Paul Krugman: Housing bubble instigator, not predictor — VOICES for REASONVOICES for REASON

Recently on his blog, Paul Krugman claimed that he predicted the recent housing bubble as early as 2004. His cited 2005 op-ed certainly does speak of an impending housing bubble. But whatever credit he deserves for seeing it should be revoked because by his own admission he was calling for the Fed to maintain low interest rates, which was a major cause of the housing bubble. (For more information, see this course by Yaron Brook. For more general information on the impact of central banks on boom-and-bust cycles, read up on Austrian Business Cycle Theory, which is most famously advanced by Ludwig von Mises and Friedrich Hayek.)

Of course, Krugman insists that he was calling for low interest rates, but not for a housing bubble. But these artificially low interest rates misled many people to go into debt to either build or purchase houses—houses they could not afford when interest rates rose later. Once rates were rising, the Fed faced the following alternative: either they would have to continually expand the money supply to maintain these artificially low rates and thus, through inflation, continue robbing people of the purchasing power of their savings. Or they would have to eventually let rates return to normal and thus, letting those who went into debt feel the pain. In either case, a large number of people were inevitably going to be hurt by this Fed policy, as is what actually happened when the bubble burst.

In essence, Krugman’s calling for low interest rates while insisting that he was not advocating for a resulting asset bubble is demanding for a cause without its effects. It is just as absurd as if he wanted to smack a buzzing hornet’s nest while simultaneously insisting that he has zero intention of aggravating stinging insects.

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