Now PhD economist Mark Thornton calls Krugman out for recommending the interest rate cuts which also contributed to this mess. The following Krugman quote from May 2, 2001, shoots a huge hole in Krugman's excuse (bold formatting added by me):
I've always favored the let-bygones-be-bygones view over the crime-and-punishment view. That is, I've always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. But I had to face the fact that speculative bubbles usually are followed by recessions. My excuse has been that this was because the policy makers moved too slowly -- that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum. That was why I, like many others, was frustrated at the smallish cut at the last Federal Open Market Committee meeting: I was pretty sure that Alan Greenspan had the tools to prevent a disastrous recession, but worried that he might be getting behind the curve.Read the rest of Thornton's post for more "tastes like crow" Krugman quotes.
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.
If we succeed in avoiding recession, this will mark a big win for let- bygones-be-bygones, and a big loss for crime-and-punishment. And that will be very good news not just for this business cycle, but for business cycles to come.
What I find interesting is the last paragraph from Krugman's quote:
For the big lesson of the late 1990's was that speculative bubbles spring eternal. The signs of irrational exuberance, not to mention sheer silliness, were there for all to see; yet the bubble expanded — and then burst — all the same. Surely there will be other bubbles, and other burstings, in the decades ahead. The best we can hope for is that when the bubbles burst the consequences can be limited. And the faint signs of good news in the U.S. economy are reason to hope that they can.Contrast that with Krugman's view from his May 27, 2005 column:
The important point to remember is that the bursting of the stock market bubble hurt lots of people - not just those who bought stocks near their peak. By the summer of 2003, private-sector employment was three million below its 2001 peak. And the job losses would have been much worse if the stock bubble hadn't been quickly replaced with a housing bubble.So after 4 years of pulling for interest rate cuts and housing bubbles, Krugman FINALLY started to see the problem with bubbles?
So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it's hard to imagine what that might be. After all, the Fed's ability to manage the economy mainly comes from its ability to create booms and busts in the housing market. If housing enters a post-bubble slump, what's left?
Mr. Roach believes that the Fed's apparent success after 2001 was an illusion, that it simply piled up trouble for the future. I hope he's wrong. But the Fed does seem to be running out of bubbles.
But the question remains: Was Krugman's "hope" that the bubble was not just an illusion based on his desire for the economy to work, or was it based on the fact that Krugman had spent years advocating the failed policies which were about to lead to disaster?