I know that I promised to stop blogging again. But when Krugman says something like this:
One of the curious things about economic debate in the later Bush years was the conviction among many on the right that there wasn’t a bubble in housing, but that there was one in oil.
We now know the truth about housing. But what about oil?
Oil prices did spike to triple-digit levels in early 2008, then drop sharply. But think about the fact that right now, with the world economy still seriously depressed, oil is at $80 a barrel. This suggests to me that high oil prices are largely caused by fundamentals.
How can I resist? So what’s wrong with Krugman’s assertion? Nothing at all. You would expect the price of highly cyclical assets like oil or commercial real estate to fall by 40% to 50% in the deepest recession since the Great Depression. Indeed I made an almost identical argument about both assets in several posts, noting that their prices did not start falling in mid-2006 when housing began decline, but rather in the second half of 2008, when NGDP started falling.
But there’s just one problem; I have a long memory and I seem to recall Krugman making exactly the opposite argument 6 weeks ago in this post on commercial real estate. Actually, the US recession is worse than the world downturn, so ceteris paribus CRE prices should have fallen further. On the other hand oil prices are somewhat more volatile in response to demand shifts. So they fell by roughly equal amounts, as you might have expected.
Why the post title? Just yesterday Krugman called himself a poet. In fairness, he was half-joking, and he actually is brilliant at using metaphors to get to the intuition behind economic arguments. As far as spotting bubbles, however, he’s not so brilliant. Like most people he calls price patterns bubbles when he can’t explain them in terms of fundamentals. BTW, what would Hayek think if he came back today and found so many people who confidently knew when markets were overpriced? Why do we even need markets? If it so obvious what the correct price is, let’s bring back Soviet-style central planning. (On the other hand, even the Soviets couldn’t have done much worse than some of our bankers.)
OK, back to my book.