On the heels of George Bragues piece on the Fatal Conceit of Central Banking I felt the need to post once again the infamous quotes from that famous defender of all things Fed related, Paul Krugman wherein he calls for the Federal Reserve to create a housing bubble.
Well Paul, they followed your advice, and after a housing bubble and bust, TARP 1&2, QE1&2, and the Canadian has gone from $.60 USD to parity today.
If we are lucky, they won’t follow your advice with regards to the fabulous stimulus a Third World War would provide.
A few months ago the vast majority of business economists mocked concerns about a â€double dip,â€ a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As Iâ€™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 wasnâ€™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.
And here are a variety of other 2001 quotations from Paul – maybe he was laying the groundwork for that 2002 NYT article!(pulled from Mises.org here)
German Interview, undated
â€œDuring phases of weak growth there are always those who say that lower interest rates will not help. They overlook the fact that low interest rates act through several channels. For instance, more housing is built, which expands the building sector. You must ask the opposite question: why in the world shouldnâ€™t you lower interest rates?â€
May 2, 2001
Iâ€™ve always favored the let-bygones-be-bygones view over the crime-and-punishment view. That is, Iâ€™ve always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. But I had to face the fact that speculative bubbles usually are followed by recessions. My excuse has been that this was because the policy makers moved too slowly â€” that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum. That was why I, like many others, was frustrated at the smallish cut at the last Federal Open Market Committee meeting: I was pretty sure that Alan Greenspan had the tools to prevent a disastrous recession, but worried that he might be getting behind the curve.
However, letâ€™s give credit where credit is due: Mr. Greenspan has cut rates since then. And while some of us may have been urging him to move even faster, the Fedâ€™s four interest-rate cuts since the slowdown became apparent represent an unusually aggressive response by historical standards. Itâ€™s still not clear that Mr. Greenspan has caught up with the curve â€” letâ€™s have at least one more rate cut, please â€” but the interest-rate cuts do, cross your fingers, seem to be having an effect.
If we succeed in avoiding recession, this will mark a big win for let- bygones-be-bygones, and a big loss for crime-and-punishment. And that will be very good news not just for this business cycle, but for business cycles to come.
July 18, 2001
â€œKRUGMAN: I think frankly itâ€™s got to be â€” business investment is not going to be the driving force in this recovery. It has to come from things like housing, things that have not been (UNINTELLIGIBLE).
DOBBS: We see, Paul, housing at near record levels, we see automobile purchases near record levels. The consumer is still very much in this economy. Can he or she â€” or I should say he and she, can they bring back this economy?
KRUGMAN: Well, as far as the arithmetic goes, yes, it is possible. 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 donâ€™t knowâ€
August 8^th 2001
â€œKRUGMAN: Iâ€™m a little depressed. You know, inventories, probably thatâ€™s over, the inventory slump. But you look at the things that could drive a recovery, business investment, nothing happening. Housing, long-term rates havenâ€™t fallen enough to produce a boom there. The trade balance is going to get worst before it gets better because the dollar is still very strong. Itâ€™s not a happy picture.â€
August 14, 2001
â€œConsumers, who already have low savings and high debt, probably canâ€™t contribute much. But housing, which is highly sensitive to interest rates, could help lead a recoveryâ€¦. But there has been a peculiar disconnect between Fed policy and the financial variables that affect housing and trade. Housing demand depends on long-term rather than short-term interest rates â€” and though the Fed has cut short rates from 6.5 to 3.75 percent since the beginning of the year, the 10-year rate is slightly higher than it was on Jan. 1â€¦. Sooner or later, of course, investors will realize that 2001 isnâ€™t 1998. When they do, mortgage rates and the dollar will come way down, and the conditions for a recovery led by housing and exports will be in place.
October 7, 2001
â€œPost-terror nerves aside, what mainly ails the U.S. economy is too much of a good thing. During the bubble years businesses overspent on capital equipment; the resulting overhang of excess capacity is a drag on investment, and hence a drag on the economy as a whole.
In time this overhang will be worked off. Meanwhile, 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. But it seems inevitable that there will also be a fiscal stimulus packageâ€
Dec 28, 2001
â€œThe good news about the U.S. economy is that it fell into recession, but it didnâ€™t fall off a cliff. Most of the credit probably goes to the dogged optimism of American consumers, but the Fedâ€™s dramatic interest rate cuts helped keep housing strong even as business investment plunged.â€