Sunday, December 02, 2007

Paul Krugman takes down Ben Stein, but gets something a tiny bit wrong

The blog entry is great:

Maybe I don’t have what it takes to be a serious columnist. I mean, it would never have occurred to me to suggest that the only way to explain an economic forecast I don’t agree with is to say that it must be part of an evil plot to drive down the market, so that Goldman Sachs can make money off its short position — and to suggest that Goldman should be the subject of a federal investigation.

But he goes on to say

For what it’s worth, Goldman’s forecast of a 15 percent decline in home prices seems implausible to me, too — but on the low side. A 15 percent decline would bring prices back to their level in early 2005 — when the bubble was already well inflated. If prices fall back to their level in early 2003, that’s a 30 percent decline.

Implicit here is the assumption that prices in 2003 were roughly in equilibrium, and I think that is probably right. But if prices rose by 3 percent per year since then (that is, if real prices stayed constant), then prices would only need to fall around 21 percent to get us back to alignment with fundamentals.

OK--that is really, really picky, and truth be told, I have no idea how much prices will fall (or even if they will continue to fall) for reasons I have explained in other posts. It's just that Krugman is usually precisely correct, so I am surprised he benchmarked to a nominal, rather than real, price from the past.

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