At the time, I thought of it this way: it was as if bacteria that used to cause deadly plagues, but had long… — Paul R. Krugman
At the time, I thought of it this way: it was as if bacteria that used to cause deadly plagues, but had long been considered conquered by modem medicine, had reemerged in a form resistant to all the standard antibiotics. Here's what I wrote in the introduction to the first edition: "So far only a limited number of people have actually fallen prey to the newly incurable strains; but even those of us who have so far been lucky would be foolish not to seek new cures, new prophylactic regimens, whatever it takes, lest we tum out to be the next victims." Well, we were foolish. And now the plague is upon us.
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Indeed, there has long been a strand of thought that says that moderate inflation may be necessary if monetary policy is to be able to fight recessions. Still, advocates of inflation have had to contend with a deep-seated sense that stable prices are always desirable, that to promote inflation is to create perverse and dangerous incentives. This belief in the importance of price stability is not based on standard economic models—on the contrary, the usual textbook theory, when applied to Japan’s unusual circumstances, points directly to inflation as the natural solution. But conventional economic theory and conventional economic wisdom are not always the same thing—a conflict that would become increasingly apparent as one country after another found itself having to make hard choices in the face of financial crisis.
As I’ve just noted, Greenspan warned about irrational exuberance, but he didn’t do anything about it. And in fact, the Fed chairman holds what I believe is a unique record among central bankers: he presided over not one but two enormous asset bubbles, first in stocks, then in housing.
But this warning was ignored, and there was no move to extend regulation. On the contrary, the spirit of the times—and the ideology of the George W. Bush administration—was deeply antiregulation. This attitude was symbolized by a photo-op held in 2003, in which representatives of the various agencies that play roles in bank oversight used pruning shears and a chainsaw to cut up stacks of regulations. More concretely, the Bush administration used federal power, including obscure powers of the Office of the Comptroller of the Currency, to block state-level efforts to impose some oversight on subprime lending.
