I think it's useful to just go back in time and see what one side was saying and what the other side was saying prior to the economic downturn. Who understands things and who doesn't? I've talked about Mark Perry from the right wing American Enterprise Institute. Take a look at what Krugman had to say in 2006. Who knows their stuff and who doesn't?
Krugman has been criticized because in 2002 he recommended policies that would create a housing bubble in order to get us out of that recession. Basically it was some Keynsian stimulus for a slumping economy. It worked temporarily and blew up in our faces in 2008. But sometimes people don't know that in 2005 Krugman saw that as well. He said sure, the bubble was necessary. It was implemented and it worked. But at this point it's gone on too long and must be scaled back. So he seems to have understood what was going on.
17 comments:
Your impressed that an economist was able to predict a collapse in a market where the gov't told banks to lend to people that could not afford the house that they were buying?
I think the most important point of the housing collapse to discuss is that it was yet ANOTHER failed gov't driven idea.
Fanny and Freddie should never have been born. It is not supported by the Constitution period. Just one of the thousands of programs created by gov't that should never have been created.
Every empirical study that has been done related to the effect of the Community Reinvestment Act on the 2008 collapse has concluded that these were safer than sub prime mortgages that were profit driven and only accounted for a tiny fraction of sub prime (see here). That's why even your compatriot Hispanicpundit admits that government inaction and unwillingness to police the derivatives market was a far greater driver in the collapse (see here).
Check what the right wingers were saying (I link to Mark Perry). No problem. We're not in a recession. Bush said the same. McCain said the same during the nomination process. Look at Bill Kristol who in 2007 talked about how the tax cuts had obviously put us on a solid economic foundation.
I think looking in retrospect it's pretty easy. And Krugman is not the only one that saw a problem coming. Still he should be given credit. His stock should rise. Kristol's stock and Perry's stock should be low.
Listen to Peter Schiff and Ron Paul if you like. I can respect that. That's what I did following the collapse. I realized that certain people have no clue and I shouldn't listen to them, particularly these days now that they don't even admit their errors.
I didn't agree with a single person Left, Right or Middle that said all is good - common sense.
http://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis
Wikipedia does a nice job placing equal blame across all fronts, but bottom line is that gov't intervention promoted the bad loans that led to this.
If the gov't was not involved this would not have happened or at least to this degree. Just like the FDIC - what a crock. Gov't backed money that allows risky investment because if it goes bad - oh well the Gov't will just print more money to cover the losses.
No one would have had to "police" anything if banks could lend based on the applicants ability to pay or not pay. To say there should have been another Gov't monster to police the first Gov't Monster that was released is kind of a funny statement.
People under the thumb of the Federal Over Lord listen up - we are going to allow bad loans to happen, but we are going to Police those bad people making money off the bad loans - BRILLIANT!
Your wiki link is pretty good and it doesn't support your claims. 84% of sub prime in 2006 came from private lending institutions. Fannie and Freddie's share of the insured fell from 48% to 24% of all sub prime loans by 2006. This is the smallest part of the problem.
Do you know how many financial crisis ocurred prior to the dismantling of the Bretton Woods regulatory apparatus? I'm talking world wide. Zero. Count them. Zero. You now how many we've had since along with that and the repeal of Glass-Steagal? Repeated crisis. Japan, US S&L, Mexico, East Asia, Argentina, Chile, Ireland, Greece, Iceland, and now the mother of all, the 2008 US financial meltdown. Why do you think it never happened in the tightly regulated years and happened repeatedly in the unregulated years? How does that justify your claim that the problem is government involvement?
Something else has happened in the unregulated years. Expanding inequality, stagnant wages for the middle class, increased working hours for Americans, collapsed savings, increases in consumer debt and student loan debt. Deregulation has been tried. That's why Wall St is being occupied. The results are disaster.
This is precisely why I read Megan McArdle's. She had it right long before Krugman - and did so without his misguided policy of recommending a bubble.
Krugman was right about the bubble in 2003. He said inflating the bubble would pull us out of recession and it did. It fueled consumption and demand. He then said it had gone on too long and posed a threat by 2006. He was right.
Megan, after all the bubbling, still didn't see it as likely to cause problems like a recession. Krugman was precisely right and Megan was totally wrong. And what would Megan recommend in 2003? Tax cuts, like Bill Kristol?
Sorry for the delay - had to go on a weekend business golf retreat with a few "millionares" according to Obama.
My point is still valid - it took gov't intervention to supposedly stimulate (artificially of course) the economy welcoming the bubble. Whether it was by the deregulation of some law or not - gov't pushed banks and investors in a direction which they went and the results were predictable.
Keep in mind Jon when you point fingers at the Rhino Republicans who believe in Big Gov't - your not hurting my feelings. In fact I dislike the Rhino - Fake Conservative Republicans like McCain/Bush's and Nixon just about as much as the Socialist, Progressive Liberals in the Democrat party. They are evil.
My views are more Constitutional leaning toward Libertarianism - basically a very little r Republican.
I also find it troubling that Progressives like yourself point to certain regulations that 'supposedly' stopped financial crisis around the world. What you can't answer is what might have happen without the regulation from jump street? Markets will correct themselves without gov't and regulations.
Jon, you write, Megan, after all the bubbling, still didn't see it as likely to cause problems like a recession.
Oh really? Can you provide a quote saying so???
http://www.theatlantic.com/business/archive/2008/01/will-the-economy-decline-in-2008/2531/
Chad, your view is unfalsifiable. No matter what you can always say there's government involvement. We moved away from regulation 1980 and following. In 2000, under Clinton, a law was passed to exempt the derivatives market from government oversight. Prior to all that deregulation there were ZERO banking crisis. Following deregulation there have been MULTIPLE banking crisis. Your answer is that there was still some government involvement following deregulation (though the amount of government backed sub prime was much less than private backed). I think the rational person still concludes that the effect of deregulation was negative, as HP recognizes. Alan Greenspan, Ayn Rand's disciple, recognized it. Free marketeers Robert Rubin and Larry Summers recognized the criticality of government intervention after all their free market policies led us to 2008.
Sure, the market will correct things. But how will it do it? Possibly by grinding the economy to a halt and going with 50% unemployment. Even Milton Friedman recognizes the importance of government intervention in a crisis like this. He says the Federal Reserve failed to pump up the money supply in 1929. He says Keynes was right that the government needed so spur demand with debt spending after the collapse, though to this point it has gone too far. You're way out in right field all by yourself on this one. Even Milton Friedman won't go along with you.
Did you read the link dude?
This is what she wrote:
I think it's obvious we're in a slowdown, and a recession seems likely-ish, but Britain's skirted recession for over a decade now, so I can't be too fatalistic.
How is this equivalent to "Megan, after all the bubbling, still didn't see it as likely to cause problems like a recession."?
Doh. You're right. I withdraw the claim.
Still, you say you read Megan because she was right long before Krugman. Where was Krugman wrong? He said a housing bubble would fix the problem in 2003. It did. He said by 2006 that the bubble had been inflated too big and was potentially a huge catastrophe. Megan doesn't see a huge catastrophe. Recession likely-ish, but she's not too fatalistic. Not too fatalistic and we've gone through the worst downturn since the Great Depression. Did she propose a solution in 2003 that was tried and worked? Not that I can see. Krugman was dead nuts on target.
Krugman gets alot of (fair, IMHO) criticism because many claim (including Megan McArdle!) that the housing bubble started before 2003. So he was just adding fuel to an already growing fire by advocating for MORE bubble.
But pray tell, do you think the housing bubble started post 2003? If so, what date would you give the start? 2004? 2006? Please answer this question in your response.
Second, bursting bubbles is very difficult. The timing is everything. The FED has notoriously and historically had trouble doing this, no matter who is in charge. Even if one assumes the housing bubble started post 2003, it's still a risky bet that Krugman should have known is dangerous.
Say a recovering alcoholic is having headache problems and you know a glass of alcohol would alleviate him of his headache. So you advise him to just drink ONE glass to alleviate him of his headache...the alcoholic does, but then can't stop drinking. Are you saying the person who recommended ONE glass has NO blame in that as well?
Megan can claim whatever she wants in retrospect. That's easy. Was she saying prior to 2003 that we were in the midst of a housing bubble?
Sure, if you look at the data you can see that the bubble started about 2002. See here:
http://www.jparsons.net/housingbubble/
You can say that Krugman's suggestions were poor decisions from a strategic standpoint. But what you can't say is that he was actually wrong in his analysis. He said a bubble would fuel consumption, spur demand, and end the recession. It did. Then he said the housing bubble was a huge looming problem. It was.
Remember, he's not a politician. He's an economist. He is saying "If you do X you will get Y." He's shown to be right. He then said "We have done X for too long and the consequence is Z." That was right. I'd like to see anything of the sort from Megan. But it is the politicians job to take that correct data and decide on a strategy. He could easily say yes, Krugman is right on the bubble, but we won't be able to stop it so I'm not going to do it.
It's like the CIA. Their job is to give you the truth. Whatever the public or politicians want to do with that knowledge is up to them.
So lets just make sure I am understanding you here.
First, you agree that we were already in a housing bubble in 2002. Right? Second, you admit that Krugman recommended as a form of policy a housing bubble, during a time where we were already in a housing bubble.
The bubble then gets too big, it bursts, and it causes problems for everyone - but Krugman, in your view, is the one who showed the real foresight here? Is this what you believe?
Regarding McArdle: she saw the housing bubble as early as 2002 - in other words, Megan McArdle saw the housing bubble at a time when Krugman was making policy recommendations for a greater housing bubble.
But in your mind, it is Krugman who showed the foresight, not McArdle. Sigh.
I can give Megan credit for that. Really the only reason I know about this at all is because the link you just provided was the same one you provided before supposedly showing how bad Krugman is. If this is bad, what is good? Sure, I can see your point. In retrospect it looks like poor advice. Obviously the housing bubble blew up in our faces. But what I'm saying is technically Krugman wasn't wrong. As I'm sure you know (I won't pull the whole, let me explain Econ 101 card on you, though in fairness you haven't been annoying me with that, so thanks for that) Keynsians regard underutilized resources (i.e. unemployment) as of primary concern. They might live with a bubble to forestall unemployment increases.
What does Krugman want right now? Stimulus. How is that paid for? With debt. He knows that and he's fine with it. He says the real threat is the debt/GDP ratio. When resources go idle for long periods it effects long term GDP because these people lose skills, can't do as much in the future, and additionally the suffering is immense. The debt can grow to where it produces real long term problems, but it's not there yet and the greater concern (in Krugman's mind) is unemployment.
So based on his starting point and you look at the amount of bubble present in 2002 and you can see why Krugman might say go ahead and expand the bubble a bit. Take a risk to alleviate the even greater problem. Now, he may not have known that this problem would be amplified by derivatives. Remember, that's unregulated and opaque by law.
So contrast Krugman with Megan. With Krugman you get predictions. You get policy recommendations intended to produce a specific outcome, which you get. With Megan it's "You know, what that guy says about housing reminds me of what was said about Yahoo stock." OK, fine. That's a decent insight. But it's not really conveying the depth of understanding, the cause and effect relationships, that you get from Krugman, and that's reflected in the fact that she's not too concerned heading in to 2008 and Krugman is. Krugman has been extremely pessimistic since 2008 and he's been shown to be right (contrast with Mark Perry's optimism). Krugman has claimed for years that we are in a liquidity trap that will keep inflation low. The Austrians of course are predicting Zimbabwe like inflation. They're wrong, he's right. So you gotta be impressed. I don't see similarly impressive understanding/predictions from Megan. Standard right wing mantra at the time was sure, you can have a bubble, but options buyers bet against it and correct for it. The unregulated world was superior. Their advice was also pursued, not just Krugmans, but their predictions about what would happen (unprecedented stability and growth) were shown to be precisely the opposite of the truth. My question for you, which I've asked before, is what have you learned from this crisis? I've learned that some of my fundamental assumptions about free market corrections were wrong. Are you able to draw that kind of a conclusion? Has Megan?
Still trying to understand you here, so correct me where I may be mistaken.
You are arguing that yes, the bubble started around 2002, yes Krugman's advice likely exacerbated the bubble and yes, the bubble was very destructive - but because Krugman was right about the Keynesian assumption underlying the advocacy for more bubble - and really, I would say 70 to 80% of all economists are neokeynesian, anyway, so Krugman's "insight" is hardly new - he should be given credit for that?
McArdle on the other hand, was already onto the bubble in 2002. Long before Krugman was. In fact, she has two advantages over Krugman: predicted the bubble long before Krugman did, and had enough foresight to NOT recommend a housing bubble. But this is less impressive to you than Krugman saying "hey, if we artificially inflate the housing sector that will create more jobs"?
Wow dude. Seriously. Please tell me I am misunderstanding you here.
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