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You are propagating the false narrative money manager Barry Ritholz calls “the Big Lie” (which was an apposite name before Trump’s recent antics), namely the idea that it was government regulation (specifically forcing the poor innocent banks to give mortgages to “those people”) that caused the GFC. I’d say that story has been roundly refuted.

https://www.washingtonpost.com/business/what-caused-the-fina...

And for what it’s worth, that Krugman quote is out of context. Krugman is not calling for a housing bubble there, he is explaining Greenspan’s motivation in keeping rates so low for so long. Frankly, I find that disingenuous misrepresentation telling.

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You are propagating a false narrative yourself. This narrative has itself been roundly refuted, which you decided to omit. See [0][1].

[0] https://cafehayek.com/2013/09/ritholtz-and-the-big-lie.html

[1] https://mercatus.org/sites/default/files/publication/RUSS-fi...

I don't think a group setting out to deceive the public would be:

a) planting stories 8 years before the crisis, warning about the far-reaching effects of the Community Reinvestment Act

b) recruiting Democrat/Wall-Street/public-sector darling Krugman to plant a story in the NYT 6 years before the crisis, urging the Federal Reserve to "create a housing bubble" via low interest rates (which is exactly what the Fed did)

>>And for what it’s worth, that Krugman quote is out of context.

It seems pretty clear to me he is strongly endorsing a bubble in that quote, and that's when looked at in context too.

Krugman is a major believer in Keynes' demand-side economic theories.

Keynes argued that the government planting banknotes in the ground during a recession would be net-positive, because people expending resources to dig them up would create economic activity that would get money circulating:

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again… the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."

Krugman argued something similar, when arguing that an announcing a non-existent alien attack would be economically beneficial, for the same reasons Keynes gave:

https://business.time.com/2011/08/16/paul-krugman-an-alien-i...

When looked at in this context, it's obvious why he'd think a bubble during a recession would be a good policy.

But now of course the historical revisionism starts, and Krugman's clear endorsement of a bubble is reintepreted as prediction, so that the public-sector/Democrats' chief economic spokesman is not discredited.

So, you're bringing up many points; I'd prefer if we could stick to a few, but I'll briefly address them.

A) I claimed that a major factor in the 2007/08 GFC was deregulation. You countered that it was too much regulation, specifically mandatory lending to disadvantaged communities. That theory, floated by a few AEI (American Enterprise Institute) people, has been called "The Big Lie" by Ritholz, and largely rejected, I think. [1]

B) > a group setting out to deceive the public

I don't know what group or conspiracy you are referring to.

C) I'll address your contention that Krugman called for a housing bubble in 2002. I think that is wrong, when you look at his writing in context. Krugman's argument was as follows:

a) Under normal circumstances, when the economy heats up too much (inflation), the Fed raises rates and cuts off the excesses. b) This causes a typical post-war slump. c) That slump can be fixed by the Fed by lowering rates, creating a snap-back of consumer and business spending. d) HOWEVER, the slump in 2001 was not a typical post-war slump: Lowering rates did not bring back business spending. e) Therefore, if the Fed wanted to fight the slump with monetary means, it "needed" to engineer a housing bubble (and basically replace the .com stock bubble with said housing bubble).

Krugman didn't endorse the bubble.

Here's Krugman in 2003 decrying the housing bubble, and also noting that the "banana-republic policies now being followed in Washington won't just drive up interest rates; they'll probably generate a full-blown fiscal crisis one of these years.":

https://www.nytimes.com/2003/06/20/opinion/still-blowing-bub...

Here's Krugman in 2005 decrying the housing bubble and "signs that America's housing market, like the stock market at the end of the last decade, is approaching the final, feverish stages of a speculative bubble":

https://www.nytimes.com/2005/05/27/opinion/running-out-of-bu...

Here's Krugman in 2006 decrying the housing bubble, predicting its end, and saying that "If anyone is to blame for the current situation, it’s Mr. Greenspan, who pooh-poohed warnings about an emerging bubble and did nothing to crack down on irresponsible lending."

https://www.nytimes.com/2006/10/30/opinion/30krugman.html

D) > Krugman is a major believer in Keynes' demand-side economic theories.

Yes, Krugman is Keynesian, of course, and argues for stimulus via fiscal policy (taxes and spending) and monetary policy (rates and money supply), when and as appropriate.

And yes, if the economy is stalled because of lack of demand, and monetary policy is ineffective because the zero lower bound, then fiscal policy (spending) would be effective (thanks to the multiplier), even if the money is pumped into fairly inefficient ventures, as long as the money goes to people that spend it (rather than saving it). (So, tax cuts for the rich are not good.)

That is not to say that a Keynesian would advocate a less efficient over a more efficient stimulus; rather, Krugman was making the point that any stimulus (to people with high propensity to consume) is better than none.

[1] for example, https://www.washingtonpost.com/news/wonk/wp/2013/02/13/no-ma... or see https://en.wikipedia.org/wiki/Causes_of_the_United_States_ho... for an overview of the debate.

>>[1] for example, https://www.washingtonpost.com/news/wonk/wp/2013/02/13/no-ma... or see https://en.wikipedia.org/wiki/Causes_of_the_United_States_ho... for an overview of the debate.

That Wikipedia page does not really make a case for any explanation.

There was a Congressional study on it that absolved regulations, but the government, cannot be expected to do an objective study to expose the failures of government. Their institutional interests are completely opposed to that. They are largely rent-seeking institutions whose interest is in propagating the idea that central economic planning is in the public interest, and lessening the government's intervention in the economy, via deregulation, is harmful.

To examine the Washington Post article you linked, which was written by Director of Progressive Thought, Mike Konczal:

>>"From 2002-2005, [GSEs] saw a fairly precipitous drop in market share, going from about 50 percent to just under 30 percent of all mortgage originations. Conversely, private label securitization [PLS] shot up from about 10 percent to about 40 percent over the same period. This is, to state the obvious, a very radical shift in mortgage originations that overlapped neatly with the origination of the most toxic home loans."

That in no way disproves the arguement that the GSEs precipitated the crisis. If you look at the literature produced by the GSEs, they explain that their goal is to increase liquidity in so-called under-served markets, and thereby reduce the risk for private lenders to lend in that market.

See this 1999 article about how they started to expand their subprime lending:

https://www.nytimes.com/1999/09/30/business/fannie-mae-eases...

Note this:

>>''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

This kind of statement, and commitment to expanding the liquidity of the subprime mortgage market, from the CEO of the most powerful institution in the US residential housing market, will have a massive impact on market sentiment, and will cause the frenzy seen in the early 2000s.

>>Here's Krugman in 2003 decrying the housing bubble, and also noting that the "banana-republic policies now being followed in Washington won't just drive up interest rates; they'll probably generate a full-blown fiscal crisis one of these years.":

>>https://www.nytimes.com/2003/06/20/opinion/still-blowing-bub...

I don't see any mention of the housing bubble in this article. Can you point it out to me?

>>Here's Krugman in 2005 decrying the housing bubble and "signs that America's housing market, like the stock market at the end of the last decade, is approaching the final, feverish stages of a speculative bubble":

>>https://www.nytimes.com/2005/05/27/opinion/running-out-of-bu

This doesn't sound like criticism of the policy of creating a housing bubble. It sounds more like Krugman arguing that a new bubble would be needed to replace it:

"As Mr. McCulley predicted, interest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst.

Now the question is what can replace the housing bubble."

>>Here's Krugman in 2006 decrying the housing bubble

That only shows the instinct for revisionism that I mentioned earlier. In 2006 the dangers could be more clearly seen, and that's when Krugman is seen changing his tune about creating a bubble with low interest rates.

He repeatedly advocated low interest rates, and repeatedly said it would boost the housing market:

July 18, 2001

http://www.pkarchive.org/economy/ML071801.html

>>"KRUGMAN: I think frankly it's got to be -- business investment is not going to be the driving force in this recovery. It has to come from things like housing, things that have not been (UNINTELLIGIBLE).

>>DOBBS: We see, Paul, housing at near record levels, we see automobile purchases near record levels. The consumer is still very much in this economy. Can he or she -- or I should say he and she, can they bring back this economy?

>>KRUGMAN: 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"

August 8th 2001

http://www.pkarchive.org/economy/ML082201.html

>>"KRUGMAN: I'm a little depressed. You know, inventories, probably that's over, the inventory slump. But you look at the things that could drive a recovery, business investment, nothing happening. Housing, long-term rates haven't fallen enough to produce a boom there. The trade balance is going to get worst before it gets better because the dollar is still very strong. It's not a happy picture."

August 14, 2001

http://www.pkarchive.org/column/81401.html

>>"Consumers, who already have low savings and high debt, probably can't contribute much. 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. Housing demand depends on long-term rather than short-term interest rates -- and though the Fed has cut short rates from 6.5 to 3.75 percent since the beginning of the year, the 10-year rate is slightly higher than it was on Jan. 1.... Sooner or later, of course, investors will realize that 2001 isn't 1998. When they do, mortgage rates and the dollar will come way down, and the conditions for a recovery led by housing and exports will be in place.

October 7, 2001

http://www.pkarchive.org/economy/ML071801.html

>>"Post-terror nerves aside, what mainly ails the U.S. economy is too much of a good thing. During the bubble years businesses overspent on capital equipment; the resulting overhang of excess capacity is a drag on investment, and hence a drag on the economy as a whole.

>>In time this overhang will be worked off. Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. But it seems inevitable that there will also be a fiscal stimulus package"

Dec 28, 2001

http://www.pkarchive.org/column/122801.html

>>"The good news about the U.S. economy is that it fell into recession, but it didn't fall off a cliff. Most of the credit probably goes to the dogged optimism of American consumers, but the Fed's dramatic interest rate cuts helped keep housing strong even as business investment plunged."

Even in late 2004, after he had already stated that low interest rates could create a housing bubble, he was advocating to keep interest rates low:

http://www.pkarchive.org/column/081004.html

>>Oh, and on a nonpolitical note: even before Friday's grim report on jobs, I was puzzled by Mr. Greenspan's eagerness to start raising interest rates. Now I don't understand his policy at all.

And going back to the quote from the original article, which you claimed I provided out of context, let's look at it in more detail and with more context, including the follow-up paragraph:

"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.

Judging by Mr. Greenspan's remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman's crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging."

So he writes that Greenspan "still thinks he can pull that off". The "that" is the creation of the housing bubble, mentioned in the preceding paragraph.

In the sentence that follows that, Krugman expresses pessimism about the prospect of Greenspan being able to pull "that" off: "But the Fed chairman's crystal ball has been cloudy lately".

What this is saying is that since the Fed's predictions had been off recently, it calls into question whether the Fed's belief that it can pull "that" off is credible.

So the only pessimistic sentiment Krugman expresses in this article is about Greenspan's ability to fuel a housing bubble using low interest rates.

Not only did he suggest in this article that lowering interest rates could create a housing bubble that would fight the recession, but on repeated occasions from 2001 to 2004, he advocated that the Fed lower interest rates.

The context is absolutely damning for your defense of Krugman.

>>And yes, if the economy is stalled because of lack of demand, and monetary policy is ineffective because the zero lower bound, then fiscal policy (spending) would be effective (thanks to the multiplier), even if the money is pumped into fairly inefficient ventures, as long as the money goes to people that spend it (rather than saving it). (So, tax cuts for the rich are not good.)

If an economy is suffering a recession, it's only proximally due to "lack of demand". The lack of demand is a necessary property of the process of recovery. The fundamental cause of a recession is a readjustment that has to play itself out, as failing/over-leveraged industries are divested from, new opportunities are identified, and as prices adjust downward in reaction to the contraction in the money supply as loan volumes decline.

Creating more unproductive economic activity distracts from this readjustment process. It's harmful central economic planning that misallocates economic resources, and thereby disrupts the process of capital formation.

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