Paul Krugman at Princeton

Paul Krugman is an influential Nobel Prize-winning economist with a prominent voice in the media as a columnist and blogger for the New York Times who constantly uses his platform to argue for more government intervention in the market. In his latest column, Krugman asks, “Why have we been having so many bubbles?” His answer is instructive.

Krugman notes that the U.S. had a dot-com bubble followed by a housing bubble and that “One popular answer” to his question “involves blaming the Federal Reserve—the loose-money policies of Ben Bernanke and, before him, Alan Greenspan.” While “it’s certainly true”, Krugman writes, “that for the past few years the Fed has tried hard to push down interest rates, both through conventional policies and through unconventional measures like buying long-term bonds”, and while the “resulting low rates certainly helped send investors looking for other places to put their money, including emerging markets”, “the Fed was only doing its job. It’s supposed to push interest rates down when the economy is depressed and inflation is low.”

Of course, this isn’t actually an argument. That the Fed may have been “only doing its job” doesn’t mean that its inflationary monetary policies weren’t the cause of the dot-com and housing bubbles. But Krugman continues, “I know that there are some people who believe that the Fed has been keeping interest rates too low, and printing too much money, all along. But interest rates in the ‘80s and ‘90s were actually high by historical standards, and even during the housing bubble they were within historical norms.”

“Besides,” Krugman adds, “isn’t the sign of excessive money printing supposed to be rising inflation? We’ve had a whole generation of successive bubbles—and inflation is lower than it was at the beginning.”

Having thus dismissed the Fed’s monetary policy as the cause of the bubbles, Krugman diverts his readers’ attention elsewhere, writing that “the other obvious culprit is financial deregulation”. The “main lesson of this age of bubbles”, Krugman concludes, “is that when the financial industry is set loose to do its thing, it lurches from crisis to crisis.”

Krugman’s argument, however, simply is not honest. His claim that interest rates were “within historic norms” during the housing bubble, for example, is what one might call a “lie”.

If one follows his link, it goes to his blog, where he shows a chart of interest rates on 10-year Treasury securities. However, Krugman is perfectly well aware that the main mechanism by which the Fed lowered interest rates before the bursting of the housing bubble was through purchases of short-term Treasury securities (he had, after all, himself just pointed out that only in the “past few years” had the Fed taken “unconventional measures like buying long-term bonds”). It wasn’t until after the bubble burst, in 2008, that the Fed began what it calls “Large Scale Asset Purchases” (LSAPs). Under the several rounds of “quantitative easing” (QE) that have occurred since the financial crisis struck, the Fed has monetized long-term Treasury securities and mortgage-backed securities (i.e., created “money” out of thin air to buy government debt or other debt instruments).

But even looking at 10-year securities, it seems rather disingenuous, to say the least, to describe the 3.4% low that was reached in 2003 as “within historic norms” when it hadn’t been that low since 1958.

Interest rates on 10-year Treasury securities

Interest rates on 10-year Treasury securities