Archive for August, 2011

I’ve never been a Cass Sunstein fan, but his argument that the Internet has opened up space for those who are so disposed to create totally closed circles of information that reflect only what they want to see/hear/read is completely fair. See it in action on r/libertarian where something Paul Krugman apparently said on Google+ — “we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage” — is being smacked around with relish (not substantively, just ridiculed, really).

Problem: The Google+ account is a fake.

Bigger problem: No comment pointing this out on the thread has (as of now) received a single up-boat. They’re just languishing in the rarely visited depths of the page, unlikely to be seen by anyone without the presence of mind to ctrl+f the word “fake” (most people).

Consequence: The denizens of r/libertarian get to live in a world where Paul Krugman’s insensitive assholeness is once again comfortably reaffirmed.

Not that the claim fake Krugman is making isn’t economically sound, or couldn’t be read as being an ironic expression of someone despairing at the absurdity of a world that demands disaster and war before it consents to taking the steps necessary to unfuck its own economy.

Let’s break the mirrors, eh? Bruce Lee style?

Great, another one for the list!

• So the direct economic impact of the (911)attacks will probably not be that bad. And there will, potentially, be two favorable effects. First, the driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. Paul Krugman, 2001
• However, let’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 Fed’s four interest-rate cuts since the slowdown became apparent represent an unusually aggressive response by historical standards. It’s still not clear that Mr. Greenspan has caught up with the curve — let’s have at least one more rate cut, please — but the interest-rate cuts do, cross your fingers, seem to be having an effect. Paul Krugman,2001
• During 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 shouldn’t you lower interest rates? Paul Krugman, 2001
• Consumers, who already have low savings and high debt, probably can’t contribute much. But housing, which is highly sensitive to interest rates, could help lead a recovery…. 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 — 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. 1…. Sooner or later, of course, investors will realize that 2001 isn’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. Paul Krugman, 2001
• 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. Paul Krugman, 2002
• Oh, and on a nonpolitical note: even before Friday’s grim report on jobs, I was puzzled by Mr. Greenspan’s eagerness to start raising interest rates. Now I don’t understand his policy at all. Paul Krugman, 2004
• As Mr. McCulley predicted, interest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst. Now the question is what can replace the housing bubble. Paul Krugman, 2005
• 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… There was a headline in a satirical newspaper in the US last summer that said: “The nation demands a new bubble to invest in” And that’s pretty much right. Paul Krugman, 2009
• If we discovered that space aliens were planning to attack, and we needed a massive buildup to counter the space alien threat, and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. Paul Krugman, 2011
• People on twitter might be joking, but in all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage. Paul Krugman, 2011

I see this claim every time a Krugman column is on reddit, so I’m going to post a generic reply.

He said the fed needs to create a housing bubble to keep the economy going!

Prediction, not request.

Question: if Krugman wanted a “bubble”, using and meaning those exact words, then why did he call for action in 2005 when it was clear that the housing market was in, and I quote the exact term he used, a “bubble”?

Actually, it was McCulley that first called Greenspans’ bubble; Krugman merely paraphrased him. Here is the original quote Krugman referred to:

There is room for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing.”

Question: is the above speaker genuinely hoping that Greenspan will create a bubble to sustain “American hedonism”(yay hedonism!), or making a prediction about what he’ll probably do?

He said there should be a new bubble to replace the old one on Spanish TV!

Now this is getting really dishonest…Krugman was quoting the Onion headline about people looking for a new bubble. The quote on Mises is hacked up with ellipses, and they refuse to provide the entire thing unedited. But you can read what Krugman thought of the Onion article on his blog. He sees it as a statement of the market’s frenzy to find something new to throw their money at. Here’s Krugman referencing the Onion in his blog around the same time, very obviously referring to absurdity of it and not, as Mises claims, using it as a guiding economic policy. As the person he linked to said, “If it wasn’t so sad, it would be hysterical.”

He called for interest rate cuts in 2001! That proves it!

They say he “must” have meant it because he called for interest rate cuts in 2001, when the economy was in a slump. They seem ignorant of the fact that both the fed and the economists that offer advice for them re-assess interest rates every 6 months or so.

Ok then, but he DID want the housing boom to drive the economy

If you take that to mean Krugman wanted a bubble, it appears to be based on a confusion between what a speculative bubble is and what an economic driver is. While they can go hand in hand, the two are different things.

In layman’s terms, a “bubble” seems to have become synonymous with “any big boom in the economy, which will inevitably come to an end with a backlash”. If you believe in Business Cycle theory, you’re very inclined to think that, since that concept is fundamental to the theory’s model of how the economy works (Boom-Bust).

But a “bubble” is not defined as “bad shit that happens after seemingly good stuff happened”. A speculative bubble is defined as “trade in high volumes at prices that are considerably at variance with intrinsic values”.

In other words: Investors drive up the price of a good. Others, seeing the price rise, assume it must be a great investment, driving the price up even further. This cycle continues, until someone tries to sell the good at the (ridiculously overvalued) price. When people are unable to sell, the price drops to realistic levels, and all the money people had on paper vanishes. And worse, if they bought the good at the overvalued price, they’re in debt with no way to recoup. (I’d like to point out that as much as Austrians worship gold, it’s perfectly possible for the above scenario to happen with that good, too).

However, bubbles do not have to go hand in hand with economic drivers. It’s perfectly valid for a housing boom to stimulate the economy…if houses are actually needed, and of benefit to people who genuinely need to buy them and are willing and capable of getting them at the market price. The problem is when prices move out of sync with what the market can bear. And that is where the fed can step in.

You might disagree with that, and believe that any manipulation in interest rates will inevitably lead to a bubble, and that therefore anyone that believes in the power of the fed wants one. But keep in mind, when you say that, you go against 100 years of mainstream economic thought, not just this guy specifically.

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The response to this generic reply will typically be to ignore all this, and just re-paste the above quotes all over again.