Paul Krugman's Prophetic Prescience

By Megan McArdle

Wow.  Just . . . wow.

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.

As Arnold Kling says, there's a paragraph I'm sure glad I didn't write.

This article available online at:

http://www.theatlantic.com/business/archive/2009/06/paul-krugmans-prophetic-prescience/19544/