaches. When it comes to Bret Stephens -- it's your call.
..., Low-rated comment [Show]
written by Last Mover, January 22, 2014 3:08

It's a credit to Krugman that such trivia is all the foamy mouth haters can find to hang on him.

For them, he has more clout than all of Fox News combined when it comes to economics and that's what they can't handle, someone who has broken through the fog of mainstream media sock puppet pablum like a hot knife through butter.

Next they will be waving around a list of typos found in some old drafts somewhere, claiming Krugman can't even spell.
written by kharris, January 22, 2014 3:15
"Can anybody specify how the economy would have been turned around in 2001 by monetary policy without the bubble?"

Not a useful question. It is impossible to "specify" a counterfactual. We can, however, have reasonable confidence that if regulatory action had been taken to prevent the worst excesses of the housing bubble, then monetary stimulus would have been better able to spur the use of resources in other sectors of the economy.

A housing bubble, by definition, means distortions in the distribution of productive resources. Investment decisions during the bubble were made in anticipation of making a buck when a greater fool came along, rather than in anticipation of producing a return based on conventional demand. If "greater fool" motives were stomped on hard and fast while monetary policy was still easy enough that investment was spurred in other sectors, it should have been possible to have a more balanced expansion. Housing is very sensitive to rates, and should have been watched with a more skeptical regulatory eye when rates were being held down. "Specifying" exactly which sectors would have benefited from resources not sucked into the housing sector would more realistically be called "guessing".
Off-topic: Trademark rent-seeking in the video game business
written by Shawn Wilkinson, January 22, 2014 3:17
Rent seeking discussions on this blog tend to circle around medicine, which I understand it should be a major focus since medicine does a public good versus other goods, like cellphones or video games. But here is an interesting article from the mouths of video game distribution executives at King, the distributors of the Candy Crush game everyone is/was addicted to on Facebook: http://www.p4rgaming.com/candy...-the-game/

"[Nintendo refuses] to practice real business tactics like trademarking words like plumber or mushroom."

Apparently, rent seeking is a 'real business tactic'. Thanks oblivious executive for making everybody's point about what is wrong with the wealth maximization principle.
written by kharris, January 22, 2014 3:22
Oh, and the bubble wasn't evident in 2001, so I think you want to restate the question.
Either Or Both
written by John Q, January 22, 2014 3:47
With the House of Representatives controlled by a foolhardy Republican Party, anyone who gets paid to be a conservative pundit is likely to be both a fool and a liar. Several come to mind -- Brooks, Douthat, Will, Krauthammer, Gerson, Hannity, Gingrich, Matalin, O'Reilly, Beck, Limbaugh, Coulter, Malkin, Noonan, Gregory, Scarborough.
Just Kidding Krugman, Low-rated comment [Show]
written by djb, January 22, 2014 5:25
brett stephens is just a bad guy

steve forbes article today is even worse, he calls Keynes a quack because he recognized we have a monetary economy, not a barter economy, I guess

and then I think he tried to imply Keynes must be at fault for all the wall street shenanigans for maybe all the gubmint spending, or maybe for all of it somehow mysteriously all mixed up and ruining life on our planet

I guess
mossmoon on bad acid?
written by Squeezed Turnip, January 22, 2014 5:28
Just Kidding Krugman
written by clive mossmoon, January 22, 2014 5:52
So we don't when Krugman is serious or just kidding?


Economists like you and Krugman who defend central banks in the name of poor people make me sick to my stomach.

lol, good one, moss moon! I'm sure DB and PK will send this joke to their bosom buddies, Rubin and Greenspan.
written by Phil, January 22, 2014 5:28
Pretty dumb comment, Clive.
"The Big Lie"
written by D M Smith - maximillianwyse.wordpress.com, January 22, 2014 5:38
"...in the big lie there is always a certain force of credibility; because the broad masses of a nation are always more easily corrupted in the deeper strata of their emotional nature than consciously or voluntarily." - Adolf Hitler, Mein Kampf
Free Lunches, Low-rated comment [Show]
Not again!
written by Dave, January 22, 2014 5:59
This same claim is one of 2 that have become what are supposed to function as a complete rebuttal to everything Krugman has ever said. The other is the false claim that he predicted unemployment wouldn't go above 9%, which is something he never said.

But to the right wingers, this is all they need. They don't understand anything of what is being said here, only that whomever is saying it displays confidence, enough to as to make a complete fool of themselves by continuing to repeat it over and over.

I think what they prove is that their either dumb or they lack the embarrassment gene.
A distinction without a difference, Low-rated comment [Show]
A distinction with a huge difference
written by Dave, January 22, 2014 7:55
SHADOW BANKING was allowed to flourish under Greenspan, and shadow banking invalidated much of the the textbook analysis of Fed policy.

Ben? It was Greenspan that let the thing go off. Ben stopped it as soon as he took power.

Look back at what Ben did. He immediately raised interest rates to stop the housing bubble from growing larger. Some people blame him for the burst, but that is not correct. He was itching under Greenspan to stop Greenspan's megalomania.

As soon as he took power, Ben stopped the damage of the housing bubble.
"Let's cut the crap"
written by John Parks, January 22, 2014 8:19
It is almost like the act of lying (I am not a tactful person)has become institutionalized. It seems to be universal.

When our President says "If people can't trust not only the executive branch but also don't trust Congress and don't trust federal judges to make sure that we're abiding by the Constitution, due process and rule of law, then we're going to have some problems here." then we know that we, us peasants, really do have a problem.

The Chinese citizens have a specific word for the "official" line spread by various political and governmental authorities. The word is "guanyao." I am struck by how similar it is to our own "guano" which is, as we know, bat shit.

When a third of the world's population can recognize bat shit for what it is, perhaps it is time we catch up.
Where the truth lies
written by Dan Nile, January 22, 2014 9:24
"To be honest, a new bubble now would help us out a lot even if we paid for it later. This is a really good time for a bubble…"

Paul Krugman, May 5, 2009, speaking on Spanish TV

After 2:50 here:

Krugman was in favor of the bubble but, just against the pop., Low-rated comment [Show]
its much worse...., Low-rated comment [Show]
The income and output were real in 2007
written by Dean, January 22, 2014 10:02

I have never said the housing wealth was real. In fact, no one has been clearer on this point than me. The output was real. The point was that people were working and producing goods and services. No one had a gun to their heads, they were willing to produce the level of output we had for the pay they got. That was real.

If someone has an argument as to why that was not, let's try explaining it rather than just shouting bubble. That doesn't make any sense. The Indianapolis Colts won the Superbowl in 2007. That victory was real, even though we had a housing bubble and so was GDP in that year.
@Dave, Low-rated comment [Show]
written by djb, January 22, 2014 10:13
Dan nile once again thinks he is proving something when all he shows is he is incapable of seeing the big picture....

Sound byte arguments may win over the stupid crowd but it is meaningless in terms of really understanding economics
@Capt. J Parker
written by Dave, January 22, 2014 10:57
Good question. I don't have an answer.

They have advocated for regulations that would fix this, but at the same time advocated policies that ignore them.

No answers here.

We need to fix shadow banking.


We're pretty much Fuc**ed. It won't be fixed in time to avoid major new problems...
written by Michael Deegan, January 23, 2014 4:16
Block That Metaphor

... someone who has broken through the fog of mainstream media sock puppet pablum like a hot knife through butter.
A bubble is better than a depression
written by acerimusdux, January 23, 2014 4:22
I think it's clear that both Dean and Paul preferred fiscal policy to monetary policy, and both argued that monetary policy alone could or would cause such bubbles. Once fiscal expansion (not to mention regulatory reform) became politically impossible though, what was the alternative? Yes a bubble is bad, but isn't it better than a depression?

But what if both fiscal and monetary policy had been contractionary? It seems apparent to me that this would have caused a contraction. The counter argument in a couple of comments above seems to be coming from those who don't seem to believe the economy has a demand side, thus "If it was a bubble, there was no wealth, so no wealth effect, no loss of employment...".

This sounds like the "Say's law" view of the economy, in which there is this fantasy world where there is basically no such thing as a recession, and if we were to make all policy contractionary, that's when the confidence fairy would appear, and if we were to all believe hard enough, she would make this fantasy world come true.

For the rest of us though, has monetary policy really been too expansionary? To me, it seems that any time wages have begun to actually increase, that's when the Fed has been hiking interest rates and throwing the economy into the next recession. I say let wages rise, and if that means there will be bubbles, then let there be bubbles. Maybe eventually congress will realize that if they put more money into much needed infrastructure investments, and also pursue policies which boost incomes and reduce inequality, then less money will be able flow into these speculative bubbles.
written by liberal, January 23, 2014 8:28
Capt. J. Parker wrote,
Krugman endorsed easy money in 2002. So, what exactly was his policy advice? Was it: Hey, that housing bubble bomb can't possibly explode so go and light the fuse.

Huh? The primary cause of the bubble was the rise of securitization and the shadow banking system, with no attempt to really regulate it.

If you plug rates into mortgage calculators, it's very easy to see that the drop in rates explains almost nothing of the increases in housing prices.

One could argue that lower rates played a role, in some nonlinear input fashion, but clearly the primary cause is de- and non-regulation of financial products.
written by liberal, January 23, 2014 8:34
(Meaning, explains almost nothing of the huge increases during the bubble.)
written by skeptonomist, January 23, 2014 9:00
One thing which tends to get overlooked in the arguments about what Greenspan did and Krugman (or whoever) said in 2002 is that there was considerable fiscal stimulus in the recession of 2001. When the massive tax cuts were proposed in 2000 or before they were definitely the wrong thing from the Keynesian point of view, but by the time they were passed they should have been timely stimulus, if tax cuts mostly for the rich are really much stimulus. Then there were the Afghanistan and Iraq wars. Although infrastructure spending would have been better for several reason, military spending is bona fide Keynesian stimulus. The housing bubble was not the only thing helping recovery after 2001 - other stimulus was probably considerably greater than that after 2009.
written by Dave, January 23, 2014 9:13

"If you plug rates into mortgage calculators, it's very easy to see that the drop in rates explains almost nothing of the increases in housing prices. "

Actually, reality is exactly opposite. Lower rates were THE cause of the rise in prices. Shadow baking was the cause of the breakdown in the IS-LM, Wicksellian idea of Savings/Investment which caused the Fed to lower rates so much after the .com bubble burst.

Looking at mortgage rates on a log scale (something FRED doesn't allow you to do), you can see the specific points in history that major changes in mortgage rates took place. The 2000s are the ONLY case where this drastic measure was used in the face of an already healthy-trending housing market.

Fed easing and a drop in mortgage rates caused by the illusion of safety caused the housing bubble. It has repeated across the globe.
written by Dave, January 23, 2014 9:18
So to summarize, the failure to regulate shadow banking caused:
1) The failure of IS-LM in non-liquidity times
2) The collapse of the financial system in the face of a stagnating housing market.

Shadow banking did not cause the housing bubble in the US. However, it might be causing the bubbles elsewhere.

Now the interaction of shadow banking with investment insurance is something nobody has investigated. Absent either of these, perhaps the bubble wasn't possible. I think the point though is that existing models were inadequate to describe the situation in the 2000s.
Payroll Tax Holiday
written by Tyler, January 23, 2014 9:48

Do you know why Krugman has not been advocating a payroll tax holiday? Thanks.
Shadow Banking Doesn't Change Macro
written by Dave, January 23, 2014 10:17
I think this is easy to misunderstand: Some people think that shadow banking should result in a change to macroeconomic models --

I don't agree. I think that shadow banking should be outlawed, making changes to macroeconomic models unnecessary.

The world was better off without shadow banking. Why did we let this happen?
written by liberal, January 23, 2014 12:40
Dave wrote,
Lower rates were THE cause of the rise in prices.

False, actually.

If you posit a simple model that assumes that a home purchaser only looks at the monthly mortgage payment, then the drop in rates in the relevant period corresponds to a very small amount of price appreciation. I forget the exact numbers, but it was on the order of 10%. (Not per annum; 10%, period.)

Home prices in many if not all regions skyrocketed far, far more than 10% in the bubble.
written by Dave, January 23, 2014 1:52
Give me the numbers. Specifically.

You are a liar.
Over valuation
written by Squeezed Turnip, January 23, 2014 2:42
Low rates weren't the cause of the housing bubble, they were one of many accomplices. The artificial inflation of home values over sustainable trends began somewhere in the early-ish 1990's. (link provided later if needed)

Median sales price in Sacramento (over all units 1-4 BR):

written by liberal, January 23, 2014 3:05
Dave wrote,

Give me the numbers. Specifically.

Rates went from roughly 8% to 6%.

Plugging into a mortgage calculator at Bankrate, for a $100K mortgage, I get
8% ==> $734
6% ==> $599
If we assume the buyer's monthly payment stays the same (per the model I outlined above), we can infer a corresponding 22% change in price. Again, that's not per year, that's overall.

Now that's not chicken feed, but it hardly explains the ridiculous price increases seen in much of the country during the bubble.

The only plausible role for the interest rate decline is that it was a nonlinear, psychological "spark" for the bubble. But the fact is that what really changed during the bubble was that people who clearly couldn't support the monthly payments on their household income were granted mortgages anyway. Why did that happen? Securitization and the change in the lending landscape: those who were making the loans assumed that the risk would be passed off to parties downstream (in the resale of the corresponding securities; in their "insurance" via CDS; etc); many people thought that new fancy math implied that securitization pools could never see massive defaults (due to an incorrect assumption of lack of correlation of propensity for default between mortgages); others might not have been sure about that, but they didn't care because they were making massive amounts of money.

As it turns out, douchebags on Wall Street, and random lesser douchebags (like some mortgage brokers) made money hand over fist, and the rest of us ultimately paid for it.
Another try ...
written by Squeezed Turnip, January 23, 2014 4:23
Sacramento single-dwelling median price trends: up far more than 10% from 2000 to 2006, more like 300%. (which far overwhelms any low-interest rate effect).

written by liberal, January 24, 2014 8:22
Thanks, Squeezed Turnip.
written by Bud 1, January 25, 2014 8:36
It's a trick question, right? Demand, finally, comes from consumers with either money to spend or a healthy credit rating, right? I wonder though, if you make minimum wage, can you qualify for credit? How about if your mortgage was foreclosed?
Let's cut the crap indeed: Krugman DID advocate a housing bubble
written by Jeremy R. Hammond, January 27, 2014 2:48
Paul Krugman describes it as a "canard" and Dean Baker accuses anyone who points it out of being "either a fool or a liar", but the truth is that, yes, Krugman did in fact call for the Fed to create a housing bubble in 2002. The best Dean Baker can do is to quote Krugman doing so, but then deny that he actually meant it by asserting that Krugman was being "sarcastic", adding "So let's cut the crap."

Yes, let's cut the crap, indeed. All we have to do to see that Krugman did in fact mean it is to look at the quote Baker refers to in its context....


Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.