Krugman 10 years after Lehman

I have to link to this column, which is better than Krugman’s average.

It is mostly Krugman’s usual shrill praise of fiscal stimulus. I find two things notable. One is that he has no time or column inches for unconventional monetary policy. He’s back to “monetary policy was ineffective because we were at the zero lower bound on interest rates.” Being an extreme skeptic about the effectiveness of QE and all that, I am pleased.

Second he stresses housing not high finance

Why didn’t financial stability bring a rapid bounceback? Because financial disruption wasn’t at the heart of the slump. The really big factor was the bursting of the housing bubble – of which the banking crisis was a symptom. As Figure 2 shows, the housing bust led directly to a dramatic drop in residential investment, enough in itself to produce a deep recession, and recovery was both slow and incomplete.
[figure 2 about here[
The plunge in home prices also destroyed a lot of household wealth, depressing consumer spending in general.

He pretty much has gone full Dean Baker. I very much agree with Baker.

So what has the macroeconomics profession learned ? Hmmm there still is no housing sector in the work horse models — it is assumed that all investment is business fixed capital investment. There is still no effect of perceived wealth on consumer spending — the Euler equation still rules.

In contrast there is now a huge literature on the importance of financial instability for macroeconomic aggregates. The simple point that the financial crisis was brief and the great recession wasn’t has not been reflected in the academic literature (which I have read).

update: See Barkley Rosser (in comments) noting he wrote independently from Dean Baker (and sometimes earlier).

Also Krugman wrote another post about it with FRED graphs

It is interesting that if you are a star (Krugman or Bernanke) you can grab em by the reduced form & do extremely simple empirical work. Sadly, one must have a reputation for people to take seriously one’s impressions when eyeballing FRED graphs.

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