As the Dow and S&P race to new record highs, a cloud no larger than a man's beard has emerged on the horizon - Paul Krugman is not worried about a stock market bubble:
And there’s a lot of bubble talk out there right now. Much of it is about an alleged bond bubble that is supposedly keeping bond prices unrealistically high and interest rates — which move in the opposite direction from bond prices — unrealistically low. But the rising Dow has raised fears of a stock bubble, too.
So do we have a major bond and/or stock bubble? On bonds, I’d say definitely not. On stocks, probably not, although I’m not as certain.
Yike! Or happy anniversary - back in June of 2003 Krugman was convinced (for reasons that were undoubtedly based on Deep Thinking and had nothing to do with his partisan posturing) that the Bush bull market was a bubble:
In short, the current surge in stocks looks like another bubble, one that will eventually burst.
The S&P 500 (currently 1628) was at 995 when he wrote that, and it has surely been higher and lower since. Yes, we had our fun. , just as we had our fun with Krugman's Bold Interest Rate Forecast of March 2003:
With war looming, it's time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.
Eventually Krugman woke up to the implications of mindless partisanship and recognized that he had made a bit of a whoopsie with that one.
However, his fans (and critics) will hear a related dog whistle in the current column:
So when people talk about bubbles, you should listen carefully and evaluate their claims — not scornfully dismiss them, which was the way many self-proclaimed experts reacted to warnings about housing.
The petulant whinging is unmistakably Our Paulie - if only the haters had listened to Krugman, all this could have been avoided. After all, he had seen the housing bubble, or so he says. My favorite Krug-prediction on housing is still this:
Ben Bernanke, the chairman of the Federal Reserve, contends that what's happening in the housing market is "a very orderly and moderate kind of cooling." Maybe he's right. But if he isn't, the stock market drop of the last two days will be remembered as the start of a serious economic slowdown.
It will all end badly, unless it doesn't - how could anyone have been deaf to such a clarion call?
To be fair, Krugman has not always pretended to have been a genius on housing. After all, plenty of folks thought hosuing was over-valued; what most of us, certainly including Krugman, got wrong was the severity opf the adjustment process. This is from October 2008, post AIG and Lehman:
LISA MILLAR: ...He's been relentless in his criticism over the latest financial crisis, but admits even he didn't see it coming.
PAUL KRUGMAN: I should have, I mean I saw parts of it, I saw the housing bubble but I berate myself for not understanding the extent to which we've had these sort of financial domino effects. I saw that there would be a burst bubble and there would be a lot of pain but didn't realise how big the pain would be. Lots of people should have seen it, Alan Greenspan, if there's a villain it's Allan Greenspan who was warned about parts of it and brushed aside the warnings. But in general, in retrospect how could we have been so blind? We had created a financial system that basically outgrew the defences that we created back in the 1930s to protect against banking crisis. We should have understood because the system had outgrown those defences, there was the possibility of another one, but very few people saw it coming.
Well, yeah. FWIW, I took a rare turn defending Krugman against the charge that he had advocated in favor of a housing bubble. As an offset, I had a long column debunking a "Flatland" column that Krugman described as "one of the best pure-economic pieces I’ve done in my tenure at the Times." Of course, I can't debunk the notion that it was his best, but it wasn't so very good.