I Agree with Hank Paulson, not Paul Krugman

Ken Houghton notes that no one has stolen my ID or shifted my sense of politics or the economy.

Brad DeLong has been running excerpts from the February 2009 Vanity Fair “Oral History” of the Bush White House. Time and priorities being what they are, I didn’t get a chance to read the whole piece until today—coincidentally, right after Paul Krugman said that Larry Summers

“is right” in his assessment that the sense of the economy falling of the table was likely ending.

Now, Krugman went on to qualify this, in the same manner, though with less clear terms, as he did on his blog last Wednesday:

Many will herald this as the end of our problems. But they’ll be wrong, for reasons I laid out during an earlier false dawn, back in early 2002 (the unemployment rate continued to rise for more than a year after that point)….[long, well worth reading but not anywhere close to excerptable for “fair use” example omitted]… I wanted to include a graph to go with this post, illustrating what happened in 2002. And guess what: that surge in output in early 2002 has been revised out of existence.

So Krugman may believe that this is a “false dawn,” but affirms that the worst is probably over.

Contrast that with Hank Paulson’s comment in the Vanity Fair piece:

This’ll be the longest we’ve gone in recent history without there being turmoil, and given all the innovation in the private pools of capital and the over-the-counter derivatives and the excesses around the world, we figured that when there was turmoil, and these things were tested for the first time by stress, it would be more significant than anything else.

I said at the time, I have a concern that every rally we’re going to have in the financial markets will be a false rally until we break the back of the price correction in real estate. And these things are never over until you have a couple of institutions go that surprise everyone. Bear Stearns can hardly be a shock.

But having said that, it’s one thing to see it intellectually and it’s another to see where we are.[italics mine]

The “couple of institutions” to “go” still hasn’t happened.