Paul Krugman: The Fed Didn’t Create the Housing Bubble

I am told that Paul Krugman denied on television last night that the Federal Reserve caused the housing bubble. There is such an embarrassment of riches on this topic that one scarcely knows where to begin.

But for some hard numbers, I recommend a few articles by Bob Murphy: “Greenspan’s Bogus Defense,” “Did the Fed, or Asian Saving, Cause the Housing Bubble?” and “Evidence that the Fed Caused the Housing Boom.”

Here’s my own brief discussion of Krugman, who in 2001 was cheering the Fed’s policy of low interest rates on the grounds that it would give artificial stimulus to housing. (Not a housing bubble, Krugman would no doubt hasten to assure us. Just the precise and perfect amount of stimulus.) I also link to Krugman’s notorious call for a housing bubble, which he later tried to explain away; I actually think the quotations in which he urges low interest rates in order to stimulate housing are even more damning, because it’s more difficult to claim they’re being misinterpreted.

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  • Alan

    Last night Krugman also tried to characterize Milton Friedman as someone on his side of the argument, even saying he’d be “on the far left today.” I almost jumped out of my seat. Anyone who looks can find that Friedman’s first preference was to abolish the fed and he said it numerous times. Some of it was infuriating, but it was great to see Ron Paul politely shut him down. God bless both of you, Dr. Woods.

  • Don Childers

    Jeremy Hammond’s new book, “Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis” is a fast, easy read I’m recommending to people who want the whole sordid tale. 

  • Daniel Moore

    Next thing you know, they will come out and say,  “It never happened”. 

  • Jeremy R. Hammond

    On that count, from my book, Ron Paul vs. Paul Krugman (

    Krugman again argued in the New York Review of Books in September 2010 that the Fed had had no
    choice but to lower interest rates following the collapse of the dot-com
    bubble. “It’s hard to see,” he wrote, “even in retrospect, how the Fed could have justified not keeping rates low for
    an extended period.” However, now his argument was that “it would be wrong to
    attribute the real estate bubble wholly, or even in large part, to misguided
    monetary policy.”

    Yet how could
    Krugman reconcile his argument here that the Fed was
    not “wholly, or even in large part” responsible for creating the housing bubble
    with his earlier arguments that the Fed should lower interest rates to spur
    investment in housing? How could he reconcile this argument with his earlier
    statement that “Millions of Americans have decided that low interest rates offer
    a good opportunity to refinance their homes or buy new ones” (May 2, 2001)? Or
    with his observation that “those 11 interest rate cuts in 2001 fueled a boom
    both in housing purchases and in mortgage refinancing” (October 1, 2002)?
    Or with his acknowledgment that it had been “the Fed’s dramatic interest rate
    cuts” that had “helped keep housing strong” (December 28, 2001)? Or his
    statement, “Repeated interest rate cuts encouraged families to buy new houses
    and refinance their mortgages” (December 22, 2002)? Or his remark that “Mortgage rates
    did indeed fall briefly to historic lows, extending the home-buying and
    refinancing boom that has helped keep the economy’s head above water” (July 25,
    2003)? Or, “Low interest rates … have been crucial to America’s housing boom”
    (May 20, 2005)? Or, “interest rate cuts led to soaring home prices, which led
    in turn not just to a construction boom but to high consumer spending, because
    homeowners used mortgage refinancing to go deeper into debt”(May 25,
    2005)? Or, “A snarky but accurate description of monetary policy over the past
    five years is that the Federal Reserve successfully replaced the technology bubble
    with a housing bubble” (August 7, 2006)? Or, “Back in 2002 and
    2003, low interest rates made
    buying a house look like a very good deal. As people piled into housing,
    however, prices rose—and people began assuming that they would keep on rising.
    So the boom fed on itself” (July 27, 2007)?

    What can explain
    Krugman’s self-contradictions? When he thought the
    housing bubble was a good thing, the road to recovery, he was all for it,
    lavishing the Fed with
    praise for single-handedly rescuing the economy from the much more painful
    recession that
    otherwise would have occurred without it. Once the devastating consequences of
    the housing bubble became
    clear, however, he changed his story, denying that he had ever called for a
    bubble and even denying that the Fed was
    responsible for having created it.

  • Jeremy R. Hammond

    Thanks for that, Don. No sooner had I got done posing a portion from the book on Krugman denying the role of the Fed than I read your comment. Much appreciated referral.

  • jen

    The so-called right like Hannity and Paul Ryan really need to be told to shut up as it is the fed first and not Obama that caused the financial slump. 

    And the left needs to be told to stop blaming Bush because it was the Fed to blame and Obama supports the Fed as much as Bush and Romney do. 

    Somehow these creeps need to be told that there is virtually no difference b/w them, just that they wear a bit different clothing.

    Too bad there are no independents or independent parties to speak truth to the two parties.  You really can’t speak to democrats while formally wearing the Republican hat.

  • JD

    Krugman – the man who thinks war is a public works program. He smiles when speaking about WW2 as some Keynesian milestone.. I mean how many people do you have to kill before something becomes a public works program?? The part i just cant get is why people listen to him. The broken window fallacy is so easily debunked and yet it fools the masses…

  • Jovan Galtic

    Of course the Fed didn’t do it… It was aliens.

  • Eric J Owens

     “Too bad there are no independents or independent parties to speak truth
    to the two parties.”

    There indeed are, Jen.  The problem is people are convinced that they aren’t “viable” and therefor make no effort to change them to “viable” no matter how disgusted they are with both parties.  Voters, it seems, would rather have two criminal organizations continually in power draining the life force of this country than do anything to stop it.

  • Christian Thomas

    I don’t think we should be quite so complacent that Krugman made an ass of himself. In many ways he came off quite well, for the allotted timespan.  First of all, he had the air of an economist, ie. of it being his speciality in contrast to Ron Paul being something of a generalist, though an informed one.  In that respect had an initial advantage.  Then, while Krugman could point to specific items or times that had been ‘good’, the solution proposed by RP was not as succinct, being a combination of ‘perhaps’ going to a Gold Standard, of abolishing the Fed ‘over time’ and that one has to consider the tax cuts and the spending cuts at the same time.  The Ron Paul promise was that the soup would be good once you had all the ingredients, and that meant taking quite a lot on trust – certainly if you were coming to it for the first time.  Even in my estimation, as a supporter, I do not think the question of what the final mix of libertarian freedoms is going to be has been adequately address, nor do I see a clear path from here to there.

    So, while we can both chuckle and be angry/superior about Krugman (and I did not get the impression of a man who is especially confident) his story is the easier to tell and is currently better suited to the soundbite format.  

    This is what I wrote on Tom’s Facebook page immediately after seeing the video.  “I thought Krugman did surprisingly well, particularly on use of the US dollar. But otherwise it was just the basic argument, each having a different prismatic view and their selective evidence. If you think 1945-2000 was ‘good’ then you go with Krugman. If you think it had failure baked in, then you are with us. More work needs to be done qualifying this difference of interpretation.”   

    The argument that has to be made is that this outcome was always inevitable and that, of course you thought it was good while you got handed money.  You were meant to feel good.  But, just like the party that lasted all night, the hangover was always going to come.  And then more work needs to be done on a proper roadmap between where we are now and recovery.  The Keynesians have their answer to that down pat – stimulate the economy.  We need the proper refutation and something more tangible than market forces will prevail.

  • Jeff

    Krugman also completely disregarded Paul’s assertion that the Federal Reserve prolonged the Depression, and that cutting spending/taxes after World War II led to prosperity.  Then in a blog post, Krugman said Paul could have said “Goo goo gah gah debasement, theft” and Paul fans would have eaten it up.  I wish he’d at least acknowledge the possibility of being wrong.

  • Jeremy R. Hammond

    I wrote up a response to the Ron Paul vs. Paul Krugman Bloomberg debate:

  • neocontrotsky

    Copied and pasted from the comments section on

    Starting around 19:40 or so, Krugman responds to the idea that the Fed created the Housing Bubble as “the great lie.”

    However, here is what he said on his NY Times blog in 09:

    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.”

  • Zsaewq75

    Lehman, AIG and Merrill Lynch did not underwrite mortggages, yet their losses gave the recession its depth and length (combined with the failure to address lack of demand and instead focus on unrelated fiscal issues). It is convenient to have the Fed, Fannie and Freddie as scapegoats.

  • Tom Woods

    You can look at the data and conclude it’s a mysterious, generic “lack of demand”? What, pray tell, causes these sudden deficiencies in “demand”? You actually think the Fed had nothing to do with this, despite all the evidence? Did you even bother to read the links? (I already know the answer to that one.)

  • Tom Woods

    Their losses were caused by systemic mispricing of assets, thanks to the Fed. Adjusting these mispricings is a good thing. Trying to prop up the phony prices is a bad thing.

  • Tom Woods

    Actually, it’s convenient to have Lehman, AIG, and Merrill Lynch as scapegoats. These are a symptom.