Krugman on Greenspan and Bubbles

As anyone who reads Paul Krugman's NYTimes column regularly know, Krugman hasn't been showering much love on Greenspan during the new century. And, frankly, given the fact that Greenspan has been bending over backwards for politics on in ways that range from "just wrong" to "downright bizarre," it's well deserved.

In today's column, he continues...

If Mr. Greenspan had said two years ago what he's saying now, people might have borrowed less and bought more wisely. But he didn't, and now it's too late. There are signs that the housing market either has peaked already or soon will. And it will be up to Mr. Greenspan's successor to manage the bubble's aftermath.

How bad will that aftermath be? The U.S. economy is currently suffering from twin imbalances. On one side, domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit, which we cover by selling bonds to foreigners. As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China.

One way or another, the economy will eventually eliminate both imbalances. But if the process doesn't go smoothly - if, in particular, the housing bubble bursts before the trade deficit shrinks - we're going to have an economic slowdown, and possibly a recession. In fact, a growing number of economists are using the "R" word for 2006.

Between the trade deficits, the contribution of housing-related jobs to total job growth in the last 4 years, the scary-ass oil situation, and the overall debt load of US citizens, I don't have a really good feeling about 2006.