After giving some of us — me — a bit of hope re: declining dollars, credit bubble problems, and import/export markets, Paul Krugman retreats from his optimism that the export market might save us. Following leads from the ever-watchful Brad Setser, Krugman points to stalling US exports. Earlier, Krugman helped us understand better why the Fed is less-than-empowered to "fix" this mess, given that the Fed's actions to pump up the now-faltering housing market lured us into the mess. Looks like were caught in a Liquidity Trap. Yes? No? Here's Krugman:
Maybe exports won’t save us, Paul Krugman, Jan. 11 I’ve pointed out that rising exports, thanks to the weak dollar, were what allowed the US to avoid slipping into recession up through 3rd quarter 2007. But Brad Setser points out that real exports have stalled over the last few months (this is monthly non-petroleum exports in 2000 dollars, seasonally adjusted):Krugman on the impotence of Monetary Policy—amid housing bubble collapse:
These data do bounce around, but it sure looks like export growth is stalling just when we need it to offset further declines in housing, consumer spending, and more.
Worries about the Fed (a wonkish post), Paul Krugman, Jan. 11 The signs point increasingly to an imminent, or perhaps already begun, recession. Ben Bernanke has in effect pledged to do whatever is necessary. But does the Fed have what it takes? … Monetary policy mainly exerts its influence through housing: high interest rates squeeze home construction, low rates encourage it. Interest rates have much less direct effect on business investment. The reason? Housing lasts much longer. …
[H]ere’s what normally happens in a recession: the Fed cuts rates, housing demand picks up, and the economy recovers.
But this time the source of the economy’s problems is a bursting housing bubble. Home prices are still way out of line with fundamentals:
So: is it even possible for the Fed to cut interest rates enough to create a renewed housing boom? (The Fed can cut the overnight rate all the way to zero, but even large changes in the overnight rate can have only modest effects on mortgage interest rates, if the market perceives those changes as temporary.) If it can’t, how much can the Fed really do to help the economy?
Those aren’t rhetorical questions. I’m actually not sure how bad things will get — remember, we still have help from booming exports. But it’s not too hard to tell stories in which monetary policy doesn’t have enough mojo to deal with our current problems.