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Source link: http://archive.mises.org/10153/krugman-did-cause-the-housing-bubble/

Krugman Did Cause the Housing Bubble

June 17, 2009 by

Here is Paul Krugman from his blog trying to deny that he was a persistent advocate for the housing bubble and below that are quotes from him just prior to the bubble taking off. ht Benjamin Lee
“And I was on the grassy knoll, too”

One of the funny aspects of being a somewhat, um, forceful writer is that I’m regularly accused of all sorts of villainy. I was personally responsible for the demise of Enron; my nonexistent son worked for Hillary; etc.. The latest seems to be that I called for the creation of a housing bubble.

Paul Krugman


German Interview, undated


“During phases of weak growth there are always those who say that lower interest rates will not help. They overlook the fact that low interest rates act through several channels. For instance, more housing is built, which expands the building sector. You must ask the opposite question: why in the world shouldn’t you lower interest rates?”

May 2, 2001


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.

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.

July 18, 2001


“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 8^th 2001


“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


“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


“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


“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.”


Chris W. June 23, 2009 at 2:13 am

“There may be a recession in stock prices, but not anything in the nature of a crash.”
–Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929

“Stock prices have reached what looks like a permanently high plateau.”
–Irving Fisher, Ph.D. in economics, Oct. 17, 1929

Paul Krugman = Irving Fisher + Nobel Prize

Eric Evnas June 21, 2011 at 5:13 am

The Nobel Prize is worth less (due to current inflationary policies) than the gold it’s stamped into. Actually, sorry, it’s worth more. Have you seen the price of gold lately. The Nobel Prize is a way that leftists and statists stamp a seal of approval on whatever court jester happens to be most effectively entertaining the king at the time. You all remember that Al Gore has a Nobel Prize, right?

Gil June 23, 2009 at 2:36 am

“Stock prices have reached what looks like a permanently high plateau.” – Irving Fisher, Ph.D. in economics, Oct. 17, 1929.

“My bad.” – Irving Fisher, Ph.D. in economics, Nov. 1, 1929

Chris W. June 23, 2009 at 3:32 pm

@Gil: hilarious!!! Here’s some more damning stuff which seem to illustrate Krugman’s way of thinking:

From http://www.washingtontimes.com/news/2004/nov/22/20041122-095742-3613r/
in response to http://www.pkarchive.org/column/91401.html

“The broken-window fallacy was seen in a column by Princeton University professor Paul Krugman after the terrorist attack on the World Trade Center, ‘After the Horror’ New York Times (Sept. 14, 2001): ‘Ghastly as it may seem to say this, the terror attack — like the original day of infamy, which brought an end to the Great Depression — could do some economic good.’ He went on to note how rebuilding would stimulate the economy by business investment and job creation.

Again, do the smell test. If Mr. Krugman is right, wouldn’t the terrorists have done us a bigger economic favor if they had destroyed buildings in other cities?”


Eric Evnas June 21, 2011 at 5:17 am

Or all buildings… If Krugman is right, then what we need right now is a good old-fashioned ground war. No, then he can appeal to patriotism to obfuscate the destruction. If Krugman is right, shouldn’t we burn our houses down to stimulate the economy. He’s a buffoon dressed in a PhD with a Nobel Prize swinging from his neck. A good rule of thumb is to read Krugman and then swiftly think the opposite of whatever you’ve read. If you do that, then you can’t go wrong. That is provided, of course, that Krugman has said anything at all. I find most of his writing to be meaningless, irrational drivel. That’s just me though, and I’m not nearly as smart, smarmy or well-connected as Mr. Krugman seems to be.

Mike June 23, 2009 at 11:53 pm

What I want to know is why John Stewart hasn’t had him on to shred him like he’s shredded the dudes at CNBC.

Bob Roddis June 24, 2009 at 12:20 pm

To Mr. Michael Turner:

What the heck are you doing on Wikipedia defaming the ABCT when you don’t understand it?

You wrote:

“There’s no difference between ‘advocating policies to stimulate housing‘, and advocating policies that overstimulate it and start a bubble? There’s no difference between saying you need to lower interest rates to help stop the economy from shrinking, and recommending keeping interest rates too low for too long? No difference at all?”

If you mean is there a difference between a smaller amount of fiat money issued and a much larger amount, certainly the larger amount will probably do more damage. However, any fiat money created out of thin air amounts to theft of purchasing power from those holding the existing money to those first receiving the new money due to monetary dilution. That’s an undeniable truism. Further, the creation of fiat money necessarily distorts the capital structure of the economy resulting in malinvestments which must ultimately be liquidated in a bust. Krugman appears to not comprehend either essential ABCT concept and ALWAYS calls for monetary dilution as the primary economic cure for everything. Krugman has been exposed as a dishonest and incompetent dissembler and a partisan hack.

If you don’t understand the malinvestment aspect of the ABCT yet, take a look at Roger Garrison’s excellent power point presentations on the subject:


On a related issue, isn’t it odd that the Keynesians insist that the government create a housing bubble, become hysterical at the ensuing sprawl and then demand draconian global warming taxes to keep it in check? Like Krugman?

Eric Evnas June 21, 2011 at 5:20 am

Outstanding post, Bob!

Paul June 25, 2009 at 5:12 am

Mark Thornton likes to do thorough research jobs. And we benefit from them.

Chuck July 17, 2009 at 9:29 pm

Look what that old socialist Arnold Kling had to say about all this:


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John Papola August 4, 2009 at 5:01 pm

Professor Krugman is a pitchman for horribly crude keynesianism. No doubt about it. But it is fair to say he “caused the housing bubble”?

Isn’t that about as fair as Milton Friedman claiming that Austrian Business Cycle Theory caused great damage during the depression?

In both cases, there is little evidence the powers controlling policy at the time were paying attention to either Krugman or Mises/Hayek.

Now, given, Bush/Greenspan did do precisely what Paul Krugman was advocating, while Hoover did the opposite of what the Austrians advocated. But I don’t know that Bush and the GOP were interested in what “The Conscience of a Liberal” had to say.

They were simply hack keynesians all by themselves, no?

Patrick August 15, 2009 at 4:15 pm

I do not think we should be using the title of “Economist” on Paul Krugman. A better title would be “Social Engineer” instead. The only problem with that title would be that it gives engineers a bad name instead of economists. Good engineers, like good economists, look at all of the effects of a change in the system they are attempting to make, something that Paul Krugman is notoriously disinterested in doing. However, the type of unsustainable economics that Mr. Krugman advocates more aptly falls under the category of social engineering through economics advocacy rather than mere economic policy advocacy.

Mark L November 9, 2011 at 12:44 pm

I think the term “hack” would be appropriate.

Larry Siegel May 14, 2010 at 4:12 pm

Paul Krugman won the Nobel Prize for his contributions to economic geography and urban economics in the 1980′s. This used to be my field and his contributions really were prize worthy. Krugman is now using his fame to espouse a socialist point of view in public policy, but he is no more qualified to do so than any other well-read citizen. Still, it is surprising how wrong he seems to be on every issue, in contrast with other ‘liberal’ commentators who often get something right despite having profound anti-market and anti-freedom biases.

Eric Evans June 21, 2011 at 5:25 am

Given the Nobel Committee’s recent picks, I choose to completely ignore it. The Nobel Prize, in my humble opinion, is just a way for leftists and statists of the most horrible ilk to support their rancid argument from authority fallacies. Their arguments typically go something like this: “The earth has a FEVER! It’s true because, well, see my Nobel Prize.”

scathew June 24, 2010 at 3:02 pm

Advocating lower interest rates in 2001 is not the same thing as advocating lower interest rates all the way through 2008. I might advocate you too step on the gas to get off the railroad crossing, but that doesn’t mean you should hold down the pedal until it red-lines.

No, you don’t have your “smoking gun” here I’m afraid. Show me a Krugman post in say 2007 that indicates they should maintain low interest rates and I’ll believe you. However you will note that he made posts at around that time saying that there was a housing bubble and they need to do something about it.

George D. August 3, 2011 at 3:38 pm

What did he propose to do about it?

Pointthefingerthen July 16, 2010 at 2:01 pm

He was advocating interest rate cuts, not allowing 30 to 1 leveraging of ARM’s and Subprime CDO’s people. He didn’t argue for repealing the Glass -Steagall act, which were the largest influences on the housing bubble. You people get a wiff of anything even remotely close to a sort of comeuppance and you froth at the mouth. He was advocating putting the economy on caffein not adding nitroglycerin and amphetamines to the coffee. And like the previous post, he wasn’t calling for interest rates to be low for half a decade into 2007, he meant it for the short term for impending recession. It’s easy to call someone socialist and wrong when you have no understanding of the math and logic behind it.

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Damn Hand August 13, 2010 at 9:34 am

Can you get something after 2001 please? I don’t know if anybody out there aside from fringy gold standard types who argue that the immediate post September 11 era, we needed to jack up interest rates. What about something from maybe 2004-2006? The most abusive years of the housing era. Thanks in advance guys. :)

Billy August 14, 2010 at 11:25 am

This article is such nonsense, it really illustrates the intellectual bankruptcy of the Mises crew. They dig up some quotes from 2001, and somehow that is supposed to be “proof” that Krugman caused the housing bubble. What a joke.

If the author wants to get serious about this, why doesn’t he respond to the very legitimate points made by scathew, Pointthefingerthen, and Damn Hand?

Matthew Swaringen August 14, 2010 at 12:10 pm

Billy, one not need have quotes from Krugman saying he was ok with the Fed’s continuance of low rates through the entire housing boom. One need only know that he did not say the Fed should raise rates during that time, because he writes articles regularly. His sole problems during that time was Bush’s tax cuts & the war in Iraq. He didn’t call for rates to be raised, so more than likely he was fine with those rates for quite some time longer than 2001.

You can even find this if you just do a little searching Billy:

“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.”

Now, he didn’t say it himself, but in this article he certainly agreed with Paul’s sentiment.

Also, the article’s title is a bit of an exaggeration. No one thinks that Krugman alone caused the actual bubble. We just know he advocated for a portion of the conditions that created the bubble. Did he advocate all those conditions? No, but the article writer isn’t saying that either. These arguments are strawmen. You are trying to exonerate Krugman because he didn’t agree with everything being done at time.

I haven’t seen any of Krugman’s writings until 2008 even referring to Gramm-Leach-Bliley Act, it seems like he only developed a huge problem with it after the crises occurred.

Evan September 1, 2010 at 9:56 am

“Krugman advocated for a portion of the conditions that created the bubble.” In, I might add, 2001-2002, when the economy was in recession.

This is not the same as saying “Krugman was a persistent advocate for the housing bubble,” which is a load of bollocks. Krugman was warning of the dangers of a housing bubble as early as 2005: http://www.nytimes.com/2005/08/08/opinion/08krugman.html

Jesse Forgione September 4, 2010 at 6:25 pm

Are you claiming that Krugman later saw the light and stopped advocating the inflationary policy that created the bubble?

News flash: He still hasn’t. Here he was defending the same destructive policies in ’09 after the crash:


But the real point is about more than the degree to which he’s personally responsible, which is small (but only in the short run) compared to, say, Greenspan. It’s that the gangsters in Washington (especially at the Fed) continue to get away with this $#!+ because of the misinformation spread by econo-shills like Krugman.

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Tni LeBlanc October 31, 2010 at 1:23 pm

I love it when people do research! Thanks for taking the time to unearth the history of this man’s comments. I do believe we should look back a little more than we are. We need to learn from the past in order to do better. All our efforts shouldn’t just be focused on blaming the consumers who weren’t aware of the overarching forces that were affecting the housing market. They ruined a darn good thing.

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Sebastian November 17, 2010 at 1:54 pm

Are you actually advocating that the Fed should have raised its rates in the 2000 recession? Thinking about it, that would have created a much deeper recession, so Bush might not have had the support he enjoyed. Lots of bad things could have been avoided.

So in a way, Krugman is responsible for the Irak War!!!!!! You should write about that.

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charles chan August 3, 2011 at 2:46 pm

The quotes are all from 2001, when the economy was faltering in that recession. Deliberately raise rates in a recession? This was before the housing bubble. And why would you not include his writings from any of the past 9 years? Cherry picking at its myopic worst!

Mark Thornton August 3, 2011 at 3:41 pm

That is the whole idea. The cause has to come before the effect so you would look at around the time of 2001 for Krugman’s opinions, then see the cause and then see the effect.

Thesaurus September 20, 2011 at 11:00 pm

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What is an LLC? September 20, 2011 at 11:01 pm

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pjnlsn October 24, 2011 at 4:29 am

Errr….so it’s basically decided then, that lower interest rates caused the housing bubble?

I wouldn’t know, i’m not an economist.

Because that’s all this page seems to be, to say that this Krugram fellow called for lower interest rates.

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