All day Paul Krugman has been involved in a brouhaha over a 2002 column which seemed to be advocating a housing bubble to get us out of the recession. He says he wasn't calling for a bubble, just that he was just explaining what Alan Greenspan was trying to do.
Mark Thornton has gone through Krugman's entire archives and undermined this defense. Many of Krugman's own quotes from that era suggest that he was an aggressive advocate of low-low interest in order to bring the housing market to a boil, thus bringing us out of the recession.
In Krugman's defense, this was 2001, when the economy was in the midst of cratering. As yet, no one has dug up quotes suggesting that Krugman was still pounding the table for low rates and a housing boom in, say, 2004, which is when most observers agree the housing "bubble" really started, untill now.
Krugman quotes:
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.
"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?"
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 don't know"
Housing, long-term rates haven't fallen enough to produce a boom there.
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.
Low interest rates, which promote spending on housing and other durable goods, are the main answer.
The Fed's dramatic interest rate cuts helped keep housing strong even as business investment plunged."
