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Paul Krugman’s Glory

Paul Krugman, Laureate of the Sveriges Riksban...

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From an article he wrote in August of 2002:

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.*

Hilariously, Krugman‘s article came to the conclusion that a double dip recession was probable, and even likely.

Well, there was no double dip recession despite the lack of a huge stimulus. The Stock Market dropped in September of 2002 but from there until 2007 the economy was pretty good. And the Housing bubble thing ended up being a pretty bad thing.

*Emphasis mine.


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