Tuesday, Jun 16, 2009

Paul Krugman, 2002: "Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

Mainstream economists need to remember that they're playing with people's lives.

A few months ago the vast majority of business economists mocked concerns about a ''double dip,'' a second leg to the downturn. But there were a few dogged iconoclasts out there, most notably Stephen Roach at Morgan Stanley. As I'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 wasn'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.

Dubya's Double Dip?, Paul Krugman, The New York Times, August 2, 2002,

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 Interview, May 2, 2009,

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