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.
So should one line about recovering from the ’01 slump discredit what he says about how to get over this one? Well, basically what his thinking here reveals is that he always wants to kick the can down the road. The way to get over the .com bubble is a housing bubble. And the way to get out of the housing bust is massive government stimulus. It’s a neverending stream of huge, economic endeavours with Krugman.
As long as this is the approach of government, there will never be a new normal that’s not either an artificial, sugar-high boom or a slump.
Update: Krugman responds to call the chatter about this piece:
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 — in fact, the bubble is my fault! The claim seems to be based on this piece.
Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.