[DuncanIdaho]

Now I don't understand what your motive is - but your quote is taken waaay out of context...

Original quote: "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."

Here Krugman basically quotes another source. The way I interpret this quote (and article) is not cheerleading for lower interest rates. The message to me is that whole system is unsustainable and that only move that will be able to perpetuate the lie is to replace one bubble with the next.

In this context Krugman's vision has proven prophetic.

The whole notion, nothing personal - I have noticed it more than once, that Krugman somehow argued that replacing one bubble with another is good for economy somehow is ridiculous.

[yummyfajitas]

The point of that editorial is that business investment won't end the recession, so the only hope is housing.

"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. "

Krugman is just repeating the same "insufficient demand" theory of recessions that Keynesian economists are using today.

[anigbrowl]

Yes, but once the economy was humming again he expressed worries about government spending, debt financing, and inflation too, but lots of libertarians told him to stop being such an old lady: we were spending because there was a war on, China buying US debt was proof that market economics the key to growth, and inflation of property prices didn't matter because they're not building more land.

I appreciate that Austrian economists dislike the idea of stimulating demand through looser monetary or fiscal policy, but they're not exactly famous for demanding greater restraint during good times, are they? I don't recall any of them screaming in horror when the Dow was at 14k.

[jbooth]

And he was right. 7 years from 2001 to 2008 he was saying this and everyone dismissed his concerns by calling him a partisan bush-hater. Maybe so, but he was still right.

Keynesian economics brought us out of the great depression and the lack of their application led to deflation and the lost decade for Japan.

Supply-side economics, on the other hand, have been tried twice in the last 30 years and both times they ended with massive government deficit and collapsed asset bubbles.

Before casting aspersions on someone by virtue of their -isms, I'd check the record of the -isms in question.

[yummyfajitas]

I didn't cast aspersions on anyone. I simply summarized Krugmans column: to increase consumer demand, the fed should create a housing bubble, but even that is unlikely to work.

[jbooth]

I don't think that's what he was intending to say. I remember a whole bunch of cautionary columns of his from that time period, some of which were very partisan and accused Greenspan of keeping interest rates low for political reasons.

[aac74]

The way I read it is that Krugman is quoting someone to support his argument for ultra low interest rates.

Krugman like all Keynesians thinks bubble booms are good and recessions are bad. He fails to mention the artificial carry trade in gold that central banks set up in the 90s to push gold prices down and stock prices up. Central banks at this time also promoted derivatives to create the illusion of low inflation by soaking up the price rises due to commodity speculation.

He also does not mention the FED money printing in the 30s to artificially support the pound and stop the draw on gold from London. Could this have had something to do with the boom then ???

The moral of the story is don't let the government and central bank 'run' your economy. All they can do is make bad guesses and try and cover up reality.

Panama has done without a central bank for a hundred years and look at the state it is in: http://www.costaricapages.com/panama/blog/wp-content/uploads... Who 'runs' their economy ??? Who prints their money ???

[pauldino]

Who prints their money? The US Treasury, literally. Panama has pegged its currency 1:1 to the US dollar since independence and doesn't even bother printing its own paper money, using US notes instead.

[aac74]

Unlike the US dollars/balboas in Panama are not printed out of thin air. Panama has to do productive work in order to earn dollars and thus the money supply can not race ahead of the productive capacity of the economy. This is why Panama has never had an inflation problem (unlike the rest of Latin America) and has short periods of deflation.

[DuncanIdaho]

Now if I understand you right. You're saying that US and worldwide financial markets have been ran by Keynesians for the last 30 years, leading to massive explosion and refutation of all Keynesian theories?

Let me guess - you also believe that Fascism and Nazism are right-wing ideologies?

EDIT: I'm no economist (barely an amateur wiki-economist): but as far as I know (read, heard) Keynes actually argued that money supply management should be "mechanically" managed - without central banks and officials who are corruptible and fallible.

[hga]

WRT to whatever Keynes argued, the idea that any system of mechanical management would avoid capture by the political system is fatuous. Which he should have known.